Large banks took major hits during the economic downturn, including sharp criticism surrounding board oversight. Many analysts questioned whether bank boards were comprised of the right people to challenge management, provide a proper “tone at the top” and effectively oversee risk management.
Moody’s released a report on how some large banks have changed their boards to be more effective with strategy. The report reviewed board composition at 20 large global banks in North America and Europe since the beginning of the crisis in July 2007.
The SEC’s new disclosure rules play an obvious part in the revamping of bank boards. Director nomination standards now require information about the nominee’s experience, qualifications, and attributes and reasons why that person should serve on the company’s board. A new leadership structure rule mandates that a company disclose why it has chosen to either combine or separate the positions of chairman and CEO.
The bank boards included in this report turned over 32 percent of their non-executive directors. This provides boards with an original perspective and new ideas about how to bounce back after the crisis. Author of the report, Christian Plath, said the turnover on bank boards was the most interesting trend post financial-crisis: “The turnover on some of these boards, particularly boards that received extraordinary government assistance, some of those boards saw more than half their board turn over.
Experience in the financial industry is now a much more prominent factor in building bank boards. Of the 20 banks examined, 46 percent now have outside directors with financial backgrounds. This is up 14 percent from July 2007. Plath said this comes after serious criticism about the quality of board members: “Many of these banks were strongly criticized for not having enough directors with financial backgrounds…All of this points to the criticism that banks were engaged in excessive risk taking…you want some directors on the boards that can know the right questions to ask.”
Banks that received the most government assistance–Bank of America, Citigroup, Lloyds, RBS and UBS–added the most financial experience to their boards, the Moody’s report found.
Several of the banks examined by Moody’s researchers also reduced their board size. Plath said this could be for several reasons concerning the particular bank’s restructuring process. “There are a couple of big advantages of having a smaller board size and one is that it better stimulates discussions at the board level. It enhances the board’s ability to respond in the event of a crisis.” Plath also said that a smaller boardroom means a bigger spotlight for each director: “It also makes it harder for directors to hide in terms of boardroom discussions. It forces all of the directors to speak up.”
The average board size is now 16 members. Bank of America, for example, reduced its board size from 17 to 15. Not every bank downsized the board, however. Four of the 20 banks in the report maintain a board size of 20 or more members. HSBC increased its board size from 18 to 21 members.–Ashley Chaney