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Directors' Compass
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LOOK
BEFORE YOU LEAP Our recurring message to directors deals with the concepts of loyalty, courage and honor. The second concept of courage is not the lack of fear but the ability to deal with an ever-changing environment with an open heart, an open mind and a dedication to the bank. Dealing with fear and the impact to the banking franchise is a major factor of courage. How we deal with fear is through knowledge and thought not immediate reaction. Therefore, we encourage directors during this time of strategic planning time, as well as regulatory and economic pressures, to be methodical and look before you leap. Right now directors are being presented with decisions of whether to
opt out of the FDIC guarantee program or to enter into the TARP capital
program. A lot of these programs have not been fully vetted and time
pressures may not permit a full vetting. To a certain extent this is
a leap of faith and for some banks a big leap. For some banks we believe
the leap will be problematic. Here are four suggestions that may help as you deal with these particular issues and as well as set the strategic direction for your bank going forward. Do Your Homework and Be Prepared There are no excuses for not being prepared with the availability of financial information, access points from regulatory agencies and a willingness from professionals to share information. Banks and boards have access to so much information and so many financial profiles. Don’t rely on the cliff notes or the Readers’ Digest version. Get into the information. Know what it does to your bank and how it will impact your bank going forward. So many decisions are made on guesses and misinformation. Best have all of the information available. Think it through. Be prepared. Do your homework. Know Your Bank - - Shake Yourself Down This is the question of whether your bank is prepared. Are you a strong banking institution? Are you a weak entity? What do the regulatory agencies think of you? How will your shareholders react? How will the customers react to these types of decisions? This requires a real assessment of your partners, their determination and impact on your bank. Many strategic decisions have negative consequences on various partners. How will the partners react? Is this a battle you want to fight at this time? Many decisions, if they have a negative consequence, could have long-term detrimental impact to the bank. Part of this assessment is determining the quality of the individuals that you have within your bank. Do you have the right management? Do you have the right board? Do you have the right professionals? Do they share your common goals and objectives? Shake yourself down, know yourself, know your capacity and try to figure out how you strengthen those weaknesses that are part of your overall SWAT. Assess Your Short Term and Long Term Objectives What is the ultimate game plan for the banking entity? Is it short term? Long term? Do you have the resources to be here for the long term? What will be necessary for you to be a long term player? Too many boards and managements have false impressions of their true strengths and weaknesses as well as their capabilities. They also have false expectations as to the real value of their franchise and how the bank is really perceived by the different partners. Not every bank is loved by all of the partners. While the decision may be to move forward on a strategic initiative or action item, what is the plan to implement the initiative so that it does not become a failure but a success? Too many boards, too many managements, too many banks fail in the implementation of initiatives because they don’t have an effective action plan or they don’t have the resources with which to implement the plan. We have long stated that you can have an “A” strategic plan on paper but without proper implementation and resources, you have no strategic plan! With all of these initiatives before a board, whether they are the TARP program, the FDIC guarantee program, strategic initiatives such as M&A transactions or failed bank transactions, how are you going to implement? That is a key element and should be factored into the decision prior to determining whether to move forward. This is not an after the fact discussion but rather a critical element in determining whether you have the resources and capabilities to leap. There are a lot of banks and boards that will be greatly disappointed in their ability to implement and their ability to grab a hold of initiatives. We have long stated that the majority of all bank acquisition transactions are failures in the long term primarily due to poor implementation, poor assimilation and a poor understanding of the bank. The best example is the acquisition of World Savings by Wachovia, which for most analysts is the worst acquisition ever and has led to the ultimate demise of Wachovia. That is definitely one of those transactions where the board and management did not look before leaping. While things are moving at warp speed in today’s environment, patience is important, information is important, knowledge is key. Despite the fact that the regulatory agencies, your management or your professionals say to leap, we encourage you to look over the cliff prior to jumping. Think it out. Know your strengths and weaknesses. Know your capacity to implement initiatives. Have a game plan. Be certain to talk it through. Look before you leap. Otherwise, the impact when you hit the ground may be fatal to your banking franchise. RATING THE CHAIRMAN - A FOREIGN PERSPECTIVE What makes an outstanding chairman? We recently read an article while touring Europe, which focused on the question - what makes an outstanding chairman? This article described a recent survey by Directorbank, a United Kingdom recruiting specialist. The survey reported that an outstanding chairman is someone who is never afraid to ask what might appear to be a silly question. He, and it is usually a he, is quite happy to enjoy his executives being triumphant without ever being in the limelight himself. He is a coordinator and a facilitator but never the fount of all knowledge. The survey of four hundred and thirty directors serving on more nine hundred boards reported that the qualities that the directors identified in an outstanding chairman include charisma, patience, ability to listen and mentoring skills. Business experience was also rated as important especially having weathered storms before and the ability to manage a boardroom of potentially competing priorities. Other sought after qualities include having a good network of contacts and a willingness to take risk. The most important factors were the ability to run an effective board and to manage relationships with shareholders and stakeholders. It further emphasized that those who failed to listen, who had poor understanding of the sector or exerted poor control over the board came in for sharp criticism. While most directors had said that they had worked with a chairman that they had considered outstanding, more than ¾ said that they had worked with an ineffective chairman. In looking at an underperforming chairman, the survey reported that most directors thought that there was nothing that could be done to improve an underperforming chairman and the best solution was to remove them. But 40% said that their organizations had no mechanisms to remove a failing chairman. We see that predicament in a number of bank boards who do not know what to do with a dysfunctional and poor performing chairman. The survey found that most directors felt that a board worked most effectively only if separate individuals held the chairman and chief executive roles. Also a number of directors doubted whether the chief executive role was good preparation for chairing the board, which required a completely different mindset to be successful. The biggest challenge that was identified in a chairman’s role was to remove the chief executive. Others were market downturns, turning around failing businesses, dealing with bad press and managing a large scale crisis. The majority of directors felt that while the chairman should maintain independence in the event of hostility, he or she should get personally involved in times of business crisis rather than remain aloof. In today’s environment, the role of the chairman becomes more important primarily due to the continued crisis that exists among financial entities as well as boardrooms. One of the nine directors that were identified in the Directorbank survey as an outstanding chairman was Allan Leighton, who is chairman of the Royal Mill. Mr. Leighton advised “I try to be the radar for the top team. You don’t have to be distant. Find out what is happening and feed that back to the executive team. The most important test for the chairman is to make sure that the company has a great chief executive. In the end, it is the CEO who must run the company day to day but you can help him or her put together a great executive team. In addition, you have to be aware of the government stuff but that is only part of it. You must talk to the people and stay close to the action. In the end, the chairman is the leader of the board. If the chief executive isn’t doing the business and you don’t have confidence in him, you have to make the change.” We suspect that in 2009 there will be a lot of changes in executive management for banks dealing with the current financial crisis. A strong board with an effective chairman is critical for banks to make it through this difficult time. Boards always need to be looking for ways to strengthen themselves through knowledge, through experience, through education and also adding others who can assist going forward. Confident, qualified chairman are essential as are competent, qualified directors. The European companies appear to have a handle on these traits and this is an important lesson from overseas. Gary Steven Findley, Editor URL: http://www.Findley-Reports.com/compass.html E-Mail info@Findley-Reports.com
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