The success or failure of a community bank often rests with its board of directors.

This is true of established banks, but especially so of newly chartered ones. Those who have studied de novo institutions report that if the board truly backs the bank - giving it its deposit and loan business and encouraging friends and acquaintances to shift theirs - it has a much better chance of prospering.

What do effective board members do?

First and foremost, they are the world's best business gatherers. They talk up the bank, look for opportunities to direct newcomers to town to it, look for companies that will soon need financing and try to hook them, and serve as the eyes and ears of the marketing department.

They can also be management's eyes and ears on the bank's day-to-day operations. When they see something they feel needs correcting, they pass the information on to the managers. They are also always looking for bank policies that need to be changed, and report these too.

Playing this role is easier than you might think. People who don't have the courage to complain to a bank officer will often tell their woes to a bank director.

Credit union guru Mike Welch, the publisher of Credit Union Times, recently wrote a fine editorial in which he discussed the strengths and weaknesses of credit union directors. Much of what he said applies to banks.

Mr. Welch says directors are harmful if they:

  • Micromanage and constantly remind the CEO that he or she is a "hired hand."
  • Are overly influenced by their primary jobs outside the bank - as in, "At my organization we do things this way … ."
  • Form cliques on the board and hold official meetings without the CEO.
  • Try to influence raises and promotions, and constantly try to get extra compensation - in health benefits or travel, for example - for their own services.

Then there are the things bad directors are incapable of doing:

  • Making a decision.
  • Dealing well with troublesome colleagues.
  • Helping the CEO do a better job, by giving constructive criticism.
  • Working as team members with senior management, jointly setting priorities (and sticking to them) without getting bogged down in petty details.
  • Conducting a meaningful CEO evaluation.

Finally Mr. Welch stresses a point that I have always considered vital: A good director knows when to quit the board.Too often board members are retirees or semi-retirees who view their directorships as a recreational pursuit. They go to meetings looking to reminisce about how things were done differently (and of course better) when they were in top positions.
Board members can be a great strength, especially if they know the difference between policymaking and management. Their diversity of background and their perspective as outsiders can be crucial to the operation of a bank.

The key is finding these good people - and spotting the bad ones before it's too late. Mr. Nadler, an American Banker contributing editor, is professor of finance at Rutgers University Graduate School of Management.

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