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When board and management reach parting of the ways

Failure to spot the time to split can undermine your bank

Sometimes conflict signals that the time has come for someone to leave the boardroom, says community banking expert and blogger Jeff Gerrish, in Part 1 of a two-part blog. Sometimes conflict signals that the time has come for someone to leave the boardroom, says community banking expert and blogger Jeff Gerrish, in Part 1 of a two-part blog.

Sometimes, it is time to say goodbye.

When mismatches between the board and the CEO are identified, it is that time.

When conflict gets out of hand …

Over the past 30 years, I have worked with a number of boards where there have been conflicts between the board and senior management over a variety of issues. This generally means that something needs to change at the top.

If a bank needs to address employee relations issues, implement a strong sales culture, or generally change the way the bank does its business, change has to start at the top. What do you do, then, when your chief executive and the board of directors simply cannot see eye to eye? 

Don’t kid yourself that what happens in the boardroom stays in the boardroom. This isn’t Vegas.

Disagreements in the upper ranks of the organization’s hierarchy have a significant negative impact on the bank’s profitability, morale, business development abilities, standing in the community, and a variety of other areas. For this reason, a mismatch between the CEO and the board of directors should be identified as quickly as possible.

And resolved as amicably as possible.

Identifying the problem

What causes conflict at the top? 

The general answer is “a lot of things.”  Some come under the category of “red flags.” Others are more a matter of business philosophy.

First, there are multiple red flags that may indicate problems are on the horizon.

First, the CEO and members of the board simply may not get along.

Often, this is purely a matter of personality, but sometimes specific character traits can put up a roadblock to effective communication.

Second, has the specter of trustworthiness arisen?

Clearly, if the CEO is misleading the board, fails to provide information the board needs to know unless a board member asks the exact correct question and the like, it results in a relationship with very little trust.

Third, is someone misbehaving?

A CEO stealing from the bank or having an extramarital relationship with an employee of the bank are a couple of additional situations that I have seen result in insurmountable trust issues at a bank.

Fourth, has “advise and consent” gone out the window?

There can be more subtle issues, but the CEO may have a “lone wolf” mentality and tends to either brush off or ignore the board’s strategic advice or has a personal agenda that does not align with the long-term well-being of the institution.

Mind you, none of these issues are restricted to the CEO.

But these are not the only reasons. Sometimes the issue can be more basic. As I said, “philosophical.”

Northgoing CEO, meet southgoing board

Unfortunately, it is not uncommon that members of the board of directors of community banks are less than astute in the ways of banking and tend to shy away from dealing directly with issues that they do not fully understand. In such situations, it can be nearly impossible for the CEO to get board approval to take the bank in the direction that it needs to go.

If that is the case, it may be time for the CEO to move on.

On the other hand, the CEO could be dealing with directors who simply know too much for their own good (or think they do) and micromanage the operations of the bank. Senior management should always operate within the strategic framework that the board of directors establishes for the institution, but it is ultimately senior management’s job to run the bank.

If the CEO has members of the board second guessing his or her every move, some level of change is necessary.

A significant issue is when there is misalignment between the CEO and the board with respect to where the bank is heading.

If the board has one vision for the organization and the CEO an opposite one, then a clash is imminent.

As shareholder-elected overseers of the organization, the board has a fiduciary obligation to the shareholders to act in their best interests. If a director is not acting appropriately in that capacity, shareholders can simply not reelect that member for an additional term.

The CEO, however, is hired by the board and is primarily responsible for operating the bank in a safe and sound manner that is hopefully profitable. He or she may have a specific vision for the bank that the board does not believe aligns with the long-term best interests of the shareholders, which the board is responsible to protect.

Many of the long-term vision differences come down to how the bank should allocate available capital.

Sometimes the issue is timing. Particularly as a CEO ages and nears retirement, he or she may be biased to activities or transactions providing the greatest short-term yield or in the alternative, the most conservative approach.

On the other hand, I have seen CEOs push for aggressive, long-term asset growth and becoming a “public” company—only to have their boards allocate earnings to shareholder dividends, allowing for minimal, if any, growth.

Will there be a meeting of minds?

Ideally, the CEO and the board can reach a middle ground that allocates capital to the shareholders and still allows for appropriate growth.

However, sometimes the differences cannot be resolved.

In such cases, neither side is technically “wrong,” but the misaligned interests can nevertheless impede the bank’s profitability, and it is probably a good time to make the change.

In the next blog, I will discuss appropriate steps to take when it is time to say goodbye.

Jeff Gerrish

Jeff Gerrish is chairman of the board of Gerrish McCreary Smith Consultants, LLC, and a member of the Memphis-based law firm of Gerrish McCreary Smith, PC, Attorneys. He frequently contributes to ABA Banking Journal and ABA Bank Directors Briefing, and frequently speaks at ABA events and telephone briefings.
Gerrish formerly served as regional counsel for the FDIC’s Memphis regional office and with the FDIC in Washington, D.C., where he had nationwide responsibility for litigation against directors of failed banks. Since the firm’s formation in 1988, Gerrish McCreary Smith has assisted over 1,500 community banks in all 50 states across the nation with matters such as strategic planning, mergers and acquisitions, common stock private placements, holding company formation and reorganization, and a wide variety of regulatory matters. Jeff Gerrish can be contacted at jgerrish@gerrish.com.

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