In the early 1980s, Grant County Bank of Ulysses, Kan., had an 11- member board of directors consisting primarily of aging local business leaders that generally rubber-stamped management's recommendations.
That was then. In the decade since, an industry turned inside out by unrelenting regulators and white-hot competition has forced a sea change in the community bank boardroom.
"The board has been transformed from one of general knowledge and oversight to one of action, detailed knowledge, and independent thought," said Sam Forrer, chief executive and a director of the $90 million-asset Grant County Bank. "It's now an initiator of policy, rather than just a validator."
The change at Grant County Bank is an example of what has occurred nationwide at community banks over the past decade. Once a largely ceremonial position, the community bank director now plays a more active and exacting role than ever before, observers said.
At Grant County, for example, the board has shrunk to just five members - the minimum required by state law - two of whom are in their mid-40s. The directors convene twice a month and, between meetings, immerse themselves in the bank's affairs.
The primary cause of this change is the savings and loan debacle and the bank failures of the late '80s, and the increased scrutiny those events spawned, industry experts said. The search for culprits from that period led Congress and regulators to those ultimately responsible for the banks and thrifts - the boards of directors.
The ensuing fear of liability and failure, naturally, has led to better- informed, more vigilant boards.
"The watershed was the banking and S&L problems of the '80s," said George L. Freibert, president of Professional Bank Services Inc. of Louisville, Ky., a consulting firm that advises bank boards, among other practices. "It placed greater attention on the duties and responsibilities of directors. Boards became more aware of precisely what was expected of them."
The transformation of the community bank director has been a mixed blessing, though.
The fear of liability and the growing time commitment required have prompted some bank directors to resign and frightened potential directors away, some observers said.
What's more, individuals most qualified to be directors are also likely to be the ones most aware of the problems and issues in the industry and, consequently, the most likely to shy away from the job.
"Every board has only a small percentage that are the movers and shakers," said Keith L. Dalrymple, chief executive of Dauphin National Bank of Harrisburg, Pa., and an adviser to the American Association of Bank Directors. "And they are the ones that might refuse to serve or resign because they have the pulse of the issues and know what's going on.
"I think this will slowly eat away at the quality of bank leadership in the country," he added.
This trend is most acute in the smaller banks and thrifts, where part of every board of directors is involved in the loan process, unlike the bigger bank boards, Mr. Dalrymple said. This makes them vulnerable to lawsuits if the loans fail.
"A well-regarded individual in a community will simply stay away from the institution for fear that if he gets involved, starts approving loans like directors of small institutions do, he will be subject to personal liability far beyond what he is receiving in fees," David H. Baris, executive director of the American Association of Bank Directors, testified before the House Banking Committee in June. "It's not worth it."
The government has the power to freeze the assets of a director who is under investigation. Directors can also be assessed civil penalties of up to $1 million a day, compared with the maximum for securities dealers of $100,000 a day.
In addition to a fear of serving, directors may also fall victim to a fear of lending. Faced with such harsh penalties, directors might back away from granting what may be considered riskier loans to small businesspeople, for example, loans that might have been commonplace a decade ago.
A survey about to be released by the Director Resource Group, a Washington, D.C.-based consulting firm, underscores these changing perceptions. In 1989, directors of institutions with less than $1 billion of assets listed their primary concerns as the cost of deposit insurance and understanding the Financial Institutions Reform, Recovery, and Enforcement Act, enacted that year. Today, those issues have been replaced by coping with regulatory risk and requirements, the survey said.
But some believe that in the end the prestige and stature associated with being a local bank director outweigh these other concerns.
"It's got some real sex appeal," said Parker L. Harrell of Korn/Ferry International, a head-hunting firm. "People still like telling their secretaries that they'll be out for a few hours because they have to attend a directors meeting at the bank."
