Educate or Eliminate
By Douglas V. Austin
[Editor’s Note: Dr. Doug Austin passed away on July 4. We honor his memory and commitment to the industry with this last article that we requested to be included in Connecticut Banking several months ago. Dr. Austin was the chairman and CEO of Austin Financial Services Inc. He authored and published 17 books and more than 800 articles in the area of banking and corporate conflict and was a nationally recognized speaker. Dr. Austin last addressed Connecticut bankers at the 1996 Directors & Senior Officers Symposium in May of that year. His obituary noted, “As a bank consultant, Dr. Austin's blindness was an advantage. His perception of management and board members was always the result of what he heard, not what he saw. He had the distinction of being a blind professional who would help his clients develop a “vision” with focus and direction.”]
In previous commentaries, I have championed specialized education and training for bank directors who participate in selected committees of the board. I have also recommended that directors be placed on a committee (or two) and stay on that committee until they leave the board. I do not favor rotation, since the generalist of 30 years ago is no longer relevant as a competent board member. Today, specialization is required in order to meet the challenges of the industry.
When recruiting new directors, focus on the expertise and talents required by the board. For example, there should be a premium on accountants, attorneys, financial experts, certified financial planners, marketing professionals, management consultants, information technologists and other specialized, technically oriented individuals. There should be a significant discount for farmers, doctors and dentists, housewives and small business retailers – most of whom do not have the expertise required for a modern financial institution’s board of directors.
Thus as the board of directors is developed, through additions subsequent to retirements and/or the loss of previous directors, you should recruit and hire individuals who possess the specialized accounting, finance, marketing, management techniques and qualities that would strengthen your board.
Now that there are competent professionals on the board, what should you do with them? As you know, a medical doctor can’t be turned into a chef, and a limousine driver shouldn’t be asked to serve as an Army medic. The same is true for the members of a board of directors of a financial institution. Analyze the education, skills and talents of your directors, along with their experience and expertise within the marketplace, and assign them to the type of committee(s) where they can best serve your organization.
Assigning a director to the proper committee is just the starting point. Over the past 37 years, I have encountered a number of boards that do not educate their directors, either generally or specifically. Education for directors should be a significant agenda item. Directors should be trained explicitly in the functional areas where they are involved in committees within the financial institution. General education is appropriate, but specialized education should be mandatory.
Each committee, as a part of its committee charter, should determine what continuing education is required of its members — including the chairperson. Individuals on the committee should read books, articles, regulations and other selected materials appropriate to the committee’s charge. In addition, committee members should receive education through videotapes, audiotapes or online broadcasts. Finally, the individual members of the committees should be involved in at least one comprehensive, one-week educational session at the outset of their experience on the committee, followed up with educational seminars of one or two days on an annual basis.
The chairperson of each committee has an even more staggering task - the chairperson must be involved in all of the education for all committee members as well as being able to meet the requirements of being a competent committee chairman. This is true whether the committee chairperson sits on the audit, compliance, nominations or compensation committee (as examples).
If you attempt to meet the regulatory requirements for compliance and establishing remedial actions to solve any deficiencies, the chairperson must be knowledgeable and have the technical sophistication to understand the problems and how to fix them. Therefore, it may be necessary for the committee chairperson to have additional education in excess of what is required for other committee members. This is another excellent reason for not rotating committee members or chairpersons. Once the committee has spent the time and effort to receive special training and education, and your financial institution spends the financial resources, it doesn’t make sense to move people around.
What can be done with a board member who does not commit to the additional training and education deemed necessary? The answer is simple, but not always easy: Do not nominate that person for another term as a director when his or her term expires.
Such a simple solution will certainly solve the educational deficiency, but it will not be easy. Most boards hate confrontation and controversy. It is amazing how many boards will tolerate a director who sleeps through board meetings, rather than retire the director! Replace the problem director with someone who will put forth the effort required to be effective.
Finally, board members should understand the time necessary to meet their committee education and training requirements. If they are placed on the board and have not been told what is expected of them, you are doing a disservice to board members. If they cannot spend the time to become better educated and stay current within their expertise, then they should not become board members. Your job is not to sandbag new directors, but to provide them with additional education and the training necessary for the board to conduct itself as appropriate supervisors and monitors for the safety and solvency of your financial institution.