The essence of banking
It is believed that the origins of banking date back to lending for farming and trade activities as early as 8000 BCE. The practice of extending credit began with banks’ lending seeds to farmers (seed money, indeed).1 Modern banking, as we know it today, likely began with banks such as Banca Monte dei Paschi di Siena in Italy founded in 1492 and Hoare Bank (standing on London’s Strand today) founded in 1672.
Today, roughly 300 traditional banks exist in the United Kingdom,2 and more than 5,000 commercial and savings banks are active in the United States.3 Over the centuries, the banking sector has remained a fundamental segment of commerce and a cornerstone of business, large and small. It is nearly impossible to grow a business without the benefit of a banking relationship. While this relationship is challenged by many new forms of bank-like start-ups and fintechs (financial-technology firms), bankers remain ensconced as essential.
Today’s stories of financial success are replete with anecdotes about bankers taking a chance, extending a small-business loan to an entrepreneur; but even for those of us more inclined to patronize a business than to start one, very few of us travel through our economic lives avoiding a loan. Home, auto and business loans are almost tantamount to being a citizen of the planet.
Banks are indeed changing, yet as we’ve learned during 2020, they remain central to an orderly existence. During the last 18 months, every citizen around the globe has experienced a year of dramatic disruption. Pausing to consider the essential transactions of trust and the leadership required to maintain a sense of faith in our economic stability is worthy of a few minutes of our time.
While disruptive fintech and technologies abound, the leaders of more traditional banks still set an important tone within the towns, cities and countries of our world. Banking still matters, and not only because of what we think of as a banking transaction; banking matters because bank-related transactions are a pillar of our trust in currency and confidence in future economic viability.
Visit a well-run organization at which confidence and trust in the leadership are high, and one will find that productivity and innovation can coexist. The small business–bank relationship has fueled business growth for centuries. As noted by Paul Saltzman, chief legal officer of EagleBank and former president of The Clearing House, “Integrity in the banking sector overall instills confidence in our economy and supports the critical role banks play in helping communities meet their credit needs. Integrity in the banking sector starts and ends with the tone at the top of each institution.”
During the past 20 years, the board of directors within a business, particularly public companies, has evolved into more than a mere overseer or friend of the chief executive officer (CEO). NEDs (non-executive directors) and independent directors dominate most boards today, even among private-company boards. The relationship between the board and CEO offers insight into both the company’s present and future.
A bank’s CEO and its board of directors play an essential role in the lives of citizens. A small, rural financial institution may focus primarily on lending to farmers, the local population and small but vital rural businesses, helping to maintain a healthy and vibrant village culture. Large banks manage massive transactions daily as citizens go about their daily lives in the world’s mega-cities. Each local bank, large or small, carries forward the actions of legislative bodies and central banks. Many of the economic-protection programs of 2020 were managed by banks; most of these transactions that sustained our global economy were carried out by traditional banks.
During the past 10 years or so, the competitive grab for traditional-banking market share has resembled Pac-Man, the still-popular 1980s arcade game where the player’s goal is to eat as many dots and “power pellets” as possible before being eaten himself. As they compete for market share against start-up fintechs, with names such as Root and SoFi, as well as with first-generation mega-companies, such as PayPal (with a market cap exceeding $270 billion as of January 1, 2021) and Virgin Money, traditional banks have learned that to succeed, they not only need to be nimble and innovative but must continue to maintain the trust and leadership they have built then fought to rebuild through challenging times.
Despite the tech changes occurring in the banking sector, its leadership is still paramount to the trust that is the foundation of our modern economic system. The strength of this trust was tested during the financial crisis of 2008-11. The global economy survived the test, and 2020 showed that the many banking and regulatory changes had positioned the financial sector to help us endure the challenges of a global pandemic shutdown.
While many aspects of our financial lives have forever changed, a few truths are just as important today. Volatility, uncertainty, complexity and ambiguity (VUCA) are ever with us. A term first used in 1987, VUCA was introduced in the United States Army War College to describe the conditions of the post-Cold War era.4 The 2008 financial crisis and 2020 pandemic are reminders that existential threats are ever present. VUCA is a reminder of our need for leadership excellence.
“One reason that the U.S. economy has been dynamic, resilient and powerful is the strength of its capital markets and banking industry. Banks play a critical role in the economy through intermediating savings and investments, providing financial advice and handling critical functions like payments. Strong leaders at our best-run banks view banking as a noble profession and appreciate the role they play in helping families achieve their potential, businesses grow and become stronger, communities prosper, and local economies thrive. They put the needs of their stakeholders at the center of their mission, manage risk well, and inspire confidence in our economic system. This resonates even more clearly during the current challenging times we face.”–Bruce Van Saun, CEO, Citizens Financial Group
The COVID-19 pandemic has clarified a few questions about the future of banking. Perhaps propelled now by banks’ need to make online banking easier for their customers during the pandemic, banking transactions made by mobile devices are becoming more commonplace. Banks have been tapped with the responsibility of administering PPP (Paycheck Protection Program) loans and finding ways to lower small businesses’ costs of borrowing, all while working to maintain their own stability and ensuring that they will be resilient enough to service businesses to meet demand when demand shows signs of recovery. Visionary and courageous leadership will be essential to banks’ success.
The important role of boards
The best-run financial institutions maintain healthy board-management working relationships. This relationship requires role understanding and balance:
|An effective board member …||An ineffective board member …|
|Arrives at board meetings prepared and focused||Arrives unprepared and unfocused|
|Asks relevant, thoughtful, appropriate questions||Fails to grasp the core business or support strategy|
|Provides constructive dissent and credible challenge||Avoids healthy debate|
|Is an active listener||Asks unhelpful or inappropriate questions|
|Enhances strategic discussions||Brings few ideas or business-development leads in support of the business|
|Collaborates purposefully and is restrained||Confuses role of board and role of management|
|Promotes respect, diversity and collegiality||Violates norms of collegiality and confidentiality|
|Contributes to building value||Talks behind the backs of directors or managers|
|Willing to take the tough or the “right” stand||Is disruptive|
|Promotes healthy dialogue and debate||Avoids constructive feedback|
|Brings at least one unique skill to the board||Uses board membership as a retirement plan|
|Embodies integrity||Confuses shareholder value with his or her board membership compensation|
|Is self-aware and relational||Is not relational or self-aware|
|Is humble (modest)||Is self-important (arrogant)|
|Keeps emotions in check||Is overly emotional|
|Understands a board director’s role||Is obdurate (inflexible)|
A misaligned or dysfunctional board–CEO relationship can undermine a company’s stability and deplete stakeholder value.
Ask a successful business leader to name the resource that is most important to shareholder value today, and nearly always the answer is talent: the “human” element. Among boards, in fact, along with the financial progress of a company, one of the most consistently discussed topics is talent. It’s a central factor in the ESG (environmental, social and corporate governance) equation. Ask a leader such as Bruce Van Saun, CEO of Citizens Financial Group, what makes the difference, and often he (or she) will begin talking, with animation, about the people who make the difference.
It’s often said that culture determines whether a great strategy will become successful. At the core of nearly every banking transaction is the relationship between two entities—the customer and the bank representative. For most of us whose expertise is outside of the banking sector, financial and investment guidance is needed, and so trust is essential. The bank that cares for its customers’ best interests will become known for that quality among its prospects, particularly in this highly disruptive and connected world. Reputation travels ever so quickly. The bankers who put the “needs of their stakeholders at the center” will succeed. The institution found caring for itself to the detriment of stakeholders suffers the consequences.
Over the last 10 years in our work with boards and leadership teams, we’ve learned and observed that highly effective organizations have the following nine traits in common:
- A culture of continuous improvement that promotes innovation and productivity,
- Board and management alignment that is like iron sharpening iron,
- An environment that welcomes constructive dissent,
- A CEO who invites the board to know the company and its managers,
- Openness, transparency and collegiality,
- Board members who are prepared and relevant because they actively learn,
- Productive board meetings propelled by dynamic engagement and robust discussion,
- A commitment to measuring performance throughout the organization, including that of the board, and implementing needed changes,
- The practice of acknowledging and appropriately rewarding successful execution.
The COVID-19 pandemic thrust banks once again into the economic spotlight. Banks around the world are engaging as essential partners to support the regulatory and fiscal strategies intended to help economies, businesses and individuals survive the pandemic’s financial fallout. Digging out of the GFC (global financial crisis) required public-regulatory and private-bank leader partnerships and mutual respect. “A culture of integrity and candor set at the top leadership levels of the banking sector is critical to ensuring confidence in our economy and is a critical success factor for any individual institution,” reflected Saltzman. Without banking-sector integrity and the ensuing trust currently present, the pandemic crisis could have been an existentially economic one. Imagine if the pandemic had struck in 2009. We have miles to go on the journey of economic rebuilding. Banking and great banker leadership still matters and is needed now as much as ever.
1 World Bank: “The History of Banks”
2 Corporate Finance Institute: “Top Banks in the UK: An overview of the UK’s leading financial institutions”.
3 Federal Deposit Insurance Corporation: “BankFind Suite: Find Annual Historical Bank Data”.
4 VUCA World: “Leadership Skills and Strategies”.
Additional resources Global COVID financial-sector response data link: The World Bank: “COVID-19 Finance Sector Related Policy Responses”, updated January 19, 2021,  Citizens Financial Group, Inc.  Nasdaq (Paul Saltzman)