Tools and Rules: Surviving as a Bank Director in the New Era Great Bank Director GetTogether March 1

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Tools and Rules Surviving as a Bank Director
in the New EraGreat Bank Director
Get-TogetherMarch 14, 2004San Diego, CA

• Presented by
• Marilyn Seymann
• President and CEO
• M ONE, Inc.
• and
• Michael Rosenbaum
• President
• Rosenbaum Advisors, Inc.

M ONE, Inc. Rosenbaum Advisors, Inc. 2355 E.
Camelback Rd. 4116 N Kennicott Suite
605 Arlington Heights, IL 60004 Phoenix, AZ
85016 847.749.1010 602.957.7479 847.577.6767
(fax) 602.957.4925 (fax) michael_at_rosenbaumadvisors
.com marilyn_at_moneinc.com
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Top Ten Reasons I Like Being a Bank Director
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The Directors Real World

• Not enough time
• Not enough information
• Not enough insight
• Not enough compensation
• Too much CYA
• Too much liability
• Too much legalese

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We Feel Your Pain
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The Directors Legal Role

• Determine CEO compensation
• Analyze and critique budgets
• Enforce policies on conflicts of interest
• Appoint and oversee independent auditors
• Oversee compliance with regulations
• The duty of care
• The duty of loyalty
• The duty of disclosure

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The Directors Illegal(?) Role

• See the big picture
• Take the long-term view
• Share the vision
• Manage the managers
• Protect the owners
• Build the business
• Set the strategic direction
• Ensure continuity through succession planning
• Understand the businessyour own and competitors
• Make a contribution at meetings
• The duty of curiosity
• The duty of candor

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How Well Do You Know Your Bank?

• How does the bank make money?
• How do you add value to new competitive
  strategies?
• What could really hurt the company in the next
  few years?
• If the CEO were hit by a bus, who could run the
  bank?
• What is the compensation philosophy and how
  accurately does the pay scale reflect it?
• How does bad news get to the top?

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Directors Expectations of Management

• Cooperative, open relationships
• Material information provided in a timely fashion
• Management's best insightbeyond the numbers
• Adequate meeting times and agendas
• Direct access to key employees
• Early identification of problems
• No surprises!!

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Managements Expectations of the Board

• Read the materials
• Come to meetings prepared for subject matter
• Offer meaningful challenges and questions
• Be available between meetings
• Provide feedback regarding external perceptions
• Understand the company and its operating
  environment
• Track performance against strategic objectives
• Serve as a role model for employees, stakeholders
• Maintain confidentiality and build trust

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A Common Sense Guide To Board Excellence

• You are here
• Life cycle analysis
• Limited skill set
• Old habits bad and good
• The journey from here to there
• Designing the high-performance board
• Recruiting and training excellent directors
• Maximizing committee effectiveness
• Jump-starting the dynamic board
• Confronting the transition/succession imperative
• Getting down to cases
• Identifying the best best practices for your bank

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The Corporate Life Cycle
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The Corporate Life Cycle
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Designing the Excellent Board

• Focus on the Company
• Focus on the Board
• Board structure
• Committee structure
• Recruitment
• Group dynamics
• Evaluation

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Designing the Excellent Board

• Focus on the Company
• What is our corporate strategy?
• Has the strategy worked?
• What do competitors do better or worse?
• How deep is our talent pool?
• Do we have financial staying power?
• What emerging trends threaten or help us?
• What do stakeholders think about us?
• Why would anyone want to buy our bank?
• Why would anyone want to own our bank?

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Designing the Excellent Board

• Focus on the Board
• What kind of board do we have?
• How has the board contributed to success or
  failure?
• What skills do we need today?
• Do we have them?
• Do we use them?
• What skills do we need tomorrow?
• Do we have them?
• Can we get them?
• How can we be more effective?
• Structure
• Schedule
• Group dynamics

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Designing the Excellent Board

• Focus on Board Structure
• Director roles and accountability
• CEO/Management roles
• Reporting lines of management
• Board budgets
• Board advisors

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Designing the Excellent Board

• Focus on Committee Structure
• Which committees do you need?
• Charters and procedures
• Relationship to board
• Relationship to management
• Committee budgets
• Committee advisors

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Standards for Committees

• NYSE and Nasdaq (Backed by SEC)
• Audit, comp and nominating/governance
• Must be made up of independent directors
• Audit chair should be financial expert
• Committees must have published charter
• Committee purpose
• Specific duties
• Annual performance review
• Committees should be created when
• Regulatory directives require them
• Complex issues require greater focus

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Effective Committees

• Link membership to specific skills and interests
• Selection of chairs should be tied to
• Skills needed by the committee
• Recommendations by governance/nominating
  committee
• Discussion within committee
• Specific skills and interests
• Size should be limited to 3-5 directors
• Specific roles and limitations add value
• Create clear and frequently updated charters
• Obtain access to independent advisors when needed
• Meet more often than full board
• Provide regular updates to board and management

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Committee Connections

• Relationship with Management
• Share concerns and topics - seek input
• Respond fully and promptly to questions and
  recommendations
• Create think tank of combined expertise
• Encourage independence, not anarchy
• Relationship with Full Board
• Recommend policy for approval by the entire board
• Make full use of all board member expertise
• Never seek to supplant responsibility of board
• Drive agenda time and content in area of
  expertise

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Designing the Excellent Board

• Audit Committee
• Exclude insiders of all types
• Select and oversee external auditors and approve
  compensation
• Ensure adequacy of internal controls
• Ensure adequacy of financial reporting
• Monitor total risk management role
• Hire outside advisors
• Conduct executive sessions
• Ensure compliance with standards
• Direct involvement in internal audit

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Audit Committee
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Designing the Excellent Board

• Compensation Committee
• Exclude insiders of all types
• Develop detailed expertise on compensation
  techniques
• Review and assess corporate compensation policy
  and its alignment with strategy
• Review and assess compensation packages for
  senior management
• Hire outside advisors to ensure objective
  measures
• Conduct frequent meetings on detailed issues
• Meet regularly in executive session

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Compensation Committee
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Designing the Excellent Board

• Nominating/Governance Committee
• Exclude insiders of all types
• Develop governance insights
• Study corporate life cycle issues
• Create board development strategy
• Develop timetable for board evolution
• Establish succession plan/timetables
• Create board evaluation process
• Confront oversight role versus board
• Add independent advisors as resources

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Nominating/Governance Committee
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Designing the Excellent Board

• What Other Committees Make Sense For Your Bank?
• Risk management
• Privacy
• Marketing
• Acquisitions
• Regulatory affairs
• Technology
• Community affairs
• Loans

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Its All About People

• Lessons from Good to Great
• Who is on the bus?
• Seat assignments
• Who needs to get off at the next stop?
• Old Bill should have left years ago!!
• But what if Im Old Bill????
• Lessons from Wayne Gretzky

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Director Skills Matrix
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Mirroring Matrix
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Board/Committee Evaluation

• Evaluation includes directors, committees and
  board
• Evaluation is an annual audit process
• Start with the skills matrix and mirroring matrix
• Identify need for continuing education
• Reduce confrontational aspects of review process
• Create process to identify/remove underperformers
• Observe and analyze group dynamics
• Identify potential causes of dysfunction
• Separate issues of structures, process and people

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Board/Committee Criteria - I

• Relationship with Management
• Is there a good balance of power with CEO?
• Is there a leader other than the CEO?
• Is there adequate access to managers?
• Are there regular meetings without management?
• Does executive management respect board/committee
  views and decisions?

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Board/Committee Criteria - II

• Knowledge and Involvement
• Is information received in a timely manner?
• Who controls meeting agendas?
• Do directors understand the business and the
  competitive marketplace?
• Is there adequate information flow from sources
  other than management?
• Is there enough focus on long-term corporate
  strategy?

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Board/Committee Criteria - III

• Structure and Efficiency
• Does the board/committee have the right people in
  the right seats?
• Are structures, resources and charters
  appropriate for the companys needs?
• Is the frequency of meetings sufficient?

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Director Evaluation

• Consider contributions of individual directors
• Ask for self-assessment by directors
• Ask directors where they fit in strategic board
  plan
• Identify needs for continuing education
• Reduce confrontational aspects of review process
• Create process to identify/remove underperformers

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Individual Director Criteria

• Integrity
• Independence
• Knowledge of the business/industry
• Knowledge of senior management
• Initiative
• Preparation
• Attendance
• Time commitment
• Contribution
• Judgment
• Candor
• Teamwork
• Involvement outside the boardroom
• Interpersonal skills
• Role model

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Maximizing the Board Dynamic

• Measure the Board
• Organize the Organization
• Define roles of board and management
• Establish joint goals
• Develop structure that adjusts for strengths and
  weaknesses of directors
• Provide differentiated roles for committees
• Fill the matrix
• Cure the Dysfunctional Family
• Identify common and conflicting expectations
• Time and focus
• Collegiality
• Follow the leader
• Conflict resolution
• Discipline
• Openness to new ideas / Imagination
• Guts

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Building Productive Meetings

• Agendas
• Board manages agenda to meet its needs
• Agendas follow priorities
• Sensible divisions between board and committee
  roles
• Minimal repetition of information in board
  packages
• Preparation
• Board packages delivered early
• Include maximum insight and background in package
  
• Directors read materials earlier than asap
• Pre-meeting conference call

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Building Productive Meetings

• Meeting Process
• Attendance is required
• Group dynamics managed effectively
• Limited show and tell
• Adherence to agenda
• Maximum discussion and closure on relevant issues
• Focus on vision for future, concrete steps to
  achieve goals

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Better Boards Better Banks

• Match the board plan to the corporate plan
• Match the people to the plan
• Create the structures that fill the need
• Measure the board, management and directors
• Make succession an ongoing process
• Improve the board dynamic
• Expand productivity of board and committees

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CEO Evaluation

• Whos Driving the Bus?
• Strategic insight
• Track record
• Succession plan
• Timing Issues
• Age
• Tenure
• Doomsday

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Evaluate the Senior Team

• Get to know the next layer of management
• Consider total needs for management depth
• Consider when and how outsiders will be recruited
• Integrate management plan with HR policies,
  compensation, recruitment, training, etc.
• Executives at every level should identify one or
  more successors for their position
• Develop criteria for new leadership, based on
  culture and reputation

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CEO Evaluation Includes Succession Planning

• Early preparation
• Succession planning is an ongoing process
• Boards must be updated on a regular basis
• Communication/Partnering with the CEO
• Leadership can be addictive and can be a barrier
  to an exit
• CEOs must be engaged and committed if process is
  to succeed
• Align with strategic business plan
• Include succession planning in CEOs annual
  objectives and evaluation
• Link to company practices in staffing its
  management team

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Next Steps

• Break
• Lunch
• Case Study
• Best Practices
• Priority Lists