One size fits none in quest to define ideal bank board

M&T’s board sticks out for a couple reasons: It’s bigger than those at other regionals, and it has a relatively large share of inside directors.

The Buffalo, N.Y., bank’s recent election to the board of Kevin Pearson — its vice chairman in charge of commercial banking, among other functions — gave it 18 directors. Most other regionals have 12 to 14.

Pearson became its fourth inside director. That is not a large number, but at 22% of the total board, the $119 billion-asset M&T’s share of inside directors is the highest when compared with seven other big regionals.

Breakdown of independent, inside directors at eight regional banks.

There is no war going on over the makeup of the M&T board, like there was recently at the scandal-plagued Wells Fargo, but M&T’s board structure highlights a number of corporate governance questions that even well-run banks are asking themselves: What’s the right mix of independent and insider directors? After how many years should directors be asked to leave? And what is the main job of directors?

M&T declined to comment for this story. Its board size is no doubt partly a function of having grown through acquisitions over the years and having kept directors through some of those deals, observers said.

Bright-line answers are tough because each bank’s situation is different, but experts say there are some general guidelines.

“A high percentage of inside directors can be a red flag, especially when combined with other indicators that suggest a lack of independence,” said Jeremy Kress, a lecturer in the University of Michigan’s Ross School of Business. “I’d be concerned about boards that are too big. … I’d be concerned about boards where many members have very long tenure, as that can suggest a lack of independence. A lack of diversity may suggest the board is not equipped to challenge management effectively.”

Board composition has become an increasingly important issue, and not merely because of more prominent questions about diversity or engaging younger generations.

Regulators have also begun to demand more oversight work from boards in recent years. One high-profile example of those regulatory expectations came in March, when the Federal Reserve hit Wells with an order restricting it from further growth and also ordering its directors to take more ownership of Wells’ strategy and risk tolerance.

And fresh blood has been recruited to the Wells board. Within the last year, seven of the company’s 15 directors have left the board, and those who departed had an average tenure of more than 14 years. Today, the average tenure on Wells Fargo’s board is less than three years.

Where boards are concerned, diversity doesn’t mean strictly gender or ethnicity, but also diversity of thought — especially relevant thought, said Carter Burgess, managing director of the search firm RSR Partners. Banks have always liked to staff their boards with directors experienced in other regulated industries — utility companies are common — but increasingly banks are looking for directors with tech experience, he said.

And when it comes to independence, the consensus is that the more independent directors you have, the better that is for the board. Outsiders are generally thought to do a better job of monitoring management, while insiders are considered better suited to providing advice and continuity.

There are practical reasons to have a high proportion of independent directors, too.

“If you have too many non-independent directors, it’s hard to staff your committees,” said Bob Rivers, the CEO of Eastern Bank in Boston.

The $11 billion-asset Eastern Bank has just two non-independent directors at any given time, its current and former chief executive officers, and neither can sit on audit or executive compensation committees, Rivers said.

For many companies, a typical board of directors might number around 10, although 12 is a little more normal for the banking industry because bank boards have more committees than those in other industries, experts said.

At 14, Eastern’s board is also a little bit on the larger side, although Rivers said the bank has staffed its board a little bit higher than normal in anticipation of some upcoming retirements. Half of the bank’s directors are also now either women or people of color.

Again, establishing firm rules is hard — as is defining “independent.” A board stacked with company outsiders who have mostly served for a decade or more can still raise questions of independence, said Rusty O’Kelley, the global leader of Russell Reynolds Associates’ board consulting and effectiveness practice.

“You become very close to management,” he said. “Many directors become personal friends and close to each other on the board as well as with management, and you may not exercise the independence and dispassion you would have shown earlier.”

Under the U.K.’s corporate governance code, directors are presumed to lose their independent status after serving for nine years on a board, but the U.S. has no similar standard.

Although term limits are becoming more popular at some public companies, industry experts say it is unwise to count out directors just because they are older or have served for a long time.

For one thing, Americans are living longer than ever. That is reflected in public companies’ increasingly older mandatory retirement ages.

And, in a highly specialized industry like banking, directors without a financial services background may need those extra years to learn the industry so they can more effectively serve on audit and risk management committees.

For his part, Rivers said that even though he has developed interpersonal relationships with Eastern’s directors over the years, the longest-serving directors certainly do not shy away from challenging him.

“If anything because our relationship is stronger, they feel more confident in that relationship to say, hey, this is something I think the company should really look at harder,” he said. “It’s more a function of the people you get and the expectations you set than a function of the tenure or their age.”

At the end of the day, different dynamics work for different boards, Burgess said.

“Some folks are sticking around, and they’ve been doing a good job,” he said in discussing M&T, which has seen its shares rise 7.2% in the past year and reported a $353 million profit in the first quarter. “If you look at the performance of this company’s stock, you probably wouldn’t be too concerned about it. If this was a different situation, you probably would be.”

Kevin Wack contributed to this story.

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