By David Sasaki

Pressure to adopt strong independent leadership in the boardroom has never been higher. Over the past few years, boards in all industries have grown more independent with fewer affiliated directors and a greater prevalence of non-executive chairs and lead independent directors.

In this article, we look at some of the numbers behind these trends and investigate how these pressures are affecting the boards of Western banks with assets under $5 billion. Comparing the most recent information with data from four years ago for 49 banks, we find that, consistent with general industry trends, bank boards have become steadily more independent.

While the size of boards increased slightly over the last four years, from a median of 9.1 members to 9.3 members, the number of independent directors on each board increased more rapidly, from a median of 6.4 to 6.8. In the most recent year, independent directors made up a median of 72.1 percent of the board.

Regardless of their overall independence level, many boards have strengthened their commitment to an independent board by appointing a non-executive director to serve as chairman of the board. Non-executive chairs are common among the banks we looked at, with 73.5 percent of the boards under the leadership of a non-executive chair. This represents an increase from four years ago, when 69.4 percent of boards had this position.

Western banks which recently appointed a non-executive chair include Cascade Financial Corporation and Heritage Commerce Corporation.

Though most banks have a non-executive chair, a smaller percentage of these chairs can be considered completely independent. While 36 companies have a non-executive chair, only 25 of these directors were identified as having no material relationship to the company. The remaining 11 were often former employees or had other affiliations with the company. Though such directors would still be considered non-executive chairs, many shareholder groups would prefer that these positions are held by individuals able to provide completely independent leadership to the board.

General industry trends indicate that companies with an employee chair will often appoint a non-affiliated director to serve as the lead independent director. This director will preside over meetings of non-management directors and can provide leadership to the board in lieu of the chairman. However, few of the banks in this analysis name a lead independent director; based on the most recent data, only one company (CoBiz Financial) does so. The lack of lead independent directors may be related to another trend in board leadership unique to banks: the high prevalence of vice chairmen.

Among the 49 banks studied, 16 had a vice chairman of the board in the most recent year. With a prevalence of 32.7 percent, vice chairs were much more common among banks than among companies in other industries. The 16 vice chairs include 15 directors who are not employees of the company. In many cases, companies had both a non-executive chair and a non-executive vice chair. Additionally, companies with an employee chairman may appoint a non-executive vice chair. For the 13 companies with an executive chair, three had a non-executive vice chair. These directors may be able to provide independent leadership to the board in place of an established lead independent director.

Community banks have certainly kept up with demanding independence standards, despite the minimal use of lead independent directors. Most bank boards currently maintain some form of independent leadership, whether through a non-executive chair, a lead independent director, or a non-executive vice chair. Only 18.4 percent of the 49 banks did not have one of these independent leadership positions. As non-executive chair positions become a standard element of good corporate governance practices, we can expect this percentage to shrink in the coming years.

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