Review the contents of your board package

When is the last time you reviewed the contents of your bank board’s package? If you have not reviewed the information in more than 12 months, you may not be providing what you should.

The reports in the board package have traditionally been non-specific, often based on guidelines provided by the OCC or FDIC, and focused on the analysis of the bank’s financial performance. This approach was based on the philosophy of “more is better,” so the bank made sure it provided everything the board needed to carry out its responsibilities.

A shift in the banking industry, as well as in the overall economy, has complicated board reporting for banks of all sizes. Each required policy has its own reporting requirements, which may not necessarily be directly linked to board reporting (it does influence it and requires reporting standards, though). This is primarily because the documentation may be expected to serve as a partial record of the bank’s processes and procedures for the benefit of regulators.

While financial performance analysis continues to play a significant part in reporting to the board, the inclusion of operational risk management and compliance management adds to the amount of information that bank officers are obligated to include in their presentation to bank directors.

Considering that the data reported to the board comes under scrutiny from so many different avenues and carries severe penalties for banks found not following best practices, the importance of reporting has significantly increased. This can be quite challenging for smaller banks where senior management already wears more than one or even two hats.

Heightened risk and compliance considerations call for a more thorough, broader analysis. The reactive approach is not considered adequate and must be replaced with proactive monitoring and reporting. In a nutshell, the reports have to be comprehensive, but meaningful. There is an implied obligation to educate the bank’s directors on the best practices employed by the bank, so they can effectively make decisions based on the information they are presented.

The two key areas to reevaluate are content and delivery.

Board packages should be delivered well in advance of the scheduled board meeting to allow ample time to review the information before discussion. Delivery encompasses more than just a timing factor.

An effective delivery incorporates the following:

• Easy-to-understand presentation
• Useful information
• Direct delivery from the data source, not a report that has been manually crafted by someone

It is impossible to meet all of the requirements for report delivery without the use of technology. The bank’s IT system (platform) can produce timely and accurate information by accumulating data across business units, providing support data for ongoing risk assessments and for reporting at the business unit level. This technology can function not only as a comprehensive collection of financial information, but can also be used as the focal point for bank-wide risk management and control.

Technology-produced reports supply not only accurate data, but also accumulate data over time to provide an active, dynamic benchmark to measure bank performance. All the information in a data warehouse produced by the IT platform ties back to the source — the financials and the general ledger — allowing the bank’s management team to walk into a meeting with the information they need to support their position. If auditors request reports to assist them in their analysis, the bank can go to the data warehouse and recreate reports.

Once we have the delivery issues addressed, we can focus on the actual reporting and best practices.

Board members appreciate the shift toward a more efficient and effective agenda that focuses on committee reports and meaningful presentations about the condition and operations of the bank. Most directors only visit the bank once or twice a month, which makes a full understanding of the bank’s plans and status very difficult.

There needs to be an educational element in board meetings. Most directors have an ongoing need and desire for growth and development in their understanding of the banking industry. With education, directors can become more effective in their recognition and understanding of the risks to be monitored, as well as the factors that most influence a bank’s strength and performance.

Financial and operational presentations by management should focus on informing the board members on “what time it is, not how the watch was built.” This approach can result in more interesting and informative board meetings and in greater interaction and participation.

There are no regulatory requirements regarding information that must be included in the monthly board package; the only requirement is that the board should receive and review enough information to effectively manage and oversee the bank.

Following are best practices for assembling information for your board’s review.

1. Provide the board with information, not data: Make the monthly financial report meaningful. Most boards need to know only about 20 to 30 key data points and ratios and how those numbers compare to budget, peer banks and prior year results to have a good handle on the condition of the bank.

   The typical financial report at a bank board meeting is encompassed in a 25- to 30-page document that blurs into a very detailed, and often meaningless, presentation of pure data that is often difficult to follow. Providing meaningful information in an understandable format is essential for board members to identify and manage risk. Less is often more in effective board presentations.

2. Encourage board participation: No board should have a devil’s advocate who is in opposition to everything, but there should be an open enough relationship in the boardroom that allows for opposing views and occasional “no” votes. Many times there are meaningful questions that go unasked in the board room. Board members need to feel informed and comfortable enough to ask challenging questions and also to speak up when they don’t understand a proposal or presentation.

   In my experience, “why?” can be a very powerful question. I know several bank boards that benefited from a few independent thinking directors in the years leading up to the economic recession. Those directors had the insight and the courage to question the longevity of the booming real estate market. The culture of the boards on which they served allowed for real discussion of concerns expressed by directors.

3. Information to include in the board package:

• Financial performance reports that provide supporting information of the bank’s health and profitability.
• Risk management reports that allow the bank’s directors to assess the institution’s ability to manage, monitor and control risks through the review of processes, policies and practices.

Again, there are no regulatory requirements for these reports. Consider your bank’s complexity and markets and require your management to provide information that will give you the ability to make informed decisions.