There are probably a bunch of ways a former bank CEO winds up on a bank board. Two and a half ways spring to mind and this is how I feel about each of them (with the obvious caveat that ultimately it depends on who that former bank CEO is).
The first way is in reaction to some issue at the bank. A recent example of this is Opus Bank (NASDAQ—OPB). In 2017, Opus experienced some real credit issues in segments of its commercial business. As part of what I consider to be an aggressive reaction to these issues, they named a former bank CEO as lead independent director and later promoted him, I guess, to chairman of the board. As a general matter, I like when this happens for two reasons.
The first reason is because I generally assume that former bank CEOs have a very well developed understanding of the potential liability that comes from serving on a bank board as well as the ability of regulators to make life hell for bank directors if they choose. I also generally assume that former bank CEOs don’t need or want that type of aggravation, so they will not take a board seat without doing significant due diligence to understand the scope of the issue, whether it is or on its way to being under control and whether or not there are additional shoes that are going to drop. Finally, I generally assume that former bank CEOs know how to diligence a bank, its loan portfolio, liquidity, risk controls, etc. far better than I ever will. In sum, my general view is that they are a proxy for any diligence I might do (and then some) and, by accepting the board seat, are essentially signaling that the issue is under control.
The second reason has to do with why I think it is pretty rare for former bank CEOs to be appointed to bank boards, which is that the current CEO doesn’t generally want someone looking over him and second guessing what he is doing. I am pretty sympathetic to that sentiment, which is why I like seeing a former bank CEO appointed to a bank board after some issue with the bank. It suggests one (or a combination) of two things: either the rest of the board is acting pro-actively to bring in knowledgeable oversight or the existing CEO is open to having (and hopefully taking advantage of) an experienced bank executive on the board. Either or both are great by me and evidence a company that is proactively facing its issues.
The second way a former bank CEO might wind up on the board of a bank is if he is a founder or part of the founding group. I don’t necessarily love this situation. Sometimes, it seems like the former bank CEO wants to act like the CEO in terms of controlling the bank and its strategic decision without actually being CEO and therefore responsible for performance, etc. In those cases, it seems to me, you wind up with a weakened management team overall, issues with accountability and a difficulty in attracting and retaining talented bankers.
In other cases, it feels like the former bank CEO is window dressing. I don’t know if that causes as much harm as the former bank CEO trying to control things, but I worry that other directors might be, consciously or not, relying on the former bank CEO to effectively take the lead in terms of supervising the business giving his experience. If the former bank CEO is really just mailing it in, problems could develop.
The second and a half way a former bank CEO might wind up on the board of a bank is if he retires and doesn’t leave the board. Again, all this is subject to the caveat that it ultimately depends on who the former bank CEO is, but I really don’t like this situation. A CEO transition is the perfect time for a bank to take a wholesale look at its business, prospects, etc and make appropriate changes. It is pretty hard to make any meaningful and/or directional changes with the former CEO on the board, particularly if any of those changes might be construed as a repudiation of actions taken (or not taken) by the former CEO. CEO turnover at banks is pretty rare as it is—when it happens, the new CEO should be free to set his own direction and not be constrained by the continued presence of the previous CEO.