Strategic Planning: What Questions Should Your Board Be Answering?
In our practice, we’ve noticed a substantial disparity in the amount of time, effort, and formality community bank boards invest in developing a detailed forward-looking strategy for where they want to go and how they want to get there. Some community banks hold off-site strategic planning retreats with a professional third party facilitator, while others informally “tack on” strategic planning discussions to regularly scheduled board meetings without the help of any outside resources. In our experience, there is no absolute right or wrong way to structure your strategic planning process, so long as your board is thoughtfully answering the right questions.
So what questions should a community bank board be answering? We’ve put together a list of questions addressing issues that we regularly encounter with our community bank clients. We developed these questions as a tool for boards to use, and hope that they will facilitate strategic discussions in community bank boardrooms. We’ve included below a sampling of our questions with some commentary. If you would like a copy of our full list of questions, feel free to contact the authors using the contact information at the end of this article, and we would be happy to share it with you.
Succession Planning
Who is the next generation of potential directors in your community? Make a list. A lot of community bank boards consist of individuals who are at or approaching retirement age. Identifying the next generation of directors is critical. Who in your community has the requisite competence, experience, character and integrity to successfully direct the course of your community bank? Will the candidates actively contribute to the bank in and outside of board meetings? Will the candidates be good referral sources? Does your candidate pool have a diverse mix of backgrounds (e.g. manufacturers, real estate investors, accountants, lawyers, etc.)?
Are any executive officers planning to retire in the next five years? Who will replace them? How long do you think it will take to find a replacement? A lot of banks will need to replace a retiring executive officer within the next five years. When should your board start its search for a successor? Perhaps you have identified a successor within the bank. If so, is that individual training someone to take over his or her current position? If you have to look outside of the bank for a candidate, it could be a challenging process, especially if you are trying to convince someone to move to a small community where they have no roots. Either way, developing a plan of action with a list of possible candidates, referral resources, and timelines is prudent.
Capital and Shareholder Issues
Does your institution have enough authorized and unissued shares of stock? If you want to raise capital or are presented with an acquisition opportunity, you will need sufficient authorized and unissued shares of stock. If there are not enough authorized shares, you will need to seek shareholder approval to authorize additional shares. Needs and opportunities often arise unexpectedly, and you do not want to be in a position of having to seek shareholder to authorize additional shares in order to act on an opportunity. It’s best to get additional shares authorized proactively in order to give your board the flexibility that it needs.
How should you respond to shareholders looking for liquidity for their shares? It is very common for shareholders wanting liquidity to seek to sell their shares either to the holding company or to a third party. Some holding companies act as a “matchmaker,” whereby the holding company will connect willing buyers and sellers of the holding company’s stock. These matching services can sometimes work well for small volume transactions, but can be an unreliable liquidity source for shareholders (especially large ones). They also expose the holding company to liability if not structured and operated properly.
Some holding companies repurchase shares from their shareholders to provide liquidity. Your board needs to take great care to ensure that such a repurchase is the best use of capital and does not result in preferential treatment for a select group of shareholders.
Buy, Sell, or Remain Independent?
What do you (i.e. management and the board) want the bank to look like in three, five, and ten years? Some boards envision themselves as an aggregator of other community banks in a “roll-up” strategy. Others see themselves as being one of the banks “rolled-up” as part of a strategy to cash out or because there is no management succession plan in place. Still others want to grow organically while avoiding any combinations with other banks.
What do your shareholders want the bank to look like in three, five, and ten years? The board is accountable to the shareholders. Therefore, it is imperative that you understand what your shareholders want the bank to look like in the future, and it is advisable to consider their views in your strategic planning discussions. Perhaps your shareholders would like stock in a larger institution made up of several combined community banks. Maybe they would like liquidity for their shares. Or, maybe they are happy with what they have, proud ownership in their community bank and a reliable dividend stream. If you have a large percentage of non-local shareholders, have you considered their vision for the future of your bank? In our experience, the interest of non-local shareholders can sometimes differ from those of local shareholders.
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We hope that the sampling of strategic planning questions above is helpful as your board continues to plan for the long-term success of your community bank. As mentioned above, for a more extensive list of questions to consider at your next board meeting or strategic planning session, you may contact either of the authors using the contact information provided below.
Pete Wilder and Josh Torres are attorneys on the Financial Institutions Practice Group at Godfrey & Kahn, S.C. Pete may be reached at (414) 287-9609 or . Josh may be reached at (414) 287-9579 or .
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