In the Trenches
Bank Director Magazine
By Susan Lahey
New business doesn’t just roll in the door like it used to. The intense competition among banks and other financial companies has catapulted a once-sleepy aspect of the director’s role into a front-line issue: bringing in business for the bank.
In battle, the generals, the captains, and the kings have traditionally watched from a distance—either all the way back at headquarters or at least from a nice, safe hill. Their value rested in their wisdom, their skill, their ability to strategize. Not to fight.
In banking, the rules had been much the same. The generals—the directors—made strategy and issued orders from the relative safety of the boardroom. Not so anymore. Bankers say the battle has become too heated. They need every man and woman on the field, wielding whatever weapons they have.
“The whole banking industry has become more aggressive and solicitous,” says Joseph D. Reid, chairman and CEO of Capitol Bancorp of Lansing, Mich., which has always made it a practice to hire directors for their ability to work in the trenches. “It’s no longer waiting for business to come to it.”
These days, no business can sit back and wait for customers to call. Competitive marketing has taught consumers to sit back and wait for the best deal. Furthermore, bank mergers and technology have made consumers cautious and confused. Most bankers have determined that they can no longer afford directors who are merely sagacious. They need directors to be out there with everybody else, hauling in their friends from the upper echelon; helping their officers land the plum accounts.
Trouble is, many directors didn’t sign on to get shot at, as it were. They’ve held to their fiduciary duties of monitoring bank safety and soundness and protecting the interests of shareholders and depositors. That means reviewing loans, setting policies, and overseeing top management. In itself, that’s a hefty responsibility, especially given the risks involved and the roily nature of banking today. Moreover, most directors are either easing into their retirement years or scrambling to build their own careers and businesses. Now CEOs are asking, and in some cases demanding, that their boards get serious about calling colleagues, nudging buddies at the country club, or setting up breakfast meetings between a bank officer and a pal on some foundation board.
For many banks, consultants say, it is a good time for the CEO and the board to have a heart-to-heart about what the CEO expects in the business development area.
Specifically, CEOs should determine how far directors are willing to go to drum up business for the institution. “The banking business has become a marketing business,” says L. William Seidman, publisher of Bank Director and former chairman of the FDIC. “Business development is a top priority for the CEO and that makes it top priority for directors. But directors, not having to meet the budget and being aware of their responsibility for the safety and soundness of the bank, don’t put marketing as their number-one duty.” (See Boardroom Perspectives, page 54.)
Seidman says he serves as a director for businesses other than banks and, at those businesses, he notes, “most of what I do is introduce them to people I know whom they may need to know. It’s a very gentlemanly project.”
Banking from scratch
From a business development standpoint, the best bank is a brand new bank where directors glow with evangelistic zeal hoping to better the world and improve their portfolio simultaneously. Joseph Reid’s $600 million Capitol Bancorp, for instance, is a relatively young holding company. Started in 1982, Capitol now is the holding company for 10 banks, all with their own boards of directors, many members of which have never served on a bank before. In exchange for his willingness to train directors, Reid gets a board full of people who are fired up and whose business development efforts flow from real, personal enthusiasm about the venture. In addition, whenever one of Capitol’s banks gets too big, he starts another one, keeping that maiden voyage feeling alive.
“We have focused on the notion of developing our banks from scratch,” Reid says. “We are in a growth mode and that is our focus. If we get too big, we’ve lost the kind of marketing capability that we enjoy as a community bank.”
Reid’s corporate culture puts business development high on the list, which means that anyone who accepts a directorship with Capitol accepts the job of aggressively promoting the bank. It’s just part of the job.
“The days are gone,” Reid says, “when a director can say ‘I’m too tired to get out there and drum up business.’” For that reason, Reid has tried to recruit a younger group of directors. Instead of elder statesmen, he wants people currently active in the community and exposed to potential customers.
“I’m not real excited about the idea that everyone on the board is in their fifties,” he says. “I’m in my fifties and my peers’ retirement comes up frequently. They are winding down. They’re not really into taking on commitments.”
In fact, about 10 years after he founded Capitol, Reid talked his original board into retiring to make room for a new, more aggressive generation. The attrition took place over several months. He also appoints women and minorities to each board. One of his directors, he says, is involved in the arts, which might frighten most bankers.
“Her referrals,” he says, “are legion. You never know who the referral strong horse will be.” Can Capitol keep the momentum going as his banks mature? “That is what we would like to do,” Reid affirms. “I don’t know. Ask me in 10 years.”
Changing the board’s focus
While some younger banks like Capitol have built business development programs into their culture from the start, many older banks are having to retool directors’ job descriptions to improve business development. One such bank is Hibernia Corp., a $12.5 billion bank holding company with a 65-year history and a six-month-old business development program.
“We have only just begun to establish a program to focus directors more on business development efforts,” says Herb Boydstun, chairman of New Orleans-based Hibernia’s Southwest region. “Before the program, business development was probably very, very low on the totem pole. [Directors did] whatever they thought about on the spur of the moment. With all the increased competition, [now] it’s critical that we fire every bullet that we can to help us increase market share.”
Hibernia’s program links a director with a bank officer so that the director has someone specific to whom he or she sends prospects. In addition, at each board meeting directors are presented with a prospect list that may include 10 people from a given industry or from a given region. Directors review the list to see whom they know and then contact the banking officer who would be in charge of the account. The director might just give the prospect a call; he might set up a breakfast or a lunch to introduce the bank officer and the prospect. The director would not be included in any discussions about the actual business.
The prospect list is a model that several banks are using. Pacific Bank, a $600 million institution in San Francisco that started a year after Capitol, has a similar program called the Wish List. President Michael Tun Zan says the bank calls its program the New Business Pipeline, and, through it, directors are asked to submit names of prospects whose business they feel the bank has a 75% probability of garnering within 90 days.
Keeping arms length
Although Hibernia has its program in place, Boydstun is unsure what the program’s future will hold.
“The biggest question in my mind,” he says, “is how do we make it work? How do we make sure we execute what we have put in place?”
That is the problem facing most banks. According to a recent survey by the American Association of Bank Directors, only about 5% of institutions surveyed offer some financial incentive to directors for bringing in new business. Others, consultants say, opt for what psychologists call a negative reinforcer: establishing quotas and sometimes threatening board members with the loss of their positions if they fail to produce good leads for the bank. Either option, notes Seidman and others, is likely to inflate the importance of business development disproportionately with corporate governance and should be avoided.
“I definitely think it’s very bad if directors become less than independent,” Seidman asserts. “If they’re earning more than a director’s pay that, in my view, is a real no-no. Directors’ number-one duty is independent judgment.”
George Freibert, president of Professional Bank Services, Inc., a Louisville, Ky.-based financial institution management and corporate governance consulting firm, uses almost the same words. “You don’t ever want to put the director in a place in which his or her business development responsibilities effectively compromise being an independent representative of the company,” he says. “If there is so much pressure placed on board membership to bring business in, the director will focus on that rather than his duties to the shareholders.
“The CEO has still got to remember that he’s talking to his boss,” Freibert continues. “He shouldn’t step over the line. You hear about a CEO scolding a director for not bringing in business. If the CEO says, ‘I expect everyone to bring in this amount of business or you’re not going to have a board seat,’ I’d tell the guy to take a hike. He’s certainly not going to be very responsive to my questions and direction as a corporate governor.”
Michael Tun Zan says there was talk at Pacific Bank of having specific objectives for directors in their business development efforts until they realized that such benchmarks become “a total imposition. They are not my employees, they are my advisors and my sounding board.”
But if the carrot and the stick are both verboten, how does a bank inspire its directors—presumably busy people with their own interests to foster—to beat the bank’s drum? Bankers and consultants both say peer pressure. After all, reasons Peter F. Faletti of Atlanta-based Edgar Dunn & Co., a financial institution management and corporate governance consulting firm, if a chairman goes around the room and asks who has a referral to make, what director would want to be silent week after week?
“We give recognition in the pipeline very clearly” for people who bring in many referrals says Tun Zan. Additionally, he says, it is important for management to help the board understand the pressures created by the newly competitive environment in which banks have found themselves and the reasons for the heightened emphasis on business development.
Separation of church and state
As important as it is to recognize why business development has become so crucial, it is equally important to communicate what a director must not do when trying to represent the bank. They must never, for example, give the impression that a loan is a “sure thing” if the director solicits someone’s business for the bank. And, says TK Kerstetter, chief operating officer of Bank Director and a training consultant for directors, directors must never alter the loan review process because the applicant is a friend, business associate, or relative of a board member.
To steer clear of this ethical minefield, Reid says Capitol’s rule is that no director would be expected to attend a meeting between an associate and a bank officer.
“We would never want to compromise the director in that way,” Reid says. “They would have too much of a proprietary interest in the outcome.”
Other banks have directors set up meetings between the bank and the prospect and then go along to ease the introduction.
“If a bank officer knows he wants to solicit a certain lawyer and the director knows them, the director would go along, not so much to make a pitch, but to add to the banker’s credibility,” Tun Zan explains.
Conversely, if a loan is turned down, bankers say, it undoubtedly causes some discomfort for the director who referred the applicant. Whether the director attends the introductory meeting or not, consultants and bankers say, it’s better to keep them as far from involvement in the business dealings as possible. It’s less embarrassing for the director if the loan is denied. It’s also a great deal safer.
“Directors should steer the person to the bank and then step away,” says Kerstetter. The simplest form of business development, he says, is to offer: “We’d like to have a shot at your business. I’d like to bring some loan representatives to meet with you.”
It’s whom you know
Dennis Carey, vice chairman of Spencer Stuart U.S., an executive search firm in Philadelphia and co-managing director of its board practice, says these days, the top criteria all corporations are looking for in a director is the individual’s career position. The second is his or her relationships.
“To start off with, they want to find the best athlete: a sitting CEO of a major corporation; someone running a major business unit; an heir apparent,” Carey says. “When you get beyond that piece of spec criteria, the tie breaker would be ‘Who has broad-based relationships in markets we want but don’t have?’”
Corporations, including banks, want directors who can serve as door openers. In large banks, Carey notes, those door openers may serve in defensive measures—warding off hostile takeovers. In smaller ones, they would serve in an offensive vein.
The individual should not only be well known, but also well liked. A board looking for a new director who could help the corporation navigate in Washington, D.C., for example, would be examined not only for his good relationships but for “who has the fewest enemies.”
Directors at Pacific, Tun Zan says, “are selected and weighted toward a group that is not only invested in the bank but also well known in the community.” And that may include people who previously would never have been considered for a board seat. People in social services, for example, or the arts.
The best thing a bank can do, consultant Faletti says, is to create a culture in which business development is the norm. If this has not been the case in the past, cultivate it as much as possible so that it eventually becomes the norm. The raw data from the AABD survey shows that in about 45% of banks surveyed, the full board determines who will be selected as new directors. In about 30% of the banks, the chairman has that responsibility. That is one place to begin shifting emphasis, if necessary, to business development.
“New directors are very quiet at first,” says Faletti. “They key off who they see as the leaders. They don’t want to get their heads shot off. Existing directors can communicate the message to them that ‘We all pitch in. It’s part of the culture. We all do it. It’s fun.’”
Part of the job
In reality, though, both bankers and consultants acknowledge that some directors who are valuable corporate governors just aren’t likely to be top performers in business development. Hibernia’s Boydstun acknowledges that some directors have been less-than gleeful over the new business development program. Leonard Abel, chairman of the board of Eagle Bank, a Maryland de novo, has been involved with several other banks and says he is a “horrible salesman.” He admits he had reacted poorly at first to the idea of having to garner business.
“It wasn’t part of my nature to do that,” he says. Other directors run the gamut between being enthusiastic marketers and dragging their feet. But Abel acknowledges that bringing business to the bank is part of a director’s duty—particularly in community banks. And at his institution, if a director refused to make this part of his job, he would not be reappointed.
Freibert recommends having a business development committee customized for both camps: one for the directors who are natural-born salesmen and one for those whose strengths lie in networking.
“Each director should only be expected to do what he or she feels he can do,” Freibert says. “Don’t make them feel like they’re shirking their duty. The committee should have a charter and a mission statement. Stated goals. Then if directors don’t want to serve on the committee, they don’t have to.”
On the other hand, Freibert acknowledges that if, in developing the corporate culture, a bank has clearly stated that business development is part of the job, board members can’t ignore that. Even the most reticent director has a responsibility to understand the institution’s mission and do what is within his or her power to help achieve it.
Faletti recommends reviewing at least annually any changed expectations of the board, including business development. “You need to have a discussion,” he says. “Say: Let’s understand what we expect from each other, or someone’s going to get surprised.’”
“The director is very seriously responsible to the depositors and shareholders,” Faletti says. “And part of his job is to help make the place a success.”
Reid says he is constantly trying to think of ways in which Capitol’s directors can help build the bank.
Once he had them all call a candidate for an officer position who was reluctant to sign on with a de novo bank. He also throws a cocktail party to honor a director every quarter at the bank and invites important people in the community.
“We’re always trying to think of ways to get directors involved,” he says. “I’m not interested in having them stand on the highway in a clown suit, however.”
Just short of the clown suit, however, is where some banks seem to be leaning these days, with the competition for bank business more cutthroat than ever. The slings and arrows of the friendly neighborhood brokerage house or subprime lender—not to mention other banks—have left deep marks, and today’s directors are demonstrating more willingness than ever to pick up a sword and join the fray.
©2010 Susan Lahey, All Rights Reserved.