Time to refresh your bank's board

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Serving on a bank board isn't what it used to be. Directors today are expected to interact regularly with regulators and shareholders, monitor cybersecurity efforts, plot online and mobile strategies, ensure the right culture by setting the tone at the top, and a whole lot of other things that, even a decade ago, weren't part of the job.

Yet the composition of many bank boards hasn't changed all that much. Overall, the industry has a reputation for boards that are "stale, pale and male" - clubby cliques of longtime members who lack the independence, skills and diversity to help a bank compete in the modern world. It's not always a fair characterization, but if your board fits the profile, it might be time for a refresh.

"If you want a high-performing company, you need a high-performing board," said Alan Kaplan, chief executive of Kaplan Partners, a Philadelphia-based executive recruiting firm that works with banks. "That means the board must be willing to refresh itself and ensure that it has the most current set of skills and experiences to help the bank succeed."

There are no reliable stats specifically for bank boards, but corporate directors in general are longer-tenured and older than they've ever been. According to Spencer Stuart, another executive recruiter, the average age of an S&P 500 independent director was 63.1 in 2015, up from 62.1 five years earlier. Average tenures held roughly stable, at 8.5 years, but 21% of companies boasted averages of at least 11 years.

Experience and institutional memory aren't bad traits for a director, and having veterans of the financial crisis would seem a definite plus for a bank board. "You wouldn't change Tom Brady as quarterback just to refresh things," said Joseph DePaolo, who is the CEO and also a director at the $38 billion-asset Signature Bank in New York. "If you have directors who are energized, understand the issues and are productive in committee meetings, things don't need to be refreshed."

Even so, academic research suggests that regular changes are good for boards. A 2013 study led by Sterling Huang, a researcher at Singapore Management University, found that director effectiveness peaks at nine years. After that, providing independent oversight and strategic direction gets tougher, leading to poor performance and other problems.

"Directors are expected to challenge and innovate," said Charles Elson, director of the University of Delaware's corporate governance center. He pegs the ideal limit for board service at 15 years. "The longer you're there, the more comfortable you get with the status quo."

Shareholders also are more likely to push for board changes, especially if performance lags. "Long-term investors are becoming more vocal in demanding that boards have processes in place to review and evolve board composition in light of emerging needs," said Julie Daum, head of the North American board practice for Spencer Stuart.

Many boards today are pieced together like jigsaw puzzles, with specific skills sought that reflect the complexity of strategy and oversight. According to the consulting firm PwC, financial, risk management and industry expertise are in highest demand among financial services boards. Cybersecurity, IT and human resources skills aren't far behind.

Adding board members is easy; the hard part is cutting the dead weight. According to PwC, 42% of financial services directors in a 2016 survey said someone on their board should be replaced, up from 34% in 2014. Yet few are willing to speak up publicly, for fear of damaging relationships.

"It's really hard for board members to ask someone to leave if they're underperforming or their skills are no longer current," Kaplan said.

Age and term limits are one solution. Among S&P 500 companies in 2015, 73% had a mandatory retirement age for board members, according to Spencer Stuart. But oftentimes change is mandated less by age or tenure than skills.

Kaplan suggests boards perform a confidential peer evaluation, run by a trusted outsider.

Fellow directors will open up about colleagues' shortcomings if they know it won't come back to them. If the group collectively identifies a weak link, then it's time to gently ask them not to stand for re-election.

"Sometimes you need to have the tough conversation: 'Thank you for your service; you're now an emeritus director,' " Kaplan said.

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