An editor of a banking magazine interviewed me recently on the topic of community bank directors changing role, and though not all the issues we touched on were cut-and-dried, one thing was clear: Directors have to be more active.
The days are gone when a board could consist of inside directors: the accountants and lawyers who earn their living from serving the bank, and the friends of the CEO, all of whom would go along with anything he proposed. One reason is that now, any director who mindlessly approves all the CEOs ideas is running the risk of a shareholder lawsuit.
Does this mean that directors should be more involved in decision-making on sensitive new issues like privacy, loan quality, and predatory lending? the editor asked.
I answered that the board should be wary of micromanaging, but heres the rub:
How can a director be active in assessing the quality of the banks loan portfolio without being directly involved in the analysis of each potential credit sitting with the loan committee that makes the final approval decision? How can he or she tell if customer privacy is being violated without being on top of day-to-day decisions that affect privacy?
It is to handle such issues that a chief executive officer is elected. And if the board members are dissatisfied with the day-to-day operations, they must remove that CEO.
So how can a board be active without micromanaging?
First of all, the directors should be the eyes and ears of the bank. It is up to them to learn what is happening to the banks image in the community and how it is standing up against its competitors. This information should be reported to the entire board.
A good board member, I told the editor, should also engage in MBWA management by wandering around: getting to know people at various levels in the bank and talking with them about their concerns.
She questioned whether employees would be comfortable with that and whether its even right for a director to bring up policies and practices so casually.
I replied that its right in every way. People often will not share their complaints or ideas with the CEO because they worry that theyll be fired, but they are more apt to tell directors whats on their mind.
It may be a tough job for a director to glean useful information, but if they dont do it, who will?
What about longer-range issues like diversification, merger/acquisition, or new legislation?
Again, individual directors would be invading the CEOs turf if they came right out and suggested policy changes. But directors can set up task forces to look into such broad issues and report findings to the whole board, and thus compel top management to consider these matters which is much better than simply waiting for the brass to bring these things up. All too often management is happy to maintain the status quo, and this is just what a good board should try to avoid.
Boards can go too far in running the bank, especially if there is one vocal leader who is seen as sort of a rival CEO to the top manager. But they can be constructive without being yes-men or usurping managements authority.