Still Eager to Serve

Despite increased regulatory attention, citizens are ready and willing to serve on local banks' boards of directors.In the wake of the financial crisis, regulators and policymakers paid increased attention to how banks manage their business, including the role and responsibilities of their boards of directors. In some cases, boards of large banks were called out for lax oversight, and the question was frequently voiced in the media: "Where was the board of directors when all this happened?".In response, Congress included provisions within the Dodd-Frank Act of 2010 that gave more responsibilities to directors of bank boards for regulatory compliance and risk management functions, while also increasing certain fiduciary liabilities. As with most things regulatory, some of these new rules that were inspired by the transgressions of larger banks also came to apply to community banks..Attorney Karen Grandstrand of the Minneapolis firm Fredrikson & Byron says there has been a steady creep in guidance from big to small banks which has placed heightened expectations on boards of directors. For example, some regulations now say that directors must "ensure" certain outcomes rather than providing "oversight" or "business judgment." She says bank boards spend more time these days "checking boxes" to meet regulatory expectations. While some of that effort means a better-informed board, it also detracts from the amount of time they have to think strategically..For outside directors of community banks, who already had an important responsibility to oversee the operations of their companies, the increased demands and scrutiny from regulators has caused some observers to ask another question: "Why would anyone want to serve on a community bank board?".It turns out plenty of people are still willing to serve. Community banks are a prized asset for many small towns and cities, and are considered the cornerstone of a vibrant local economy. The opportunity to contribute to their community's economic wellbeing by serving on a bank board is an honor for many local citizens..The essential role of outside directors for community banks involves three broad categories as described by the FDIC — people, policies and processes. These roles generally include the following:.• Select and retain competent management;.• Establish, with management, long- and short-term business objectives;.• Monitor operations;.• Oversee business performance; and.• Ensure the community's credit needs are met..Of those roles, the most important is the first, and that hasn't changed over time, according to David Baris, president of the American Association of Bank Directors and a partner in the law firm of BuckleySandler. The most important determinant of a community bank's success is its leadership, Baris says, and directors play a key role in supporting bank management. One of the best ways to provide that support is to challenge bank leaders, he says..Terry Jorde, senior executive vice president and chief of staff for the Independent Community Bankers of America, agrees with Baris, and adds that directors provide their best counsel when they stay focused on the bank's broad strategic goals rather than micromanaging details, like marketing budgets, for example. Jorde knows a thing or two about bank directors after spending her early career as president and CEO of CountryBank USA in Cando, N.D., where she was also chairman of the board and majority stockholder.."Good outside directors are such a huge asset," Jorde says. "In many ways they are the liaisons between the shareholders and the CEO. In that respect, they have a responsibility for the bank and the community. In many ways they are the eyes, ears and mouth for the bank. That really makes them valuable.".In her role at the ICBA, Jorde is well aware of the many rules and regulations that community banks must incorporate into their business, including those involving directors. While she admits she sometimes wonders if she would accept the invitation to sit on a bank's board of directors given all the new scrutiny, she says good banks are not having trouble filling those roles..That shows up in surveys by the AABD, according to Baris. Banks are able to fill their boards, but sometimes they are challenged to find quality members. About three years ago the AABD conducted a survey to determine the impact of risk and personal liability on directors. The survey showed that 25 percent of banks either had a director resign or a potential director decline the invitation to serve due to fears of personal financial loss. Possible civil penalties against directors have expanded under new guidance, Baris says, and this gives some directors pause. But like Jorde, he says good banks have little trouble finding good directors. "People are eager to serve and contribute to their community," he says..That is the experience of Mike O'Meara, chair, People's Bank of Eau Claire, Wis., and others interviewed for this article. "We don't have a problem getting directors," O'Meara says. He says his bank has a good community reputation, over two decades of upper quartile performance, and gets excellent grades from regulators. "We have people asking us if they can join the board.".For O'Meara, the key characteristic of a potential board member is knowledge of the economy served by the bank. For example, his rural bank in northern Wisconsin has board members who may own a lake cottage, or are involved in the tourism business or have knowledge of specialty agriculture. They often have professional expertise, like accounting or the law, but some connection to the local economy makes them most valuable. "When we're reviewing loans or considering new markets, those insights — coupled with our own due diligence — are valuable," O'Meara says..Jeff Larson, controller of KATH Fuel Oil Service in Little Canada, Minn., who serves on O'Meara's board at People's Bank, previously served on a board for a bank in Richfield, Minn., that eventually was sold. Among the many oversight roles of a board member, Larson also believes he has a role in bringing good loans to the bank he serves. And it's not like he feels he has a quota to fill, but rather that he believes in the value that community banks bring to the local economy, and connecting good loans with a good bank is a valuable service..One thing that has struck Larson over the years that he has served on bank boards is the increasing amount of time on the agenda dedicated to IT and cyber security. "These are big issues for banks these days, and there is a lot of expertise around that table," Larson says. "Banks really benefit from the experience that other businesses share.".But no director has expertise in every facet of banking, especially regulations, and that means training, training and more training, according to John Courson, a member of the board of directors of Main Street Bank in Bingham Farms, Mich. Courson is well versed in the regulatory world, given his service as president and CEO of the Mortgage Bankers Association during the financial crisis. But there is always more to learn. "The thing from the bank's standpoint that impresses me is our board undergoes a lot of training — several times a year. I would call it a training regimen." And the bank is adamant about the training, Courson says. "You must show up.".Courson sees these increased demands on directors as a positive for community banks. He says that the quality of directors necessarily improves the more demands you place on them. "Management needs people on the board who are there for more than their resumes," Courson says. For example, he was asked to serve on Main Street Bank's board for his expertise in mortgage markets. "They saw a need or a gap in their board and they worked to fill it," he says.."Purpose driven," is the term Noah Wilcox uses to describe his method of director selection. Wilcox is president, CEO and chair of Grand Rapids State Bank, Grand Rapids, Minn. "I'm looking for critical thinkers who understand complex financials and want to contribute to the forward progress of the bank," Wilcox says. "I've become friends with all my directors but I don't go out and hire friends and family." Rather, he looks for directors who can provide critical counsel. He says he has never gone against the advice of a director. "I challenge them and I expect them to challenge me as well.".One bit of advice that Wilcox would offer to potential directors is to ask for a position description from the bank. He believes strongly that a bank without a clear description of what it expects from its board will ultimately frustrate its directors. "A strong position description sets up the bank and board for success," Wilcox says..Baris says that AABD focuses its advocacy efforts on fixing three challenges that bank directors face: "Bank directors are overburdened, often undercompensated, and at risk of undue personal liability.".Baris and Jorde note that efforts are underway in Washington to reduce regulatory requirements for community banks, including their boards of directors, but they offer no predictions on what may transpire with a new administration and Congress. Either way, both expect that community banks will continue to be well served by their outside directors, and that local citizens will be motivated to serve.