by Richard T. Hills and Steffen Pelletier Arters, Waller
In light of the recent publicity surrounding the announcement of the “merger of equals” between BB&T and SunTrust, the successful integration of the venerable southern institutions has been a topic of extensive conversation and speculation. Most of the discussion has focused on the impact to customers, employees, and the communities served by the two banks. While these issues are vital, another key component will be the integration of the board of directors of the combined banking giant, which will consist of an even split between legacy directors from BB&T and SunTrust. While the merger of BB&T and SunTrust provides a unique case study for the importance of board integration, all merger transactions that change the composition of the board present similar, if not as obvious, integration issues.
According to a study by Kevin W. McLaughlin and Chinmoy Ghosh of the University of Connecticut, among the mergers of Fortune 500 companies, about one-third of target directors are retained. In bank mergers, countless hours are spent on operational integration such as data processing conversion and branch rebranding. However, effective integration of the boards of directors is seldom discussed. While this article focuses on board integration in the merger context, banks may also find the discussion useful in any context in which new board members are joining a bank (i.e., in the context of board refreshment, diversity, and rejuvenation).
Board integration is the process of creating a new board of directors from the addition of one or more directors from the bank that has just been acquired. Successful integration requires that new directors feel valued and that their unique talents and experience is recognized by the “legacy” board. It also involves the creation of a sense of shared responsibility for the oversight of the merged organizations. The following are a couple of practical suggestions to assist in achieving a successful board integration.
After months of due diligence and interactions between management and the respective bank boards, banks can often overlook the importance of getting to know the new directors that will be integrated post-merger. This process can especially be overlooked if the new board members work in the same community or have prior relationships with existing board members.
Regardless of current or prior relationships, and keeping in mind that the acquiring board and management have already completed due diligence in selecting the new board members, implementing both formal and informal processes to get to know the background, experience, and expertise of the new board members is crucial. In addition, new directors may provide key insights on new communities and customers served by the bank and are often an important source of new business. Thorough knowledge of the background and experience of new directors can also play an important role in committee assignments. For example, public companies may have added a “financial expert” who would be an ideal candidate for service on the audit committee.
A good friend who happened to serve as chairman of a community bank once informed me that he would no longer be holding annual board “retreats.” Since board retreats are often crucial times for bank boards to discuss strategic planning, processes, and procedures, especially in light of a recent acquisition, I recommended that he reconsider. In discussing further, it wasn’t the meeting or conference he was opposed to, but the title, “retreat.” “Retreat” as a verb means to withdraw and as a noun it means an act of moving back or withdrawing. Cleverly, the bank renamed the meeting an “advance” to indicate that these board meetings would be a time to evaluate how to best operate in the future.
Holding a “board advance” is particularly crucial when new board members are added following completion of a merger. New board members can often bring a breath of fresh air to a board who may have been maintaining the status quo. New directors will often provide key insights on the institution’s strategic plan, mission statement, and core values, as well as more mundane topics like board agendas, organization of pre-meeting materials, and how meetings are conducted. In addition, a board advance following the completion of a merger can provide a more relaxed atmosphere to focus on making sure that the overall acquisition and integration is proceeding smoothly and is well received by all constituencies. It also provides a forum for directors to discuss any pre-merger expectations that have not been realized or addressed.
Finally, especially with bank mergers, the time between signing a definitive agreement and closing can be onerous, lengthy, and, occasionally confrontational. Enthusiasm for the transaction may have diminished during the delay. A board advance after closing can create an immediate sense of achievement, propel a successful integration, and ensure that each director recognizes that his or her contribution is recognized and that the ultimate success of the merger depends on the ongoing commitment of every director.
Ultimately, a successful board integration will involve not only the identification of new roles and responsibilities, but the creation of an enhanced cultural identity and a sense of shared leadership for the newly merged organization.
Over a legal career spanning nearly two decades, Richard T. Hills has played a critical role in helping financial services clients grow through mergers and acquisitions, stock and debt offerings and other capital raising activities. Richard assists financial institutions with corporate formations and restructurings, recapitalizations, corporate governance, and a host of complex regulatory issues.
Banks, bank holding companies, and private equity firms as well as publicly traded and privately held healthcare companies are assisted by Steffen Arters in a broad range of strategic transactions including mergers, acquisitions, joint ventures and divestitures. Steffen also assists clients with securities offerings and periodic reporting required by the Securities Exchange Act of 1934.
