Community bank respondents report that their boards are well-informed, but they also believe many of these same boards lack the necessary aptitude or experience to put critical information to use. This interesting paradox is just one finding from a just-completed study of community bank governance norms.
Commissioned by Baker Tilly and performed by Integrated Governance Solutions, the study also reveals that there is a lack of clarity about board member tenure, training and removal which may result in inefficiencies and other unintended consequences, including sub-par performance.
Study participants said that bank boards demonstrate a clear understanding of their legal and fiduciary duties, and that they receive a reliable, integrated and holistic view of enterprise health from management. The study also gave high marks to the monitoring information boards receive, describing it as reliable, objective, accurate, comprehensive and timely.
74% of study participants rated their bank’s board "Strong" or "Moderately Strong" when it came to being informed of organization health and the monitoring of organization practices.
On the other hand, study participants gave their banks low grades when it came to board member recruiting, orientation and training. Recruiting to achieve composition goals and address organization needs is deemed a weakness, as are the orientation of new members and allowing for individual member development. Rated lowest was the topic of director tenure – specifically, director assessment and removal.
Interestingly, the data show a clear correlation between the objective monitoring of bank practices and financial returns. Banks that rated their monitoring information and the reliability of their monitoring system highly also had a higher pre-tax Return on Equity than other participants in the study. In addition, Tier 1 Capital is higher with organizations that scored higher in the area of board risk oversight.
2.5 out of 5 The overall average rating (moderately weak) respondents gave for their board’s recruiting, orientation, training, and tenure/removal processes.
Simply keeping a board "informed" is not enough to ensure success in this environment. Objective and reliable information is vital, as is the ability of boards to sort through and interpret the information they receive. Keeping a board well-informed requires continuous tuning of the form and substance of board information so that it aligns with the most critical objectives of the bank.
A community bank board needs to recognize its evolving role from business-development to governance. Legacy relationships may impede board alignment with competency requirements. A bank board is no longer a social club; it is a job, and directors are being held responsible for the health of the enterprise they oversee.
About the study
This study was conducted from April 1 to June 30, 2012. 23 banks in the Upper Midwest, with assets ranging from $30 million to over $4.5 billion were asked to complete a 28-question, online assessment regarding their board governance practices. Respondents consisted of board members and senior management, with bank CEOs, CFOs and presidents making up 56% of the participants.