In two recent columns, I've written about the makeup of bank boards. Community banks, it seems, prefer active people -- local entrepreneurs -- and sometimes struggle to find a politic way to retire older members who have turned the board into a retirement club.
Also, many CEOs find that having a lawyer or accountant on the board can be damaging to the bank's efficiency, as these members are often more interested in cultivating business for their own firms than in helping the bank to prosper.
But in an environment in which board members are subject to lawsuits from regulators, one question remains unanswered: "Why would anyone want to serve on a bank board in the first place?"
Fear of Litigation
This is a serious problem.
Many top business and professional people are declining to serve on bank boards or are resigning because of this fear of litigation.
After all, running a bank is complex. You have to know bank accounting, legal matters, marketing, and a number of other specialties that are not needed in serving on the boards of many other types of corporations.
Think how often we have read of bank board members forced to make restitution to the bank from personal funds for complex board decisions they hastily voted for but did not fully understand.
Even in cases when the regulators accused the director of insider activities, the issue has sometimes been far too complicated to automatically conclude that the director was really guilty of misfeasance, malfeasance, or nonfeasance -- the big three among lawsuits against board members.
So how do we get the board members we want and make sure we do not have to depend on those who have ulterior motives?
A Reciprocal Arrangement
First, of course, is the effort the bank staff must make to have a squeaky clean reputation. A director brings his own good name to the bank, just as being a board member accords the individual a share of the bank's standing.
Every action the bank takes can affect that image.
I remember one comptroller telling me, "If there is any way to interpret a question so that it helps the government, even if it hurts the bank's bottom line, I am bound to take it; our reputation is our most important asset."
Directors in the Dark
Second, the CEO must not look at preparation for board meetings as a nuisance. The bright people you want on the board can see if they are getting the facts of importance or if they are being given a whitewash.
In my own case, sitting on the board of a $480 million real estate investment trust that later went Chapter 11, I found that I learned more about what was happening to us from The Wall Street Journal and talking to heads of other REITs than I did from our monthly board meetings in Atlanta.
Later on, being sued for every cent I had for policy decisions and statements I knew nothing about but which the board had allowed to pass, I swore never to serve on another board.
Finally, there is the issue of what the board discusses and learns. Why is an individual willing to serve as a director? It is certainly not for the small fees most get paid.
A community bank does not pay the $40,000 to $50,000 fee per year for board members that giant big board companies do. Ten percent of that sum is more like it.
Directors of community banks report they are willing to take on the heavy work load and responsibility, plus the liability, because they find that serving the bank gives them a handle on what is happening in their communities.
"Being a board member is the best education I have ever had in the field of economics," many directors have told me.
Give Adequate Information
This may be the key.
The CEO must be honest, and give adequate information to board members on a timely basis so they can read it before the meeting.
If the head of the bank shares information about the community with the board, as well as information about the bank's day-to-day role in the community, board membership can be made appealing enough so that a community bank can attract and keep the directors it wants.
