Stocking a board with inside directors - management, former management, principal shareholders, and relatives - is one way of achieving a harmonious company and support for a chief executive.
But just beyond harmony can lie complacency and, ultimately, a serious breakdown in board oversight.
So how many inside directors is too many?
"I don't think there's any hard-and-fast rule," said Roberta J. Wagner, president of the Director Resource Group in Warrenton, Va. "It depends mainly on the temperament of the board and of the CEO. You just need the right people who have the ability to question management when enough red flags go up."
But Ms. Wagner and most others interviewed said the fewer the insiders, the better. Between one and three is considered appropriate, they said.
A survey conducted by the Director Resource Group underscores this assessment. Of the banks with an average financial performance, more than 63% of those surveyed have two or three members of management on their boards. Of those with superior performance, just 40% have two to three managers on their boards.
Superior banks are more likely to have boards with just one member of management - 43% - than the average banks. But the survey showed that below-average banks also had a high percentage of boards - 58% - with just one manager from the bank.
"It's not so surprising to see the below-average ones doing what the superior ones do because they have had to pick up their acts," said Ms. Wagner. "It's the average ones, which have not experienced any crises, that follow lackluster board practices."
One bank, in Albemarle, N.C., has no inside directors. The Bank of Stanly, with $118 million of assets, periodically runs advertisements in the local newspaper asking the community to nominate director candidates.
Its current chairman, which at most banks is also the chairman of the bank, is a law enforcement officer with the FBI.
"We didn't want to have a rubber-stamp group," said Roger L. Dick, chief executive of the Bank of Stanly. "This was designed to be a check and balance on management so that no dominant ego can run the bank."
Experts said family-run banks tend to run into the most problems with their board makeup. These banks often have three or four family members on the boards, in addition to long-term, loyal bank customers who have become directors.
"We wanted to attract people we had a fairly close relationship with to make sure that we didn't have divergent philosophies," said Frank W. Hilton, chief executive of Citizens National Bank of Springfield, Mo. Despite this philosophy, Mr. Hilton still has only two inside directors on his nine-member board.
The $300 million-asset First National Bank of Naples, Fla., has four inside directors on its 16-member board.
"I think most have only the president and CEO on the board, so we probably are an exception," said Gary L. Tice, chairman of First National. "But I don't have all the answers, and these guys bring a lot to the table."
He added that if one of the inside directors steps down, he would likely not be replaced with another member of management.
