By Stephen A. Enna, John Parry & Alexander

Most experts in bank governance will advise you that it is important to evaluate the performance of bank directors. Certainly it makes common sense and seems like a good thing to promote…but doing it may be much more difficult than it appears.

Actually, few banks have adopted a formal review process for individual director performance. According to a recent bank governance survey, 34 percent of banks surveyed conduct some sort of periodic assessment of their directors.

The tool of choice seems to be director assessments. These are typically conducted by a third party.

There seem to be three types. The first is an assessment of the overall performance of the board. These surveys are generally given to all directors to complete, answers are summarized and a report presented. The second is a peer review. Here all directors review all other directors and then the results for each director are summarized and presented to the individual director. The third is a director self-evaluation. Here the individual reviews their own performance and then, with the help of a third party, identifies areas where improvement can be made.

The question is, “Is this a valued exercise that will improve individual or group performance or is it simply a waste of time?”

From my perspective, most directors strive to be the best they can be. Many are never satisfied with their own performance. Those who are driven to this extent always rate themselves lower than they are. Those who are not driven to continue to improve feel their attendance and investment in the bank is simply what is required. These directors rate themselves high.

From my perspective the answer to the question is that director assessments and reviews take a great deal of time and for the most part don’t work. In fact they are not only time consuming, but many times can be divisive in nature.

It seems to me that you are either a director or you are not. If you are not making a constructive contribution on behalf of shareholders then you should not be a director.

Now having said this, I do believe that an annual commitment by directors can be a valuable means of ensuring their ongoing commitment and positive performance. To achieve this, directors should sign an annual accountability statement. This defines their commitment.

The accountability statement should cover the following areas of commitment:

• Commitment to give the time

• Commitment to learn and understand the business

• Commitment to represent the bank in the community

• Commitment to the establishment of annual bank goals

• Commitment to measure the banks performance against the goals

• Commitment to insist on change when the management team is not performing

• Commitment to vote their individual opinion yet to accept the opinion of the majority or resign

• Commitment to resolve any personal business conflicts in the best interest of the bank or resign

If they are not living up to their commitment, it will be obvious to all and the statement provides the means to deal with the issues presented.

  <back to March 2006 Directors Digest>