Creating a partnership through a governance plan

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Creating a partnership through a governance plan

From the January 2002 Bank Directors Briefing. Copyright Simmons Boardman Publishing. For information or to subscribe, call Steve Cocheo, editor, 212-620-7219, scocheo@sbpub.com

How can a bank CEO and the bank’s board make sure they are singing from the same hymnal? One way is to have a governance plan. Veteran consultant Jay Cornet, who also serves as chairman of Carolina Bank and Carolina Bank Holdings, Inc., Greensboro, explains some of the basics in this guest column.

By John D. "Jay" Cornet

In a recent conversation with a bank CEO, I asked him what one word best described what he wanted his board to be. With a wry smile and hushed tones, he said–"GONE!" While said in jest, his comment underscored the need for an effective governance plan in his bank.

For many banks, governance is defined by the delineation of roles–the Board of Directors’ role is to govern and management’s role is to manage. While this is an important separation of duties, a better definition of governance may be:

A partnership of the Board of Directors and the CEO to control and direct the making and administration of bank policy.

While this is simple to state, it seems to be more difficult to implement. Accomplishing effective governance requires development and guidance by the chairman and the CEO with the participation of an engaged, active, and knowledgeable board.

Value is created for the bank through the governance plan. Many investors today want to know an institution’s governance plan before and after investing. An effective governance plan, well implemented, makes a company stronger and, more focused. More than that, it can provide a sound basis for effective working partnerships among the board, shareholders, and management.

I suggest seven steps to effective bank governance.

First, assess the current state of governance. Before beginning to develop a plan, find out where your bank and board are. Conduct objective interviews with board members and management to determine their understanding of governance and their expectations for each other. (This step, and others, may best be executed by tapping outside experts.) This assessment should be detailed and cover a broad range of subjects. Among these are board duties, banking knowledge, education, expectations, management, working relationships, and measurement.

Second, based on the assessment, prepare the written bank governance policy. The bank governance policy needs to be a written statement covering how the bank will be governed, the board’s duty to the shareholders, to the board itself, and to management. The governance policy should work in concert with the bank’s mission statement.

Third, develop a governance policy and procedure manual. This document provides each board member with all the information needed to understand the duties of directors. It should include such items as: the governance policy; pertinent federal and state regulations; board structure; duties and expectations; strategic plan and planning guide; board policies and procedures; compensation plan; education documentation; and bank operations information.

Fourth, implement the governance plan through the policies and procedures. With a governance policy in hand and a manual written, be certain to follow them. These should not be "shelf" documents that look good sitting on the shelf, but instead be active tools. It is a good idea to introduce and implement these during a board retreat where everyone can focus on the material. When implementing a new governance plan, it is important to present the findings of the assessment to the board and link policies to needs as identified by the board and management. These documents should be reviewed and updated regularly and be used as the guide for board members to effectively accomplish their role.

Fifth, communicate your governance plan. Let your shareholders know you have a plan. Share this information with potential investors and market makers. Be certain that senior management and staff know that the board has a plan for effective governance of the bank. Communication helps to instill confidence among all constituencies of the bank.

Sixth, evaluate board and CEO governance effectiveness. It is very important to evaluate board performance at least annually. At a minimum, this should be an evaluation of the board as a whole and how it has performed relative to the governance policy. A more comprehensive approach consists of three steps: evaluation of the board as a whole; self and peer evaluation of individual members; and a system for CEO evaluation by the board.

Seventh, and finally, review and revise the governance plan. The governance plan and policies should be reviewed annually. This can be accomplished along with the annual review of the bank’s strategic plan. Any time there is a change in the bank’s structure the plan should be revised to reflect that change. The governance plan is a "living" document that is integral to proper bank governance. Policies should be reviewed to be certain they still properly reflect the board’s governance philosophy. Each board member should objectively ask whether decisions of the board were made in accordance with these policies. Each board member needs to evaluate how they met their responsibilities to themselves, other board members, management, and shareholders. Based on this evaluation, adjustments can be made to the plan and policies.

This article appeared, in somewhat different form, in the December 2001 issue of Carolina Banker Magazine, published by the North Carolina Bankers Association. Mr. Cornet provides bank consulting services through JDC Associates, LLC, Greensboro, (336) 288-0737.