Banking Newsletter January 2021: Optimize Board Performance to Boost Your Financial Institution’s Success

Written by Alison Wester, Partner

The board of directors plays a crucial role in the successful operation of every financial institution, from the smallest credit union to large, international banks. Ensuring board members understand their role in helping the organization fulfill its myriad responsibilities can help you maintain positive board relations, mitigate risk, and enhance your institution’s overall performance.

Sharing the scope of board responsibilities
Financial institutions have complex needs, necessitating decisions that require careful thought, and rigorous oversight. Most who assume leadership positions or sit on the board take their role seriously and bring a committed approach to their duties. Lack of understanding, however, can leave even committed individuals without the awareness that will enable them to fully meet expectations at the best of times, much less during unexpected events such as COVID-19.

Financial institution leaders should take care to convey the full scope of the board’s responsibilities for oversight and governance to each new member, allowing and encouraging questions and providing specific training as needed for individual positions. The FDIC statement regarding the responsibilities of directors and officers is a great place to start. This general introduction must be augmented with more granular and personalized guidance structured around unique institutional needs and board members’ existing depth of knowledge.  It is also a great refresher for experienced board members.  

Adopting current trends in board governance
Successfully operating a financial institution today entails navigating a host of threats and barriers that did not exist in previous years. To avoid the plentiful pitfalls that dot the current landscape, these organizations must embrace a more transparent style of governance than was expected even a decade ago, as well as adopting an aggressively proactive stance toward risk management.

This is especially true for environmental concerns and social issues. From employee equity and diversity within the leadership team to investment/divestiture policies, green buildings, and even social media

policies, your board may address questions of social justice, environmental sensitivity, and governance deliberately and with a clear rationale.

Responsiveness is another key attribute of effective governance. It is crucial to understand how significant current events impact the safety and well-being of employees. In addition, board members must also grasp any impact to the institution’s financial reporting, disclosures, and control environment, as this information can sometimes trigger initially unforeseen consequences.

Mitigating risk by staying informed
Environmental concerns may be new territory for financial institution boards, but risk management certainly is not. Knowing and monitoring the full spectrum of risks – both existing and emerging regulatory, operational and financial threats – is a core and crucial function for the board as a whole and each of its members.

The board and audit committee chairs have the most opportunity to receive unbiased information about significant risks to the institution. These leaders should communicate effectively with other board members and have appropriate conversations with external parties. As we begin 2021, cybersecurity risks remain at the forefront of concerns.

That said, it is imperative that the board have a complete understanding of risk tolerances for cyber, compliance and operational risks. Information from a variety of sources can impact risk assessments; newly acquired information may require a re-evaluation of targeted areas during the year.

  • Regardless of your primary regulatory agency, the most recent OCC Semiannual Risk Perspective provides a useful overview of operational and financial “hot topics,” including the operational and compliance risks that are currently elevated due to altered work environments and other factors. Credit risk is increasing for many institutions, as well.  
  • Another publication from the OCC, their Fiscal Year Operating Plan, can also provide insights on what examiners from all agencies may be focusing on during the 2021 examination cycle.

An effective board of directors provides support and direction that helps senior management handle significant events and day-to-day operations, while scrupulously avoiding micromanagement.

A clear understanding of the threat landscape and the board’s role in risk management, combined with a responsive and transparent approach to governance, will help your institution ride out turbulent times and remain well-positioned for long-term success. For additional strategies customized to fit your institution’s unique risk profile, turn to the financial institution experts at Mauldin & Jenkins.