Five Pillars Supporting Community Bank Independence
July 23, 2021
By: Mark A. Mangano
Most community bank boards aspire to maintain long-term independence.Supporting that aspiration requires a commitment to five distinct pillars: Performance, Shareholders, Management, Leadership, and Vision. A consistent focus on all five pillars can significantly increase the bank’s chances of remaining independent or supporting a high price for being acquired. Neglecting any one pillar will undermine the bank’s value and decrease the chances of remaining independent.
Community bank directors face increasingly complex challenges. They continually receive general admonitions to maximize shareholder value and highly specific demands from regulators to oversee operational, planning, and compliance issues. But between these two extremes, bank directors are left to fend for themselves. Neither general admonitions nor specific instructions provide a framework for boards seeking long-term independence.
Most boards justifiably concentrate most of their attention on performance. Performance is the lynchpin of independence. Achieving a safe, sound, and profitable operation is essential. But remaining independent is about the future promise of the bank. For a variety of reasons unrelated to performance, high-performing banks are sold out of existence every year. Boards with aspirations to remain independent must broaden their focus beyond performance.
Five Independence Pillars
Performance encompasses every element that impacts the creation of consistently acceptable returns. Performance includes all safety and soundness considerations as well as compliance with consumer and banking regulations. Beyond ensuring growth and strong returns, performance must focus on increasing demands to improve technology, risk management and operational efficiency.
Community banks today are generally excellent at addressing performance. Passing through the crucible of the great financial crisis honed board and management skills in designing and maintaining safe, sound, and profitable business models. Community bankers have shown remarkable abilities to adapt to constantly evolving business challenges.
A bank’s independence is dependent on its shareholders’ willingness to hold the bank’s stock in the face of many other options. A community bank shareholder’s definition of value is some combination of the following elements:
- Bank performance,
- Share liquidity,
- Share value appreciation,
- Cash flow,
- Sentimental attachment, and
- Commitment to the community bank mission.
The relative importance of each of these factors is different for every shareholder and every shareholder group.
Remaining independent requires continuous focus on addressing the elements most important to the bank’s significant shareholders and the entire shareholder base. The way in which the stock is valued by shareholders can change over time.
Boards must constantly focus on retaining quality managers while developing or recruiting the managers and leaders who can carry the bank’s mission into the future. Boards must also continually assess the technical and leadership qualities of the bank management team. This pillar requires board commitment to succession planning, compensation programs, staff and manager development, and planning.
Board leadership is a key determinant of longevity. The demands of corporate governance today are greater than ever. High performing boards are composed of directors with a combination of talent, experience, and commitment. Maintaining and improving the board of directors should be a constant priority. Boards should not wait until a group of directors is ready to retire before recruiting and repopulating the board. It often takes several years for new directors to fully understand their role in the bank.
In addition, boards should work toward improving and adapting corporate governance practices. Corporate governance is a dynamic discipline. Boards should continually evaluate whether the board’s time, attention, and resources are being devoted to the most important determinates of long-term success.
Vision is the most commonly neglected pillar of independence. Every bank should have a stated vision of the bank’s future value proposition. Vision must be something more than an abstract concept. A strong vision places the daily decisions of a board and management team in the context of the board’s chosen path to increasing shareholder value.
A clearly articulated vision can bind the board, management, and staff in the pursuit of a goal greater than the sum of their daily activities. It also provides a framework for the board to model its definition of future shareholder value.
Using the Pillars as a Structure for Making Decisions
Board agendas should reflect pillar considerations
Including discussions of all five pillars in monthly or quarterly board agendas can keep critical priorities before the board. We are what we do routinely. Boards that choose to prioritize all five pillars are much more likely to take actions that create a wholistic approach to their bank’s future.
Recognize that the process is never complete
Corporate governance should constantly evolve. The best boards embrace the knowledge that the banks they lead are dynamic and changing. The board’s response should be to adapt governance practices to match that dynamism.
Boards that prioritize all five pillars have a greater sense of the true value the bank offers the shareholders. A board’s evaluation of the five pillars ensures a forward-looking approach to bank leadership. With focus on the five pillars and a little good fortune, shareholders will continue to value investment in the bank over other investment opportunities.
Mark Mangano is Counsel with Jackson Kelly PLLC. Mark is a former community bank CEO and owner. He focuses his practice on assisting clients with strategic planning, corporate governance, banking regulation, and mergers and acquisitions. Contact Mark at 304-670-0441 or email@example.com.