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7 Best Practices for an Ideal Community Bank Board of Directors

7 Best Practices for an Ideal Community Bank Board of Directors

As you set out to look for Board successors, consider these 7 best practices for an ideal community bank board of directors. As we conduct strategic planning sessions with community banks around the nation, we often hear the need for succession planning at the Board level. This need is so urgent that it becomes one of the institution’s top objectives for their strategic plan. But whether that’s your situation or not, these 7 best practices for an ideal community bank board of directors may help you:

Differentiate between “independent/outside director” and an “insider.”

The first step is to understand the difference between an “independent/outside director” and an “insider.” Outside directors are those who are not employed by the institution nor are a large shareholder. They can be a customer and can (and should) receive compensation for their Board service. An insider, on the other hand, is employed by the institution for their regular job or is a family member and part of the ownership. Ideally, in a community bank board of seven Directors (which is the minimum we recommend), you should have four outside directors and three insiders. With three insiders you can have the majority shareholder/owner, one family member, and the CEO of the bank.

Be open to inviting “independent/outside directors.”

Be willing to invite “independent/outside directors” to join your board who are not family members, nor owners, nor customers. These candidates are hard to find but they are the best suited for the Audit Committee Chair role. They bring a true objective perspective and have zero conflicts of interest. They will tell you the truth!

Avoid the risk of having other executives as directors.

It is common for small community banks to have more than one executive as Board directors. I strongly caution you against this practice as it puts the bank at risk in two ways: First, if you lose the executive, you will also lose a director. Secondly, if the executive has performance issues, you cannot discuss it with other directors without excluding that one director and that, at the least, can be awkward. At the worst, your bank keeps a bad performer which puts you at risk.

As a best practice, the President/CEO should be the only executive that is a director. If your bank has a separate CEO and President then, ideally, only the CEO should be on the Board. The President can also be on the Board but keep in mind he/she occupies an additional insider seat.

Pay your Directors well.

Directors of a bank have an enormous responsibility and risk. For this reason, you don’t necessarily compensate them only for the time they spend on meetings. Some institutions hold monthly meetings in addition to quarterly committee meetings. The Board package ranges from 100 to 300 pages, and it takes time to read and come prepared to the meetings. Most Board directors still run their own businesses or hold high positions of leadership. Therefore, it is fair to compensate them for their time, in addition to their fiduciary liability. If you want to attract the best board directors, you must compensate them fairly based on your asset size and complexity of your institution.

There are out outside organizations such as Bank Director that conducts in-depth Board compensation surveys that you may check out. You could also ask your peer bank colleagues if you need to review your Board compensation.

Clarify Directors’ roles and expectations.

The primary roles of directors are their fiduciary duty to enhance the shareholders’ value, provide strategic direction for the bank, and to protect the customers’ data and deposits by ensuring the bank is safe and sound. Board Directors can refer business to the bank but that is not their primary responsibility. Business development is a management responsibility and that is the primary function of business development officers.

Invest in Director training.

It is crucially important that you invest in director training and budget for it annually. There are conferences, webinars, and onsite training you need to provide to your directors to stay on top of regulation, cybersecurity, and risk management. There are also special certifications such as the Certified Community Banking Director offered by the SW Graduate School of Banking Foundation in partnership with the Southern Methodist University.

Consider establishing an age limit.

While it’s important to consider establishing an age limit, I am personally more interested in director engagement. If a director is actively engaged in the meetings and provides valuable insight, it doesn’t matter how old they are. Having said that, it is important to bring fresh blood and new perspectives to your Board of Directors as well as diversity of skills.

I hope these 7 best practices for an ideal community bank board of directors helps you in your quest for your directors’ successors. Struggling with your directors? As always, we’re here to help.

Ten Human Capital Management Best Practices – Part 2

Ten Human Capital Management Best Practices – Part 2

Human capital management continues to be at top concern for leaders; therefore, we are devoting this two-part blog to address ten human capital management best practices. In Part 1 I defined what human capital management involves, the important components, and shared the first five best practices. In this blog, I address the next five best practices as follows:

6.      Establish and Communicate Succession Plans for All Key Positions

It is imperative for your leadership team to identify successors to take over the key positions in the organization. You need to identify an “immediate successor” and a “planned successor” to have a complete plan. The immediate successor to a specific position could be several employees in the event of a tragedy or sudden departure. The planned successor must be a person who has the skills, talent, and experience to take over the duties of the person leaving. Once you identify the successors, tell them! Often emerging leaders leave a company because nobody told them they were being considered for key positions in the company. Communication is key to the success of succession plans.

7.      Provide Leadership and Management Training for Emerging Leaders

Once you identified and communicated to the potential successors that they have an opportunity to move into leadership positions, provide them with leadership and management training. Choose the appropriate course for them to attend and ensure you budget for their training. There are also leadership books that can prepare emerging leaders to take over leadership positions. They need to know that you support their learning activities and that it’s okay to not have all the credentials just yet. Give them time to grow and mature so they can succeed at their first supervisory job and grow from there.

8.      Continued Leadership Development for Experienced Leaders

One key to the ongoing success of any company is to continue to develop your leadership team members. Often their training does not happen because they themselves are too busy helping the upcoming leaders. But leaders at all levels must continue to develop their own leadership talent. There is nothing like experience; however, even experienced, matured leaders need help in new situations—especially in the uncertain world we currently live in. Ensure you budget for higher leadership training and send your senior executives. They will come back refreshed and encouraged to continue leading the organization.

9.      Implement Cross-Training throughout the Entire Organization

The best way to avoid “control freaks” in your company is by cross training everyone in something else. When there is an established culture where every employee is trained first in their own job and then cross-trained to back up another position, the company will experience higher employee retention. Employees appreciate when the company invests in their education and training. To elevate the importance of ongoing cross-training, always keep your customers top of mind. Can they be serviced regardless of who is on vacation or out of the office? If the answer is yes, you have a well-trained and cross-trained staff.

10.   Pay Incentive Compensation Plans and Bonuses Based on Performance

Organizations want to please their employees and ensure they feel appreciated. However, there is now a spirit of entitlement where employees forget that a “bonus” is simply that—a bonus paid based on their efforts beyond the call of duty. Communication is the key to ensure employees understand on one hand that they are valued, and on the other hand, that they are paid to do a specific job. They should not expect a bonus for doing their job. The bonus is based on merit, their own performance, and also based on the company meeting its goals as a whole.

I hope these ten top human capital management and talent management best practices help you in your development of your talent management program. Attracting the right talent and then taking care of your top talent is key to the future success of your organization.

Struggling with your talent management program? We’re here to help.

Books by Marcia Malzahn