The Board of Directors

I read an interesting article in the Wall Street Journal this week regarding activist investors. Investors who only have a small interest in an underperforming companies have found a unique way to get their voices heard. They have been working with the larger, typically silent investors, to demand seats on company boards to have their interests represented. You see, typically mutual funds or other large institutional investors would buy large stakes in companies, but didn’t actively concern themselves with how the company was governed. These small activist investors have convinced them to suddenly take a more active role!

I find this exciting and interesting, because the Board of Directors for any organization will tell you a lot about how the organization is governed. And, as a bank examiner, I meet several boards of directors.

With community banks, there is typically a single family that owns a majority of the bank. Thus, the Board of Directors is usually their family, and might include a friend or important community leader. Needless to say, there isn’t much debate over operations or where the institution is headed. It is the same principals who pretty much control everything from top to bottom.

Regional banks tend to have a different flavor. Often, a regional bank has become a regional institution by swallowing several smaller institutions. It is not uncommon for former owners or executive management to be placed on the Board of the new, bigger institution. Not only do these directors have some important insight into how the bank should be run, but also they serve as a magnet for business opportunities. Often these directors are used to attract new business lending relationships to the bank, although that is not the director’s formal role.

The boards for credit unions also seem unique in their own rite too. To me, it seems these boards serve the purpose of a board better than any organization I’ve seen. Credit union boards are typically made up of competent community leaders that show a genuine concern in how the institution is run and whether it is property serving its membership base. While this shouldn’t seem surprising, note how much this differs from the community bank and regional bank commentary I provided above!

And no matter in what capacity a person may come to serve on a board of directors, it is much more than just an honor, it is actually a big responsibility. Directors can be held criminally liable if their organization operates outside the law or in an unethical manner. This means a board member should not expect to only provide wisdom and guidance, but they should be well educated about the industry their organization belongs to. This will also mean ongoing education and keeping up with current events is likely expected of you, if you become a director.

The general idea of a board of directors is to provide oversight, guidance, and representation to the organization on behalf of shareholders. So ultimately, the best thing a director can do is be involved, and a major stakeholders should care about directors being involved too!