Board Leadership: What Directors Need to Know

Two recent high-profile bank failures have raised questions about the role directors should play in oversight. The operative word here is should. Each bank had a board of directors responsible for assuring proper oversight of their institution’s operations. For banks, regulatory requirements and regulators’ guidance place a fine point on roles and expectations beyond those for directors of other types of organizations. It is expected that directors possess some type of relevant subject matter expertise which prepares them to effectively dispense their duties on the board.

But there needs to be more than domain knowledge. As evidence, consider the case of Signature Bank. One director was a former legislator who led the Dodd–Frank Wall Street Reform and Consumer Protection Act, designed to overhaul financial regulation in the aftermath of the Great Recession. Knowing the rules is one thing; knowing what to focus upon as a director is another.

Failures of Signature Bank and Silicon Valley Bank are still too recent to have detailed post-mortem root causes assessments. That said, there have been calls for additional regulation, more robust regulatory oversight, more severe penalties for bank failures. As these potential remedies are debated, there are learnings available to directors for application immediately. Here are five actionable ideas directors can apply now:

• Understand the relationship between revenue and risk drivers beyond reporting – Are risk and revenue drivers aligned in your organization or is there incongruence? Directors generally receive ample access to financial and risk control reports. It is rare to see a report that reflects risk exposure relative to the size of a specific activity within the company (revenue-weighted risk metrics). For example, a bank trust department may have a small special needs trust book of business which represents ten percent of total department revenue, yet those accounts equate to fifty percent of risk exposure. One discretionary distribution error may cost the bank $5 million while their entire book of special needs trust accounts only generates $500,000 annual revenue. In order to assess risk drivers (beyond traditional reporting), directors need to dialog with management to delve into dimensions of exposure that may not translate into quantitative reports. Clarifying questions for management: When you think of areas of risk exposure in your department/division, what comes to mind that is not represented in your internal controls reporting? Are there activities performed (processes executed, products manufactured) that present above-average risk and below-average revenue? Given changes in the operating environment over the past few years, where in your department do you believe risk exposure levels have changed since existing policies were implemented?
• Learn from Columbo – The 1970’s television show, Columbo, featured a detective who was masterful in the art of inquiry. He had a lowbrow approach to asking obvious questions, which advanced his theory about who committed the crime. Columbo often paused as he was leaving an investigation, delivering his catchphrase “Just one more thing”, before asking a critical question. The Columbo lesson translated for directors is: obvious questions can lead to less-than-obvious answers, which guide directors down a path of further inquiry. Directors are not detectives, nor are they solving crimes. However, mastering the art of inquiry is a transferable skill from detectives to directors. Clarifying questions for management: When you look ahead over the next few quarters, what unexpected events in the economy (broader business environment) might surprise you? Thinking about how our customers/employees/partners expectations are changing, where might we see disruptions in our business over the next few years? As you think about our strongest competitors, what factors are they betting on in the operating environment that we may be overlooking or seeing differently?
• Recognize timing mismatches – By the time a business activity or risk event is reflected in a report for the board of directors, the information is likely stale, if not irrelevant. If a board meets quarterly, chances are that company performance information reflects activities which took place 90 to 180 days earlier. Interesting for historical sake; not necessarily meaningful for anticipating changes in the company’s operations or competitive environment. Neither directors nor management have a crystal ball but knowing the timing lag between events and board reporting, directors need a forward-looking mindset. Clarifying questions for management: What have you seen in the business over the past 30 days that raised financial or risk questions or concerns? Between now and our next board meeting, what should we (directors) be watching for in the operating environment that could impact the company? What early warning signals are you or your direct reports/department heads looking at to anticipate changes in the business?
• Get over it – If something doesn’t make sense to you, it may not make sense at all. Yet, I’ve been on boards with directors who have said things like “I’ve always wondered about that activity, but never asked because I assumed everyone else understood it”. If you have never asked about something that seems odd or opaque and you’ve been on the board for ten years, now is the time. Navigating the possible embarrassment of asking questions today is much better than dealing with regrets in the future. What kinds of curious questions should we be asking of management? In my article Seeing Your Organization as Others Do for the publication, Board Leadership, I discussed the objectivity challenge leaders face. Research tells us our self-assessments tend toward inaccuracy; sometimes too favorable, others, too harsh. For most of us, individual self-objectivity is difficult to achieve. Is the dilemma different for our organizations? Companies are complex social networks comprised of individuals, therefore subject to human conditions. Leaders at your company are likely to have blind spots when it comes to objective assessments of risks and performance. As directors, part of the way to override the bias toward subjectivity is to broaden the lens through which you observe the company. You can play a role in organizational self-awareness by seeking and understanding stakeholders’ perceptions of how the organization shows up. Identify cues and clues suggesting shifts in the company’s relevance with its stakeholders. While each organization tracks different metrics, general leading indicators that relevance may be at risk include changes in employee engagement or satisfaction, changes in customer engagement, satisfaction or loyalty metrics, increasing complaints, unfavorable online traffic (social media, online reviews, blogs) and slowing accounts receivable turnover. Lagging indicators include decreasing employee productivity, increasing regrettable turnover, uptick in customer attrition, decreasing repeat customer activities, or fewer new customers. Any of these cues or clues inferring that relevance may be waning are an invitation for directors to engage in inquiry with management. Clarifying questions for management: What is the root cause of shifts you are seeing in _____ (i.e., employee engagement, regrettable turnover, customer engagement, dissatisfied customers)? What intervention is needed to shift the trendline? What are the risks if strategic adjustments are not made forthwith?
• Make it personal – Every business is a relationship business. While there are lines between a board and its business operators, that does not mean there should be a moat around the company. There is value in directors developing relationships with key people in the organization and broadening connections beyond a limited number of C-suite executives. Directors benefit from hearing diverse perspectives about the business and employees can develop comfort sharing unvarnished feedback about the company. When directors have a clear line of sight into the people running day-to-day activities and understand how they view their roles, what success looks like from their perch, what keeps them awake at night, and what they believe should be done differently, governance can be more effective.   Clarifying questions for management: Who in company leadership should we get to know better? Are there natural relationship opportunities between certain directors and key employees we should advance? Which key people with shorter tenure with the company might have insights from their early observations from which directors can benefit?