Failing to Plan Is Planning to Fail
On the surface there appears to be no better maxim for today’s bank than the title of this article. Thanks in large part to their regulators, banks seem to have a plan for everything. There is a loan policy, an investment policy, and a compliance policy. There are also fair lending policies, Community Reinvestment Act policies, Bank Secrecy Act policies, flood insurance policies, funds availability policies, privacy policies, and asset liability management policies, and that is merely scratching the surface. Those who have served on the board of directors of a community bank know that there are approximately five to 10 policies approved for renewal by the board each month, most of which the board can give only a cursory review because the number and breadth of these policies make it impossible for the board to review them in depth.
Then there are the committees. There is a loan committee, an asset liability management committee, a compliance committee, a management audit committee, an investment committee, and an information security committee. Your average community banker often feels as if twice as much time is spent each week in committee meetings as is spent serving the needs of customers.
But as much as community banks plan, more often than not they fail to plan for the strategic direction of the organization or for the governance structure needed for success. It’s almost as if the mind-numbing minutiae of the day-to-day planning forced on banks by their regulators have caused many of them to lose sight of the forest for the trees. After all, a bank does not open its doors each day just so that it can make sure it gets its OFAC reporting right. The purpose of a community bank is to create value for its shareholders by providing meaningful service to its customers and their community, and failing to plan how to do that could be detrimental when an activist shareholder makes an appearance.
That is because when an activist shareholder invests in a bank, you can guarantee that he or she has a plan. Activist shareholders know exactly what they want out of their investment, and it often isn’t consistent with the continued existence of the bank as a going concern, especially one that has underperformed for some time. Most activists expect to turn a quick profit on their shares, which is an appealing narrative to other outside shareholders if management has not done a good job of verbalizing why growing the existing bank could be more lucrative than selling it. Even when an activist shareholder’s motivations are different from those of an opportunistic capitalist, such as when environmental, social and governance priorities are proffered, the management of the bank has few defenses against such an attack without a vision of what the bank should be and a plan for how to get there.
This does not mean that every community bank needs to spend tens of thousands of dollars hiring another consultant to guide them through a soul-searching exercise and develop a 500-page strategic plan in order to protect against shareholder activism. While every bank should have some general idea of the strategic direction of the institution, the activist shareholder risks posed by a bank’s strategic planning apparatus are often greater for community banks that are publicly traded or not closely held. If a community bank — even one that may not consider itself “large” — has recruited capital investment from shareholders previously unrelated to the bank in order to grow, failure to adopt a strategic plan is a recipe for management forfeiting its opportunity to lead an independent bank.
At a minimum, such a plan should identify the values of the institution and the vision or mission that management and the board believe the institution has been formed to fulfill. It should define the unique market position of the bank that will guide its growth going forward, and it should list a handful of long-range goals that the bank is trying to reach in order to further its mission and ultimately return value to its shareholders. These goals must be measurable and broken down into tasks to be accomplished over the short term in order for the bank to be able to take tangible steps toward those goals.
Without such a plan, a community bank can be an easy target for an activist shareholder. Most community banks are mature organizations that are well past the rapid growth stage of their life cycles. Unless it has already clearly communicated to its shareholders a coherent plan to increase long-term shareholder value, the management of a mature bank may find it difficult to contradict assertions by an activist shareholder that the bank’s only option is to sell.
Having a plan is not always enough to shield a community bank against an activist shareholder. A community bank must also reexamine its governing documents periodically to make sure that such documents are structured in a way that will allow the bank to effectively and efficiently pursue that plan. If the strategic plan is the bank’s road map, the review and revision of its charter and bylaws represent the tune-up it needs in order to ensure it can reach the destination without a breakdown.
Because many community banks are decades old, and the applicable law may have changed extensively for these institutions, it’s more likely than not that there are vestiges within the banks’ governing documents that not only are useless but could be deadly if found and utilized by an activist shareholder. Provisions addressing corporate governance — such as cumulative voting, board terms, and shareholder meeting proposals and nominations — could easily be used by an experienced activist to ambush a board or its agenda. Additionally, other provisions, such as director and officer indemnification and exculpation provisions, an advanced and enhanced notice provision for shareholder proposals and nominations, director qualifications, and forum selection clauses, can be utilized as shields against the incoming arrows of an activist. If a bank wants to get really aggressive in protecting its mission, it can adopt highly defensive provisions within its governing documents — such as poison pills, staggered boards, and supermajority voting requirements — that are sure to frustrate an activist.
The trick, though, is to adopt your strategic plan and update your governing documents before an activist invests in your institution. If you wait until after an activist has made his or her presence and intentions known, any attempt to amend your charter or bylaws in order to protect the current board’s vision could be interpreted as an act of aggression toward the activist that may subject the board and management to fiduciary duty liability. Additionally, unilaterally making any such amendment without being able to show how it furthers a mission that the board has already articulated to its shareholders can be seen as management entrenchment arbitrarily pursued for no other reason than to protect the status quo.
Where activist shareholders are a developing threat, it’s not enough for a board to simply review the bank’s policy on allowance for loan and lease losses once a year. The board members, along with management, must articulate for shareholders where they are planning to take the bank, and they must work with the bank’s legal counsel and other advisers to adopt governing provisions that will enable the bank to get there. Otherwise, there may be little to plan for after an activist appears with a competing agenda for consideration by the bank’s shareholders.