Magazine article American Banker

Rule of Thumb Offered on Inside Directors: The Fewer, the Better

Magazine article American Banker

Rule of Thumb Offered on Inside Directors: The Fewer, the Better

Article excerpt

Stocking a board with inside directors - management, former management, principal shareholders, and relatives - is one way of achieving a harmonious company and support for a chief executive.

But just beyond harmony can lie complacency and, ultimately, a serious breakdown in board oversight.

So how many inside directors is too many?

"I don't think there's any hard-and-fast rule," said Roberta J. Wagner, president of the Director Resource Group in Warrenton, Va. "It depends mainly on the temperament of the board and of the CEO. You just need the right people who have the ability to question management when enough red flags go up."

But Ms. Wagner and most others interviewed said the fewer the insiders, the better. Between one and three is considered appropriate, they said.

A survey conducted by the Director Resource Group underscores this assessment. Of the banks with an average financial performance, more than 63% of those surveyed have two or three members of management on their boards. Of those with superior performance, just 40% have two to three managers on their boards.

Superior banks are more likely to have boards with just one member of management - 43% - than the average banks. But the survey showed that below-average banks also had a high percentage of boards - 58% - with just one manager from the bank.

"It's not so surprising to see the below-average ones doing what the superior ones do because they have had to pick up their acts," said Ms. Wagner. "It's the average ones, which have not experienced any crises, that follow lackluster board practices. …

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