By Bob Souster

One of the most important drivers of good corporate governance is leadership. In most banking organisations, the responsibility for leadership lie with the board of directors. It is the directors who decide the organisation’s medium- to long-term ‘road to travel’, commit resources to enable the achievement of organisational goals, as well as putting processes in place to keep the organisation on that road.

The board structures of banks have remained remarkably stable for many years, despite the many upheavals that the banking industry has faced. This article describes the alternative structures that can be adopted, considers some of the challenges that boards may have to face in the future and discusses how this may affect the ways in which boards operate.

Single-tier Boards

A single-tier board is the most commonly used structure in both private and public limited companies. It is typically made up of executive directors, who are full-time employees of the company, and non-executive directors, who are appointed as external officers. While executive directors have a contract of service, the non-executive directors are engaged under a contract for service. In most jurisdictions, both types of directors are agents of the shareholders (owners) of the company and have the same legal duties.

Over time, best practices in corporate governance have come to reflect the importance of having proper ‘checks and balances’ in place to ensure that power and authority at the board and executive levels are not concentrated in too few hands. As a result, many codes of corporate governance now highlight the crucial roles of non-executive directors, with some codes stating that the board of directors should have a majority of independent non-executive directors who can offer an objective view of strategy options as well as providing scrutiny and oversight. Some codes also stress the importance of segregation of roles, such as having different persons occupying the role of Chairman of the board and Chief Executive Officer.

Two-tier Boards

The two-tier board is an alternative structure adopted in several countries, notably in Europe. As the term suggests, a two-tier board has two levels. The Supervisory Board sits at the apex of the organisation and comprises non-executive directors, while the Operating Board has responsibility for day-to-day operational matters. In effect, this model separates the executive and non-executive directors, though their roles are similar to those performed in the single-tier model.

Standing Committees

As the business operations of large banks, and of larger companies generally, have become more complex, so too have the structures necessary to direct and control them. A typical large bank now has at least four standing committees: Audit Committee; Nominations Committee; Remuneration Committee; Risk Committee. However, some banks have additional committees; some have a Credit Committee to deal with larger or unusual loans, while in recent years some have appointed an Ethics and Standards Committee, reflecting the growing importance of these matters.

The Challenges of Change for Board Structures

The accepted view is that non-executive directors must play a crucial role in steering the strategies, policies and practices of organisations. But do we expect too much? And are we asking for the impossible going forward?

Non-executive directors are not practising bankers, and very few of those in these roles have direct banking experience. They are expected to exercise independent judgment, but few have an in-depth grasp of the technicalities of banking.

As corporate governance systems have developed, so too has the guidance offered to companies. For example, in some countries the code of corporate governance suggests that at least one member of the Audit Committee should have a detailed understanding of financial management, while one of the international trade associations that represents credit unions states that all members of the board should have a grasp of financial accounts. Likewise, many now acknowledge that it is very difficult for the Risk Committee of a bank to function effectively without at least some members having a comprehensive understanding of risk management and specifically, its importance in asset and liability management.

These issues have prompted debates that it may be necessary to broaden the competences of board of directors. Many banks are already exploring fields of operation that were unanticipated only two decades ago. There are exciting opportunities but also daunting threats in decentralised networks and (specifically) blockchain, as well as in artificial intelligence (AI) and machine learning. International commitments to environmental, social and governance (ESG) objectives have already been confirmed in the United Nations’ Sustainable Development Goals and the Principles for Responsible Banking. Do all of these developments imply that every bank should have a director who is an expert in AI, another in sustainability, another in cryptocurrencies, and so on?

These questions somewhat miss the point of what a board of directors should do, or what its members should be. A board of directors of a large bank is typically made up of 12 to 18 directors. Boards of smaller banks have fewer members, perhaps between six and nine directors. It is generally acknowledged that a board should be of an ‘appropriate’ size, with a good balance and mix of knowledge, skills and experience, but once the size of a board exceeds (say) 20 persons, it will become unwieldy and inefficient.

In most banks, the board meets each month, occasionally more often if the need dictates, but its role is strategic, not operational, in nature.

Boards of directors are already guided by experts in their own organisations: the heads of marketing, human resources, compliance and lending are accountable to the board for producing reports, offering policy options and making recommendations for future action. But it is inevitable that boards, as well as the senior executives who put their strategies into practice, will become increasingly dependent on taking expert, usually external, advice when appropriate. However, the directors who ultimately take decisions based on the advice they are given need not, and cannot, be experts in everything.

What these huge changes imply is that the work of a director will continue to evolve. Directors will need to have enough knowledge and understanding, but of more things that are relevant to their companies. To use an analogy, they will have to ‘look at the whole forest but not the individual trees in it’. And increasingly, they will have to detach themselves from the details, which is best left to the experts. In fact, one future differentiator between excellent organisations and merely good ones may not just come down to the quality of the board and management, but the calibre of the experts and advisers who support them.

Robert (Bob) Souster is a Partner in Spruce Lodge Training, a consultancy firm based in Northampton, England. He lectures on economics, corporate and business law, management, corporate governance and ethics. He has worked extensively on the Chartered Banker MBA programme at Bangor University, Wales, since its inception, serving as both a Module Director and, currently, as a Moderator for ‘Ethics, Regulation and Compliance’ and ‘Financial Institutions’ Risk Management.’