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February 22, 2016 Article 3 min read
Banking regulators are placing greater emphasis on your board's role in establishing risk management policies and overseeing management. Use this guide to develop criteria to recruit and retain the directors who are the best fit for your institution.

In the wide wake of the financial crisis, banking regulators are placing greater emphasis on the board of directors’ role in establishing risk management policies and overseeing management. So it’s critical for community banks to review the composition of their boards, and develop strategies for recruiting and retaining directors with the qualities and skill sets needed to do the job well.

There’s no single set of attributes that defines an effective bank director. What you need in your directors depends in part on the nature of your bank, its community, and its business lines. The following checklist is designed to help you develop your own criteria for identifying directors who are right for your financial institution.

Qualities all directors should have

Directors owe the bank the fiduciary duties of care and loyalty. The “duty of care” means directors must act in good faith, prudently, and in a manner they reasonably believe is in the bank’s best interests. The “duty of loyalty” means directors must place the bank’s interests above their own and avoid conflicts of interest.

To ensure that directors fulfill these duties, they should possess:

  • Strength of character and personal integrity
  • An inquiring, independent mind
  • Practical wisdom
  • Sound judgment
  • The ability and willingness to put the bank’s interests ahead of personal ones
  • The willingness and ability to avoid conflicts of interest

Directors should also have:

  • Basic knowledge of the banking industry and regulatory framework
  • Knowledge of the communities the bank serves
  • Knowledge and experience in business or another discipline that facilitates oversight of the bank
  • The ability and willingness to commit the time necessary to prepare for and regularly attend board and committee meetings

Naturally, your directors should be free from financial difficulties, such as a personal bankruptcy or corporate receivership, which might embarrass the bank.

Diversity is essential

The most effective boards possess a diversity of skills, education, experience, backgrounds, and views, such as the following:

  • Strong reputation in the community and his or her industry
  • Strong reputation among potential investors
  • Background in your bank’s key business lines
  • Prior banking experience
  • Prior board experience (either business or nonprofit)
  • Corporate governance or audit committee experience
  • Financial acumen and investment knowledge
  • Accounting knowledge and experience
  • Risk management knowledge and experience
  • Legal, government, and regulatory knowledge and experience
  • Executive compensation experience
  • IT background
  • Ability and willingness to be a team player
  • Strategic planning skills
  • Marketing and public relations experience
  • International business experience
  • Mergers and acquisitions experience

These are just some of the characteristics to look for in a quality director. Others, as mentioned, depend on the nature of your bank’s business. For example, if healthcare providers, higher education institutions, or insurance companies make up a significant portion of your customer base, it would make sense to include one or more executives from those industries on your board.

How to get started

Begin by reviewing the composition of your board and evaluating its performance as a whole as well as its committees and individual directors. This assessment will help you identify directors who aren’t making a contribution or performing effectively. It also will help you pinpoint knowledge gaps that need to be filled to better align your board’s expertise with your bank’s products, services, activities, and strategies.

Armed with this information and a checklist of director qualifications for your bank, you can begin to build a more capable and productive board.

Recruiting and retaining directors

At one time, the honor of being asked to serve on a bank’s board was sufficient incentive for prospective directors. Today, however, that may no longer be enough, given concerns about the demands of the job and potential personal liability.

Offering attractive compensation, benefits, and liability insurance goes without saying. But it’s also important to create a culture that empowers directors to do their jobs effectively. That means management should:

  • Provide the board with current information
  • Be transparent in regard to the bank’s finances and operations
  • Seek board input on critical decisions
  • Provide board members with training and educational opportunities

Where should you look for prospective directors? Quality board members can come from virtually any discipline and background, provided they possess the requisite qualities, skills, and experience. Bank boards commonly include business owners, physicians, attorneys, CPAs, executives from healthcare and higher education, real estate developers, investment bankers, and insurance executives.