US Banker  |  December, 2009

By Paul Davis

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Responding to regulator and investor pressure to be more accountable in a post-crisis world, an increasing number of banking companies are shrinking their boards and asking more of them.

“The writing is on the wall that investors want accountability,” said Stephen Davis, the executive director of Yale University’s Millstein Center for Corporate Governance. “We’re entering a new generation of board responsibility, and we’re experiencing a significant change in the expectations for what boards do.”

Bank boards have been slimming down and the trend will only continue, observers said. Among the nation’s biggest banks, the average board has roughly 15 directors, ranging from 10 at Capital One Financial Corp. to twice as many at BB&T Corp., according to company filings. Many boards grew in the last decade as companies made acquisitions or sought out high-profile directors to raise the board’s profile.

Ray Groth, co-founder of Duke University’s Director’s Education Institute, said he expects more boards to dwindle to as few as seven to nine members, consistent with a broader trend across corporate America.

Reducing board sizes could address a concern that banking companies may find it harder to encourage people to volunteer in what has become a time-consuming and highly scrutinized role. Though Bank of America Corp., Citigroup Inc., BB&T and Fifth Third Bancorp have all hired directors this year, some believe that the banking industry as a whole is facing difficulties with recruitment.

“Bank board searches aren’t easy these days,” said Thomas Watkins 3rd, a partner at the recruiting firm Chartwell Partners. “There are a lot of negative incentives to serve.”

Diminished interest and the rising costs involved with many directors may also lead to smaller boards, some said. Government oversight and legal quagmires have threatened to dampen interest. Several governance experts pointed to the New York attorney general’s decision in September to subpoena five B of A directors to discuss disclosures concerning Merrill Lynch & Co. Such actions are driving up the cost of insuring any individual director from liability, something that is considered a necessity to get qualified candidates to serve.

Added duties are likely to increase time commitment, which could rule out those who are executives at other companies. The result may be an aging candidate pool of retirees who are available to serve. The average age on the biggest banks’ boards is already 61, leaving less than 10 years until they reach the typical board retirement age.

Board independence has been steadily rising in the past decade. Eighty-eight percent of directors at the 12 largest banking companies are independent. Five years ago and immediately after passage of the Sarbanes-Oxley Act, independent directors made up about 84% of the board at those companies.