Filling the Knowledge Gap


Bank Director

By Susan Lahey

Building the perfect board means searching beyond traditional networking for new experience and insight. The good-old-boy network may be on its way out.

If a CEO filled his executive ranks with friends and acquaintances from the President’s Club, the golf course, or the philharmonic board, he and all his pals would soon be sent packing. But when it comes to choosing board members, the criterion of being a corporate highbrow with friends around the table has generally been considered sufficient.

Not for long.

“In the past, when a board has convened, they say something nice about the person who is no longer [with them] and then they say, ‘Now, who do we know?’ ” says Michael Nieset, managing director of executive search firm Christian & Timbers’ technology and board services practice. “It’s an incredibly thoughtless way of addressing the needs or recognizing the importance of a board member. The question should be, “Who don’t we know.” Let’s understand the challenges today. Let’s think about the minefield we have to walk through. Wouldn’t we love to find the person with the map?”

Most boards recruit new members pretty much the way they always have while boards themselves—their structure and their mission—have changed dramatically. Boards are shrinking, which means each director’s contribution is that much more important. Boards are shedding some of their insiders, so outsiders need to be more knowledgeable. Boards are expected to be diverse, not homogenous. Directors’ workloads are swelling as regulators lean harder on them to enforce compliance. In addition, they’re expected to keep track of a growing number of different products and delivery channels.

Given such changes, companies are beginning to search beyond the board’s inner circle for a candidate qualified to help the bank meet its strategic goals, in much the same way they search for a new executive.

“There’s a sea change in director recruitment, although you still don’t see that many players out there doing it,” says Roger Raber, president and CEO of the National Association of Corporate Directors. When companies ask to use the association’s directory to locate possible candidates, Raber says, they’re more interested in the person’s skill sets than they used to be.

“It’s the people who are more enlightened,” Raber says. “There are still a whole lot of people out there bringing on their ‘buddies.’ But when I talk about a sea change, you see enough companies out there that are changing that culture. They want to know, ‘What value will this person bring to this board?’ ”

Nieset cited two recent director searches his company conducted based on what some call “functional skill sets.”

“The spec we built for each one was very distinct,” Nieset says.
His client was Imediation, an early-stage software company headquartered in France that was planning to go public in the near future and was looking for North American leadership. It wound up bringing on Paul Hansen, then CFO of Tibco, a software company that had recently gone public and had grown from a $20 million company to a $400 million company in short order. “Paul was a bulls-eye,” Nieset says.

Imediation was also looking for someone with technological aptitude who could give the company the customer’s perspective. When the board recruited Peter Burrows, CIO of Reebok, it got what it was looking for. “That’s an example of where we’re going,” Nieset says. “Nobody knew them. In the boards of the future you will have people who’ll say, ‘I’ve just been through this with my current company. When this happens, don’t do that.’ ” Nieset calls it the “been-there-done-that” background.

That is precisely the recruiting attitude that investors are looking for, says Ann Yerger, director of research for the Council of Institutional Investors. Searching for candidates with relevant skill sets is “more the process that our members prefer to see rather than trolling around and adding friends.”

By the same token, investors want to have an opportunity to provide input on who gets hired. “Our policies suggest that we should have meaningful opportunities to suggest or nominate candidates. We also should have meaningful opportunities to suggest processes and criteria for choosing board candidates,” Yerger says.

Most companies still desire a sitting CEO or chairman, says Dennis Carey, vice chairman of executive search firm Spencer Stuart. Functional exposure is nice, Carey says, but it’s the breadth of experience that companies want. The trouble is finding it.
“I sit in my world and listen to the requests,” says Peter Crist, vice chairman of Korn/Ferry International. “They all say, ‘I want a sitting CEO or chairman.’ ‘Well,’ I say, ‘You can’t have that.’ ”
As part of a joint venture with Corporate Board Member magazine, Korn/Ferry has begun to identify the next generation of leadership from the ranks of COOs and CFOs of all public companies. “From the list,” says Crist, “the company recruits a number-two executive who may, one day, become the number one.”

Beyond looking for a CEO, most banks have the same wish list, recruiters say. First, they want someone with financial acumen to meet the new audit committee rules. Second, they need someone with technological expertise. Third, they need someone with marketing skills, preferably someone successful at pushing consumer goods. Many also are looking for someone with a human resources background or with international experience.

When $35 billion Union Bank of California lost five directors to retirement in one year, the board took the opportunity to figure out what it needed, says John McGuckin, executive vice president, general counsel, and secretary. The remaining directors considered this an opportunity to reduce the size of the board slightly, by one or two members. The nominating committee’s wish list included a CEO or CFO. They also wanted: diversity; representation from major market areas; someone with accounting and financial acumen; someone with technological expertise; someone with insurance expertise; and someone from financial services who is either retired or was merged out and who is especially knowledgeable about credit issues.

The nominating committee elected not to use a search firm but instead solicited nominations from colleagues. “The nominating committee members felt that the collegiality of the board was important to maintain,” McGuckin says. “Having defined the various criteria, they believed that the other members of the board would provide them with a large number of qualified candidates who at least one person on the board would know personally.”

Within a year, the committee had replaced three board members. With only one vacancy remaining, the board is giving serious consideration to using a search firm for a very focused search, McGuckin says.

There is one big advantage to looking for candidates within a board’s circle: Many director candidates opt to serve because of who is already on the board. Recruiters say that is one of the top three reasons candidates give for choosing a board.

The first reason candidates join boards is because they are interested in the business model. Directors join boards because they like the business and they want to learn something, says Korn/Ferry’s Crist. When Jerry Sue Thornton arrived in Cleveland in 1992 as the new president of Cuyahoga Community College, several boards began courting her. Among them was $35 billion National City Bank. Her predecessor served on Keycorp’s board, she says, but that board was full, while National City had an opening. First a vice president asked her to lunch; then a board member invited her to a function. Thornton, who has spoken internationally on management and diversity issues, says there seemed to be a fit between her philosophies and those of the bank. “I liked what I saw in terms of the leadership and vision of National City,” she says. “When someone asks you to serve on a board, you can go through their annual reports and read about the company and find out whether you would be comfortable at board meetings—whether they’re in sync with your philosophy.”

Another reason directors join boards is because they feel they can contribute significantly. If the board is huge, for example, a director candidate may turn down the opportunity to serve because his or her contribution would be limited. Says Linda Heagy, area managing director of Heidrick & Struggles, a search firm based in Chicago: “People want to know, ‘What impact am I going to have? Don’t make me waste my time.’ … They want to understand from the chairman and from the nominating committee how they are going to impact the company.”

Nieset says his approach is to draw up a very specific list of criteria. Often, he says, he winds up with only a handful of potential candidates. But for those candidates, the fact that they alone can fill the bill is very attractive. Finally, Crist notes, “If the board is viewed as being populated by interesting, stimulating people, there’s a much higher draw.”

And what if it’s not? What if the board is populated by retired CEOs who have held their seats for the past decade? How does a bank attract someone dynamic and desirable to such a board?

“You can go out and expend all your energy on attracting a lightning rod,” says Crist, referring to someone who attracts other people by his or her background, skills, or persona. “The best boards go from being sleepy to being terrific by bringing on a lightning rod.” Sometimes, Crist says, he will even tell the candidate that the board is on the threshold of major change, and the candidate is being recruited as a lightning rod. That challenge becomes the draw.

Those are the top three tools for attracting directors, recruiters say. Meanwhile, compensation is on the bottom of the totem pole. “People don’t want to feel they’re being underpaid or being taken advantage of,” Crist says, “but compensation is way down there. It’s ‘Oh, by the way, you have to pay me something.’ ”

These days, the demand for top-notch directors far exceeds the supply. Part of the reason for this, says Carey, is that there are thousands more companies today than there were five years ago. Crist says Korn/Ferry’s board practice has doubled its number of unit searches in the last year. And of the extensive list of directors in the NACD database, Raber says, only about 20% are looking for new positions.

In Korn/Ferry’s 2000 Board of Directors survey, the number of companies that expressed difficulty finding quality outside directors increased from 39% in 1999 to 44% in 2000. In response to the question “What are you doing about it?,” 73% said they were using executive search firms, compared with 52% the year before; 63% said they were seeking younger, less experienced directors, twice as many as in 1999; and 12% said they were seeking retired executives, a drop of 3% from the year before. Roughly 20% said they were increasing compensation.

For many, the struggle has been to diversify the board by hiring women and minorities. In the past, says Heagy, that was the chief issue that brought companies to search firms. But today that need has been surpassed by the need for functional skills and for candidates in geographic areas where the bank wants to do business.

“We had a client, a bank, that was trying very hard to get into the Chicago market,” Heagy says. “They wanted a minority or female for their board. They already had two women and a minority on their board, but they liked the idea of a very visible female or minority from that community where they were trying to make headway. … They wanted the visibility that the appointment would get them. It would create some awareness about them through the appointment of that person.”

Crist says banks tend to be ahead of the corporate world in terms of diversity. “The financial services industry is probably the most sensitive business for gender issues,” Crist says. “There are lots and lots of women who are very successful in the financial services industry, and there’s a bubble up for that success in the boardroom. The boards of financial services companies are more diverse and because of their size, there’s a higher percentage of gender and persons of color representation. If you don’t have a board matched to your clientele, you are in trouble.”

Still, diversifying the board is not easy. And banks often have more difficulty recruiting directors than other corporations.

As Heagy explains: “Here’s the difficulty in these searches: At the very top, the people who carry that much influence are a small set and they can afford to be extremely choosy. … They think, ‘If I take on a board, it’s got to be the right board for me.’ Finding the person who satisfies the client’s needs and who has an appetite for that client’s situation can be difficult.”

Moreover, having a small pool from which to draw leads to another problem – overloaded directors. Most of NACD’s members, Raber says, sit on three boards. And the workload for those boards is multiplying.

“Our recent survey shows that each board requires 173 hours per year by a board member, and that [number] has jumped 30% over the previous five years,” says Korn/Ferry’s Crist. “We expect a doubling in the next five to 10 years.” For bank directors, the figure was 187 hours per year.

“The job of a director has evolved in the past five years, and it’s putting directors into overload. That’s true for any publicly traded company, especially a bank,” McGuckin says. “[Regulators are] … giving much more responsibility, accountability, and legal liability to directors.”

Union Bank’s audit committee, he says, had to meet 10 times to do its work. The quarterly meetings had packed agendas that took between two and three hours to complete.

“People are naturally sensitive about financial institution boards,” says Crist, “and one reason is liability. Even if you have insurance, they’re still sensitive about being associated with a financial institution. If it’s a really large bank and they meet once a month, [the candidates] say ‘Pass.’ Bank boards take a lot of time.”

National City’s Thornton, however, serves on five boards and says she was not at all deterred by the liability factor or workload of banks. “There is risk on any board. I haven’t felt that way on a bank board more than a hospital board or more than any other boards. You want to believe that the business is stable and secure and that it is going to be around for a long time. And you want to serve for a company [that] you don’t think is, in any way, going to be a negative on you and your reputation or place of work.”
Still, Spencer Stuart’s Carey says, if a candidate only has time for one board seat, factors such as size and composition of the board can make a difference. And bank boards have, historically, been huge and parochial. “All things being equal,” Carey says, “if you have someone being courted by a local bank and a local corporation, most tend toward serving on the corporate board.” Partly, he says, because of the size and partly because of the difference in the nature of the two boards. “A corporate board tends to be more diverse and global; the director knows he will be exposed to a whole new set of relationships.”

A select few banks, he says, are moving toward the corporate kind of board. “There’s a drift more toward traditional corporate structures within bank boards,” says Carey. Not only are they shrinking in size, but they are also looking for directors from a larger region rather than the local region, Crist says. And, adds Nieset, they’re beginning to reach higher for their directors.

“There’s a tendency to say, ‘We need another banker, we only have 12 on the board right now,’ ” Nieset says. “They need to say, ‘We don’t just need another person. We need a world-class marketing executive.’ That’s where you need an executive from Coca-Cola, an executive from Kraft, an executive from Nestle. Or you need a crisis management executive from Tylenol.”

Traditionally the CEO has taken the lead in appointing directors, but now, Crist says, there’s more of a balance growing between the CEO and nominating committee. When it comes to appointing committee chairs and members, Korn/Ferry’s survey reported, 45% of companies say the CEO takes the lead, down from 55% of companies two years ago.

“The CEO still has the greater share, but what I’ve noticed over the last three to five years is that the CEO delegates to the nominating committee, or they’re more partnered. You’ll hear a CEO saying, ‘I need three new board members, and this is what the nominating committee and I want.’ There’s a partnering that’s very noticeable now.”
At $35 billion Charter One Bank in Cleveland, Ohio, the nominating committee takes the lead, according to Robert Vana, senior vice president, chief corporate counsel, and secretary. But the final decision is a consensus among the nominating committee, the CEO, and the lead outside director. With 20 acquisitions since 1981, the bank has added directors without much recruiting, Vana says.

The one search it did undergo was handled within its own sources, seeking a minority candidate in a specific region of its service area. Charter One is seeking to increase its diversity and add functional skill sets, but it also wants to reduce its ranks. Deciding which way to go for each board seat, Vana says, is a difficult process.

“We’re looking for a specific talent that the director can bring,” Vana says. “In the sense of a recruitment process, that’s what we would be doing. Maybe there are some skill sets still lacking on the board, and we would be looking at that with the intent to fill those when the opportunities present themselves.”

When a director recently retired, the board decided not to replace him but to let that be an opportunity to reduce its size.

Building a board strategically, Crist says, is a painstaking process. “It takes a long period of time, a series of sequential moves,” he says. “You have to know what you want your board to look like at a certain point. Then you have to develop a strategy as to how you’re going to get there. You may have three to five openings over a five-year period, and you have to understand [who] you want in that specific chair.”

The best way to further the interests of shareholders and advance the bank is to become a trim, fighting unit. “Most CEOs in this country, when they get serious about the intersect between business strategy and the composition of the board, are going to use openings as a vehicle for supporting their position in the marketplace and how to get there,” says Spencer Stuart’s Carey. “They will see the board as a competitive weapon.” |BD|

©2010 Susan Lahey, All Rights Reserved.

 

 

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