As you sit down at your company’s next Board of Directors meeting, take a minute to look around the table and ask yourself if the composition of the Board members mirrors the age, gender, and ethnic diversity of the bank’s customer base. Odds are, it probably doesn’t. It may even slightly resemble that of the Board of the fictitious Fidelity Fiduciary Bank (pictured below).
Board of Directors of the fictional Fidelity Fiduciary Bank in the Walt Disney movie Mary Poppins (1964).
It’s very likely that your Board skews more on the mature side. And male. And, um, a little white? I’m not trying to be disrespectful at all – I’m sure you enjoy the counsel of fine people of experience and wisdom, probably including former CEOs and other successful business leaders. Unfortunately, Board skill sets and perspectives that may have added great value in the past can become problematic in today’s environment in which the customer base is becoming ever more diverse and the digital transformation is upending traditional business models.
There’s a large and growing difference between how banking has traditionally been pursued versus what it takes to survive in today’s market. Deep experience with (and a bias toward) outdated business models can hinder a forward-looking decision-making process that needs to embrace change and new technologies in a relentless emphasis on the needs of the customer. People viewing the world through a traditional or generational lens may not fully appreciate this and may be out of tune with the expectations of younger customers and the technology demands of delivering a quality service experience.
Let me give a quick example to illustrate my point: a couple of years ago I arranged for an online demo of a mobile deposit account opening solution that I wanted the bank I was working for to purchase. I invited a group of the bank’s senior executives and a very influential Board member: a gentleman in his late 60’s. The demonstration featured the opening of a checking account on an iPhone. As we got into the demo the Director seemed fascinated, and walked up to stand in front of one of the video displays to better see how it worked. I’m sitting there feeling pretty jazzed and thinking “Wow, that’s a good sign!”.
It turns out I was being a bit premature though. When the account-opening demo was over the Director turned and walked back to his seat shaking his head. And he said: “Why would anyone want to open a checking account on their phone?”
Okay, problem here. I do understand that from his perspective a mobile phone may not be his device of choice to use to fill out an account application. But he wasn’t my target demographic for this solution. I was targeting a much younger audience, many of whom would not think twice about going through an account application on their phone – even if they had a laptop sitting on the sofa right next to them.
Unfortunately, this Board member’s approval was essential when it came to approving technology expenditures. In this case, the mobile account opening solution was not approved given the Director’s belief that it did not address a demonstrated need. Today, that bank’s customers and prospects still lack the ability to open a deposit account on a mobile device – something that puts them at a growing disadvantage with respect to attracting new account relationships.
Beyond age, it is also essential that Board members understand and are sensitive to the needs of women and different ethnic groups in their communities. Another bank that I’ve worked with serves communities in which the population is over 30% Hispanic, and over half of the firms in their primary market area are either owned by women or minorities. But the Board is 100% white and 90% male. 85% of the population served by this bank is under 65, while the median age of the bank’s Board members is 70.
It’s much harder to ensure that the needs of the customers of a community-focused institution are adequately being addressed when the composition of the Board is radically different from the community it serves. It’s also much more difficult to gain support for the level of investment in new technologies and processes when you have older Directors who are heavily biased toward the traditional banking business model and who can’t directly relate to the needs and preferences of today’s Gen X, Millennial, and Gen Z customers.
The uncomfortable reality here is that any impetus to achieve greater diversity in Boards of Directors has to come from the Board itself. Any significant change in Board composition in the short run would require that the current members realize the problem and are willing to take action. Some members might need to step down, which would involve some difficult conversations.
Another problem is that financial institutions are complex organizations that are different from many other types of businesses. Because of this, there is usually a steep learning curve for new Board members – particularly for those lacking a strong banking background – before they can become effective in exercising their oversight role. This is often used as a reason why Boards are reluctant to adopt measures to foster diversity such as term limits or mandatory retirement age. This trade-off is explicitly acknowledged in this quote from The Directors Book published by the OCC:
A tenure policy can provide a road map for the board’s natural evolution and create a structured process to obtain fresh ideas and promote critical thinking from new directors. A tenure policy protects against the board losing objectivity and effectiveness if long-time directors become less active, less committed, complacent, or too comfortable with the status quo. On the other hand, mandatory retirement may result in the loss of directors whose contributions to the bank continue to be valuable.
A challenge for privately-held banks or smaller public banks is that Board members are often significant investors who would be very reluctant to step away from an active oversight role over their investment. For family-owned companies, seats on the Board are considered part of the bank’s heritage, making any meaningful change highly unlikely.
For all of these reasons changes in Board composition are likely to occur very, very slowly over time. But vacancies do open up periodically.
Here are a few things you could consider to increase diversity going forward:
- Create an ‘ideal’ Board profile that more closely mirrors the age, ethnicity, and gender of the communities you serve. Compare that to where you are today, and as vacancies become available be sure to fill them with individuals who will help move the composition closer to that ideal.
- Consider expanding the size of the Board, which would allow you to retain the existing, experienced Board members while at the same time bringing in new members to help achieve your diversity targets.
- Hire an independent consultant to discuss Board governance, and consider instituting measures such as a mandatory retirement age or term limits. For Directors who would be affected by these changes, one option would be to move them into a non-voting ’emeritus’ status for a period of time so that the company can continue to benefit from their experience.
- Create a Community Advisory Committee composed of individuals chosen from the community based on their expertise and with a composition aligned with the demographics of the area. Invite the Committee to meet with the Board periodically to present feedback and recommendations.
Changes like these will ultimately strengthen your company by bringing diverse perspectives on today’s business challenges, better understanding the needs of the customers you serve, and improving the perceptions of your company as being truly community-focused.
Finally, for those of you who enjoyed Dick Van Dyke’s performance as Director Dawes, Sr. in Mary Poppins, here’s a link to the scene where he sings about tuppence and the virtues of compound interest: https://www.youtube.com/watch?v=XxyB29bDbBA.
