In the latest contest for the presidency of the Schmidlap National Bank, I had asked for suggestions on how to make boards of directors more critical of management.
I also asked whether directors' pay should be more closely tied to the long-term performance of the bank.
Paul A. Bauer, president of Bauer Financial Reports of Coral Gables, Fla., presented a different problem in board effectiveness: How can you get the CEO to give the board data comparing the bank to similar ones that are doing better?
That, of course, is precisely when the board should be seeing and acting on data such as Mr. Bauer's company and many others develop and publish. Board effectiveness means access to information without CEO screening.
A valuable suggestion arrived from Roy L. Harmon, president and chief operating officer of Bank of Tennessee in Kingsport. He is willing to share data with other banks on how their boards are compensated, to see if each can gain ideas for making its board more effective and more inclined to look at the longer term.
Mr. Harmon's postal address is Box 566, Kingsport, Tenn., 37662; the fax address is 423-378-9558. Maybe some outside directors could start talking to other outside directors like this. After all, their names are on every periodic statement of condition, so they are easy to identify.
A suggestion much more closely directed to the topic came from an Aug. 9. article on the Community Banking page of this newspaper.
In a discussion of how banks can get and keep good directors in this era of litigation and tougher regulatory attitudes, Sam Forrer, CEO of $90 million Grant County Bank of Ulysses, Kan., was quoted as saying he had cut his board from 11 members to five. The directors not only meet twice a month, but immerse themselves in bank business in between.
Mr. Forrer's comments imply that many boards are too unwieldy and have too little young blood to be as effective as possible.
Now, in an obvious attempt to win a coveted Schmidlap presidency award, my old friend Marty Lowy, lawyer and author of books on banking, suggested a "purified" system of accounting for the difficulty and quality of decision-making. His suggestion:
"During the year our bank will record all acts or judgments of the board that could affect long-term results. We will send these to you - a college professor - to be graded, and directors' compensation will be based on your grades. In this way, board members can retain their amateur status."
No luck, Marty. I can't be bribed into sending you the award. But I can take his tongue-in-cheek letter and turn it around into a serious comment.
It seems a splendid idea to have a review session where the directors look back on its decisions and reflect on whether they did what they were supposed to do. Such an internal review once a year would have the same value as going over exams at the end of a course to see where the students went wrong.
Well, then, who does win our award? George E. Dunkel, CEO of the Community Bank of Sullivan County in Monticello, N.Y. His letter reflects the best of all that makes community banking strong.
Mr. Dunkel writes:
"I am pleased to say that the directors of Community Bank of Sullivan County do not fall into any of the categories you described in your Sept. 26 article.
"Community Bank of Sullivan County opened for business on Dec. 7, 1993. The idea for the bank was developed by a group of local businessmen in the Monticello area beginning in 1990, after the next-to-last local independent bank was merged into one of the super-regionals. The only remaining independent was located on the other side of the county.
"The directors hired me as president and CEO in April 1992. And in July 1993, after 14 months of efforts and several hundred thousand dollars in pre-opening out-of-pocket expenses paid by the organizing directors, we were successfully capitalized with $5 million.
"Until my job interview I had never met any of the organizing directors.
"Our bank has gotten off to a pretty good start in terms of asset growth. However, we do not anticipate being profitable until 1996 at the earliest.
"On average, our directors attend three to four meetings per month - and they refuse to take any fees whatsoever. Their feeling is that as a group they induced their family members, friends, and business associates to invest in the bank, and that it would not be proper for them to receive fees until such time as the bank becomes profitable.
"Not one director is beholden to the CEO for any favors or special treatment, and we plan to keep it that way."
Mr. Nadler is a contributing editor of the American Banker and professor of finance at the Rutgers University Graduate School of Management.
