Community banks are missing an opportunity to drive success if they are not filling their boards with seasoned professionals whose backgrounds and talents map directly to the challenges facing banks today.

Traditionally, many board directors at community banks have trusted management to make the right decisions without probing into the details. This model is no longer effective, as community banks confront unprecedented challenges.

Today, successful banks are thinking of board members as assets that add value to an organization, and individuals who work hand-in-glove with management to drive growth and success. Private equity-backed banks have illustrated how this new model works by filling the seats of their boards with members who not only have industry expertise but actual experience in building and managing different facets of a business. The rest of the community banks can take a page out of their playbook to drive success as well.

Since 2008, many regulations have been introduced in response to failing banks whose leadership placed a premium on chasing rapid growth strategies without implementing sufficient risk management controls. The Dodd-Frank Act puts additional burdens on banks of all sizes and, therefore, on their board directors, particularly in the area of risk management. Clearly, bank boards today are under a lot of regulatory scrutiny, as well as pressure to bring more value to the table. For community banks in particular, the difference between board members with hands-on banking, compliance and technology knowledge and board members without can mean the difference between a bank's success and failure.

As the need for strong strategic leadership grows, here are a few questions to consider:

  • Do the talents of your board members align with your business objectives?
  • Have your business priorities broadened from loan generation to expense reduction, from in-house processing to outsourcing, and from organic growth to mergers and acquisitions? Do the capabilities of your board measure up?
  • Is there enough flexibility in your board policy to rethink the terms of membership, or do the majority of your board members stand for re-election year after year?
  • What is the average tenure of your board members, and how many joined the board before the credit crisis?
  • Are your board members willing to do what it takes to add value?
  • Is the CEO working with the board chairman to bring in the right talent?

In 2010, when Sterling Financial Corporation, the holding company of Sterling Savings Bank, was fighting for its survival, private equity financiers Thomas H. Lee Partners and Warburg Pincus invested over $170 million each. With their help, and that of other investors, Sterling got back on its feet. Immediately, the new investors examined Sterling's board of directors, and identified an opportunity to bring in fresh talent. In addition to the key legacy board members that understand the bank's products and market, Sterling supplemented its board with heavy hitters, including former presidents, CEOs, and vice-chairmen of large, established and companies including JPMorgan Chase, Bank of America, Morgan Stanley, Wells Fargo, the Federal Deposit Insurance Corp., Promontory Financial Group and Starbucks.

Greg Seibly, CEO of Sterling Financial Corporation, who led the bank's re-organization recently spent time with me discussing the value of boards that contain former industry veterans and practitioners. Without question, Seibly's board has been instrumental in turning Sterling into a thriving community bank, and Seibly wonders why Dodd-Frank didn't do the obvious, requiring business leaders with industry expertise and business acumen on every board to ensure they govern from a position of experience and knowledge. Seibly believes, "if some percentage were former financial services industry experts, it would likely enhance regulatory credibility."

The Sterling case illustrates how, for many banks weakened by the financial crisis, private equity can provide the capital needed to make the transition from struggling to thriving. Private equity investors also bring a fresh vision, rigor and discipline, a great deal of capital market expertise and the knowledge of what works and what doesn't. These investors are also more focused on generating returns quickly, which leads the board and management to find innovative ways of improving operational productivity, efficiency and profitability. According to Seibly, "sometimes this leads to healthy debates, helping to eliminate blind spots and drive continuous improvement." Seibly added, "boards like ours challenge the leadership team to think around the corner." 

As community bank leadership teams think about the talent of their board members and the overall composition of their board, there are a few additional questions to consider: Are your board members "assets" or do they have to be managed and pacified by the executive team? Are they significantly invested in the bank and do they understand the repercussions of bad governance? Do they bring financial services skills and experience in compliance and risk management? Are they informed about the interconnectedness of risks, trends and issues facing the financial services industry?

Generally speaking, banks have been slow to make significant headway in attracting truly powerful board directors with relevant experience and a willingness to question the status quo. I believe that banks should aggressively seek board talent that directly aligns with the growth strategy of their company.

Struggling and thriving community banks alike need to find new ways to grow and stay competitive, but still offer that personalized touch – no doubt the board of directors will play a key role in this effort. Serving on a board of directors is more challenging today than ever before, but it is also more rewarding. Building viable banks that are invaluable to the communities they serve has never been more critical or more important.

Susan Palm is vice president of industry solutions for MetricStream, a provider of enterprise wide governance, risk, compliance and quality management solutions.