Covid-19 and bank Boards: Adaptability and speed of response are key in a crisis

The title is perhaps a misnomer, because the imperatives that I suggest in the foregoing are sound principles for Board directors at any time, not only during a market-wide stress event. That said, the current coronavirus crisis, and the impact of government lockdown policy on the economy, serve to bring into sharp focus where exactly a bank’s Board should be adding value. Only in a stressed environment exhibiting falling demand, falling revenue and ongoing uncertainty does genuine senior management effectiveness truly exhibit itself.

The current crisis is not an existential one for banks (although depending on the severity of the impending recession it may well become one). This isn’t 2008: this time around banks aren’t part of the problem. But they can be part of the solution.

Lockdown policy has resulted in severe material hardship for many bank retail and corporate customers. The need for immediate support of the customer franchise has been self-evident since governments announced social distancing measures. However the extent of this support has varied across banks, which is unsurprising because banks’ specific business models and customer types vary considerably.

It is now that a Board must deliver genuine leadership. In a situation such as we observe today, the need for adaptability – to changing events as well as changing customer demands – is clear, as is the need for speed of decision making. The best Boards demonstrate these traits, but this is not always the case. In this regard, the interplay and relationship between executive and non-executive directors (NED) is perhaps the most important factor in any Board.

There are a number of issues to address. One is the ability of NEDs to make an effective transition from executive director to non-executive director. This is not a trivial process; it does not occur overnight. Like most things, experience gained over time plays a big part in making the transition a genuine one. During a stress event, NEDs may be tempted to act more directly, to take a more “hand-on” approach, but the direct running of the organisation is the role of the executives. It is crucial that NEDs appreciate this subtlety.

Another factor is equally subtle. How much pressure, in the form of review and challenge, should NEDs be putting on executives during a stress event? The relationship between executives and NEDs is key; the latter need to know when precisely to step in. But the heavy lifting should have occurred already: it is actions taken prior to any stress event that are also paramount. For example, ideally NEDs would already have provided firm guidance on how much additional capital and liquidity buffers should be in place. They should already have demonstrated sufficient rigour and sufficient challenge during stable times. This reflects a mantra I was quoted recently by a colleague of mine:

The business driver for Boards is no longer “just in time”, it’s “just in case.”

?In his excellent book The Realpolitik of the Unlisted Company Board, (another misnomer as this book contains pearls of wisdom for all directors), Mike Baliman summarises the role of all NEDs, particularly independent NEDs, as fulfilling an objective to “preserve order and increase prosperity within the company.” I suggest that the “preserving order” mantra for all INEDs should include the ability to demonstrate adaptability and speed of response during a market-wide stress event. For example, decisions regarding to what extent existing, and new, customers can be supported; to what extent loan forbearance is decided upon as opposed to loan restructuring; whether risk limits should be eased temporarily; how much capital and liquidity should be committed; and how exactly to communicate decisions clearly and immediately to all stakeholders – these are issues that the Board rightly looks to the executive to recommend a way forward on.

But the need for the entire Board to exercise appropriate management of any new recommendations is urgent. And although guidance, oversight, review and challenge are a requirement at all times, during a crisis the onus is on NEDs to demonstrate issue-specific understanding and assist the executive’s decision making. The ability to continue making decisions, which both support the customer and preserve balance sheet viability, remains imperative.

Let us add one more imperative, captured succinctly by “Bartleby” in The Economist last week. As it states, “lack of clarity is the besetting sin of managers. If managers cannot express themselves clearly, that suggests that they are not thinking clearly either.”

In a recessionary economic environment, plain speaking, clear direction and clear guidance are vital. Whichever stakeholder is being communicated to, be it customer, regulator, employee or shareholder, clarity is everything.