BOARD DEMOGRAPHICS:
HOW DOES YOUR BOARD STACK UP:
A SPECIAL SERIES
From the February, March, and April 2002 editions of Bank Directors Briefing. Copyright Simmons Boardman Publishing. For information or to subscribe, call Steve Cocheo, editor, 212-620-7219, scocheo@sbpub.com. The full survey offers much more data and frequently cross-tabulates its findings versus the institutions’ levels of performance. The full report costs $195 (not $95, as stated last month due to a garbled message). Call Therese Rabatin at 1-800-523-4778.
FIRST PART
Every few years Professional Bank Services, Inc., a Louisville, Ky., based consulting firm, conducts the closest thing to a bank board "census" that you’ll come across. The most recent edition, published in late 2001, included responses from 574 banks and savings institutions in 49 states, most of them with assets of less than $1 billion.
Information like this is helpful to boards in assessing their practices and PBS kindly furnished us with a copy. (PBS Chairman George Freibert will also be speaking on the subject at ABA’s National Conference for Community Bankers in early March.) This article, and additional instalments to appear in the next two issues of the newsletter, give highlights of the research. The full survey offers much more data and frequently cross-tabulates its findings versus the institutions’ levels of performance. The full report, which fills a 2.5" binder, costs $95. Call Therese Rabatin at 1-800-523-4778.
THE MAKINGS OF GOOD FOXHOLE BUDDIES
What makes for a good bank director these days?
Or, better yet, ask yourself what you’d like to see on either side of you if the going got tough for your bank and its board.
In its 2001 Corporate Governance Survey report, Professional Bank Services gave responding institutions a list of eight criteria to rank, plus the ability to mention an "other." The choice included these attributes: ability to represent shareholders’ interests; assets on deposit in the institution; business acumen; company stock owned; friend of other directors; friend of CEO; net worth; and visibility within the community.
The top three choices were as follows:
• Business acumen, selected as the top criterion by 43%.
• Ability to represent shareholder interests, selected by 30%.
• Visibility within the community, 17%.
"Only 2.1% of the respondents selected ‘assets on deposit’ as the most important criteria, and only 0.4% selected ‘friend of the CEO’ as the most important selection criteria," PBS stated in its report.
MANDATORY RETIREMENT AGES AND OTHER LIMITS
Just under half–48.7%–of the institutions reported that they have mandatory retirement ages for their directors. Superior-performing institutions were much more likely to require this than below-average performers.
Of those institutions that set a mandatory retirement age, 53.6% place it between 71 and 75 years. Another 43.1% set it in the 65-70 year range. (The survey found that a small portion of the institutions polled–3%–require a director to retire from the board within a set time of retiring from their main job.)
Term limits for directors. While mandatory retirement is a perennial favorite topic of discussion in bank governance circles, something that receives much less discussion is the issue of mandatory limits on the number of terms that a director may serve. Indeed, in the survey, less than 1% of the responding institutions had such limits in place. This was a falloff from the consulting firm’s past surveys.
Regarding director reelection, while some institutions use some form of director evaluation (see the box below, "Goals versus performance"), only 2.3% of the banks responding to the PBS survey tied reelection to how well the director does on his or her evaluation.
"Boot outs." The survey also found that 40.6% of the institutions have a policy calling for director resignation in the event of certain developments. In descending rank order, these include a director’s indictment; acceptance of a position believed to be in conflict with duties; filing of bankruptcy; acceptance of a position "incompatible with directorship"; allowing their loan to be classified; running for or accepting a significant political position; and changes careers.
NEXT MONTH: How other banks handle risks, protections, and rewards
BOARDROOM SNAPSHOT:
WHAT TODAY’S BOARD LOOKS LIKE
Some statistics from the PBS 2001 Corporate Governance Survey:
• Board size: Nearly seven out of ten institutions report boards of six to ten members. This has remained fairly steady through PBS’ 1994, 1998, and 2001 studies. Most of the rest have boards of 11-15 members.
• Board "seniority": 52.2% of the sample reported a median tenure on their board of 10-20 years. Superior performers favored this range, whereas below-average performers tended to have lower median board tenures.
• Board age: 60.4% of the institutions reported that the median age of their directors fell between 51-60 years. Most of the rest reported a median range of 61-70 years. Very young or very old median ages for board members were rare. However, note that nearly half of the sample reported that their board had more diversity, in terms of age, than it had had five years earlier.
• Board gender mix: 72.7% reported no significant change in the mix of genders on their boards, with 23.2% reporting a more-diverse mix.
• Board racial mix: 93.3% reported no change in board racial diversity, with 4.8% reporting increased diversity.
BOARDROOM SNAPSHOT: GOALS VERSUS PERFORMANCE AT THE BOARD LEVEL
How does your board compare to these national figures from the PBS survey?
• Does your board maintain a "job description" for...
o the board?
18.7% of the sample does.
o individual directors?
21.3% does.
o the board chairman?
20.2% does.
o board committees?
47.3% does.
o committee chairmen?
13.4% does.
• Does your board conduct an evaluation of its performance?
o 14.7% does, typically annually and chiefly done internally, with 70.7% done by board members themselves and 22% done by management. (The remaining 7.3% are performed by outsiders.) About half of these evaluations are written. Nearly three-quarters of the boards that go to the trouble of conducting evaluations find them "somewhat beneficial" and 14.6% find them "very beneficial."
• Does your board perform evaluations of individual directors?
Only 8% of responding banks perform such reviews. Most do this internally, and nearly half confine such evaluations to outside directors.
• Does your board, or a committee of the board, provide for an evaluation of the CEO periodically?
55.6% of the banks do. Many of those that do are among the institutions that conduct evaluations of their boards. Slightly more institutions–58.6%–provide a written job description for the CEO.
• Does your institution set minimum meeting attendance requirements for board members?
52.4% of the sample does.
Of those institutions, more than half require attendance of at least 75% of the board’s functions for directors to remain in good standing. Most of the rest require even higher attendance.
PART TWO
Every few years Professional Bank Services, Inc., a Louisville, Ky., based consulting firm, conducts the closest thing to a bank board "census" that you’ll come across. The most recent edition, published in late 2001, included responses from 574 banks and savings institutions in 49 states, most of them with assets of less than $1 billion.
Information like this is helpful to boards in assessing their practices and PBS kindly furnished us with a copy. (PBS Chairman George Freibert will also be speaking on the subject at ABA’s National Conference for Community Bankers in early March. Note also that the American Association of Bank Directors co-sponsored the study this year.) This article, last month’s Part 1, and the final instalment, to appear in the next newsletter, give highlights of the research. The full survey offers much more data and frequently cross-tabulates its findings versus the institutions’ levels of performance. The full report costs $95. Call Therese Rabatin at 1-800-523-4778.
RISKS AND PROTECTIONS
As any director who has served on a bank board for a few years knows, accepting that seat exposes one to risk. Directorship of any company represents a significant responsibility; directorship of a bank goes beyond this because the job involves responsibilities not only for shareholders’ funds, but also for those of depositors, and, in a broader sense, for the well-being of the community in which the bank does business.
Indeed, 52% of the survey sample said they believe that judges and juries judge defendant banks and bank directors more severely than they would judge other types of corporations and those companies’ directors.
The survey indicated that slightly more than one-third of the institutions responding had been sued in the last five years. While this may seem high, PBS indicated that this was a drop of 6.7% over the firm’s previous survey. The survey found that banks with "deeper pockets"–that is, banks of larger asset size–were generally more likely to be sued than were smaller institutions.
The survey reported that lender liability cases–claims where the bank is accused of taking too active a role in a borrower’s affairs, to the borrower’s detriment–represented the top source of lawsuits. This was followed, in descending frequency of mention, by suits arising from employee firings; check forgery or wrongful payments; employment discrimination; "slip and fall" accidents; trust and fiduciary matters; consumer laws and regulations; shareholder concerns; sexual harassment; conflicts of interest; and violations of confidentiality or privacy.
What do banks do to protect themselves and their directors from such risks?
Most–97.3%–told PBS that they carry insurance of one or more kinds. Broken down, 86.9% carry director’s and officer’s coverage; 73.3% carry fidelity bond coverage; 53.3% maintain specific lender liability policies; and 21.6% carry insurance relating to trust activities.
In addition, 86.6% of the institutions provide indemnification for directors and officers. This was accomplished either through bylaws or articles of incorporation.
REWARDS FOR DIRECTORSHIP
There are many reasons that people agree to serve on a bank board, but one of them is remuneration–pay, in some form.
Many institutions–59.1% of those taking part in the survey–pay their outside directors a monthly board fee and nothing else. Another 28.8% pay a combination of both annual retainer and monthly fee. A small portion of the survey base–12.4%–reported that they pay directors only an annual retainer.
Respondents were given a selection of ranges to select among regarding their fee arrangements with outside directors.
• The largest portion of institutions that pay only an annual retainer (37.7%) clustered at $5,000-$10,000. The second-most-common clustering (27.5%) was at $5,000 or less in annual retainers.
• On the other hand, of those institutions solely using monthly fees, the largest cluster (31.6%) was at the $250-$400 range. The second-largest cluster (27.5%) was at the $401-$600 range.
• Of those banks on the "combination plan," the most commonly cited range for annual retainers was $5,000 and under, while these institutions most typically paid monthly fees of $250-$500.
• 64% of the responding institutions pay outside directors extra to attend committee meetings.
• And 26.1% of the respondents said that outside directors received stock, stock options, warrants, or similar investment choices as part of their compensation.
• About half of the respondents provide other benefits beyond pay to the bank’s directors. The "other" includes, in descending order of mention: deferred compensation; health insurance; a bonus plan pegged to bank performance; stock options; life insurance; retirement program; bonuses of some sort; and stock grants.
NEXT MONTH: How other banks handle audits and other controls, plus the role of the chairman and management succession.
BOARDROOM SNAPSHOT: THE BOARD MEETING
The one thing every bank board has in common is the board meeting. Some statistics from the PBS 2001 Corporate Governance Survey:
• Meeting frequency:
o 76.8% meet 11-13 times a year–basically, monthly; a handful meet less frequently.
o 11.7% meet 14-24 times a year.
o 2.7% meet more often than 24 times a year.
• Meeting duration:
o 51.9% meet for two-four hours.
o 40.9% meet for one-two hours.
o 5% meet for four-six hours.
o 2.1% meet for less than one.
o Only 0.2% meet all day.
Comparing these results to past surveys, PBS states, "it appears that some board meetings are shorter in duration." In 1994, for instance, 58.3% reported meetings that ran for two-four hours.
• Meeting votes:
o Dissenting votes: In nearly six out of ten banks responding, dissenting votes are almost never cast at board meetings. Most of the rest report dissenting votes only occasionally.
o 53.7% "never or almost never" have absentions. Most of the rest report the occasional abstention.
PART THREE
Every few years Professional Bank Services, Inc., a Louisville, Ky., based consulting firm, conducts the closest thing to a bank board "census" that you’ll come across. The most recent edition, published in late 2001, included responses from 574 banks and savings institutions in 49 states, most of them with assets of less than $1 billion.
Information like this is helpful to boards in assessing their practices and PBS kindly furnished us with a copy. This article, and Parts 1 and 2 in the previous two newsletters, give highlights of the research.
AUDIT AND CONTROLS IN THE ENRON AGE
Oversight has always been one of the chief duties of the bank board–the Enron affair has only underscored that fact. However, oversight is a tricky thing. Directors can’t–and shouldn’t–be working over employees’ shoulders. ("Nose in, fingers out," as board consultant Dr. Doug Austin is fond of saying.) Hence, the existence of auditors–both internal and external.
Internal audit. Internal audit functions of some type were used by 80.4% of the responding institutions. PBS reported a slight correlation between respondents’ regulatory relations and their having or not having Internal Audit. Less than half (43%) of the respondents with internal audit functions give the lead role in hiring that person or persons to the board or the board’s audit committee. About a third of the respondents with internal auditors conduct formal reviews of the auditor’s work.
External audit. PBS reported that 95.5% of its respondents have external audits performed. By contrast to the situation with Internal Audit, 64.6% of the institutions responding said that their boards or audit committees dominated the choice of external auditing firm.
PBS asked respondents how they felt about the job their external firm was doing. The results:
• 37.4% grade their outside firm as Excellent.
• 56.3% rate it as Good.
• 6% rate the auditor as Fair.
• Only one institution rated the auditor as Poor.
A bit less than half–44.8%–of the survey sample conducts a review of the external auditor’s performance at the level of the board or the board’s audit committee.
Interestingly, respondents showing superior financial performance tended to give their auditing firm the top ranking of Excellent less frequently than did firms showing above-average, average, or below-average performance. Yet below-average performers were more likely to periodically change their outside auditing firm than were the best players–-possibly in an effort at "opinion shopping."
And only 11.4% of the banks reporting change their auditing firm periodically as a matter of policy. This emphasizes how much life would change for some banks if some of the Enron-inspired proposals for mandatory rotation of auditors were to go through.
In commentary on this section, PBS’ Freibert observes:
"The periodic rotation of outside auditors is a good idea. From a practical standpoint it can be cumbersome, but from the perspective of the audit committee (and the full board), it provides an additional method of strengthening the external audit function."
Freibert believes rotating auditors every five years is a good benchmark practice.
"The audit firms should know of the bank’s policy when hired so as to avoid misunderstandings at the time of the change," he advises.
THE CHAIRMAN AND THE CHAIRMAN’S ROLE
There seems to be a shift going on in the boardrooms of community banks. The PBS survey found that there has been a notable falloff in the number of financial institutions reporting that the CEO and chairman posts are held by the same person. In the most recent survey, 32.7% reported that their CEO and chairman were the same person–down 1.5% from the firm’s 1998 survey and down 11.6% from the firm’s 1994 survey.
Slightly more than half of the firms responding to the survey reported that their chairmen were outside directors–51.7% in all.
Regarding pay, about a third of the institutions reporting–29.2%–said that they pay their chairmen more than other directors. (This was much more likely among savings institutions than among commercial banks responding to the survey. Among those institutions who give the chairman something extra, 41.5% pay chairman’s fees of under $5,000; 22.6% pay their chairman between $5,001-$10,000; 10.4% pay $10,001-$15,000; 10.4% between $15,001-$25,000; 4.3% pay between $25,001-$35,000; 1.8% pay between $35,001 and $45,000; and 9.1% pay more than $45,000.
Finally, the survey asked about the relationship of the full board and the chairman, specifically, the respective roles played by the chairman, the CEO, and the full board in nominating new board members.
The survey indicates growing involvement by the full board.
In the latest edition, 28.8% of the institutions reported full-board participation in the process. By contrast, 17.9% of the banks reported that a CEO/chairman dominated the selection process, 9.4% reported that the chairman did, and 12.9% reported that the CEO did. At 8.2%, the executive committee controlled the process, while at 13.4%, a nominating committee did so. At the remaining banks, control was exercised by individual board members or principal shareholders.
The full survey offers much more data and frequently cross-tabulates its findings versus the institutions’ levels of performance. The full report costs $195 (not $95, as stated last month due to a garbled message). Call Therese Rabatin at 1-800-523-4778.
