Banks have seen heightened interest from their shareholders in recent years. Unfortunately for bank boards and chief executives, this interest sometimes manifests itself in a move for their replacement or for the sale of the institution against the board's wishes.
Shareholders can be motivated to act because of performance or regulatory problems, or both. However, more commonly, problems come from a simple failure to communicate. This failure is often rooted in the unfounded belief that shareholders will always concur with the board's wishes.
Issues to Consider
Following are several issues directors and chief executives should consider in their relationships with shareholders, depending ownership structure.
First, let us consider an institution in which the board holds control.
It is not unusual for community banks and some regional institutions to be controlled by the board of a one-bank holding company. Often the bank board and the holding company board are virtually identical.
A Fiduciary Obligation
However, it is incumbent upon the board to protect the interest of minority shareholders who may not be represented on the board. A board has a fiduciary obligation to protect the interests of all shareholders, regardless of where stock control rests.
Minority shareholders should be kept well advised about the company's performance through shareholder meetings and other communications. Shareholders should feel they are part of the team and "in the know" regarding corporate matters about which they have a legitimate right to know.
Beware of Smug Attitudes
Problems in this type of situation often stem from a smug attitude by members of a controlling board who feel minority shareholders pose no threat to their positions. If these minority shareholders feel disenfranchised, they will be easy prey for a suitor unwanted by the sitting board who understands his ability to cause it trouble. It is far better to spend some time and money keeping these shareholders in the fold rather than risking adversity.
Boards should approach disgruntled or seemingly uninterested shareholders with the view of buying their shares back, instead of leaving them as a chink in the corporate armor.
Shareholder Base Aging
At widely held institutions, there's a different set of issues.
It is quite common for board members to collectively hold only a small percentage of the institution's stock. In such cases, shareholder relations are particularly important.
The shareholder base of many banks has aged significantly in the last decade, and heirs of former shareholders have relocated out of the community. These two factors have resulted in a significantly increased desire for liquidity and decreased loyalty to the bank.
Increased Dividends a Help
Bank boards and management are often made up of older and financially secure individuals whose personal financial situations do not always parallel those of the shareholder base. As a consequence, board members mistakenly believe the shareholder base does not have a strong interest in the ordinary income received through dividends.
Payment of a realistic and yearly increased dividend is one of the most effective tools of communication available to the board.
Definitive Plan Needed
While hostile takeovers and creeping tender offers are generally associated with large, publicly traded organizations, similar scenarios are often played out in smaller, privately held companies. These institutions are tempting targets when shareholders believe they are not being treated fairly by the board and management, or when there has simply been a lack of attention to shareholders.
Boards of widely held banks that wish to maintain their ownership structure and direction should have definitive plans for working with shareholders.
An essential element in this planning process is the establishment of a bank holding company, a vehicle for making a market for the institution's shares and redeeming the stock of shareholders who may wish to cash out.
If the board owns control of the institution, the holding company is still an extremely valuable tool for making a market in minority shareholders' stock and, possibly, providing other financial benefits to shareholders.