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How should financial services directors be educated

Increased regulatory focus on board effectiveness has raised an obvious question: how should organizations educate directors so that they provide informed, credible and effective challenge of management?


In brief

  • Financial services organizations are increasingly focused on formal educational programs so that directors can enable board effectiveness.
  • Training now covers a broad range of topics at the board and committee levels as well as for new directors.
  • External educational opportunities, external presenters and virtual between-meeting training are increasingly part of effective director training programs.

Broadening range of educational topics

Regular education sessions across key areas of board oversight can help directors provide effective challenge keeping pace with emerging trends and identify new or emerging priorities. Yet, practices — and proxy statement disclosures — around director education vary significantly across the industry.

Boards should tailor board education to meet the unique learning needs of individual directors, committees and the board, in the context of company’s sector, size, strategy and complexity. Annually, board leadership, in consultation with the CEO and other members of management, should establish a formal and customized director learning plan with qualitative and quantitative goals and objectives.

Notwithstanding the need to tailor training, there are some common features of what comprises an established director education training curriculum, based on EY experience in providing training to directors and in reviewing proxy statement disclosures. Topics are increasingly aligned with emerging trends and risks.

Recent topics for board education

Proxy disclosures from financial services firms disclose other topics, including geopolitical events, regional and global developments, and climate risk. COVID-19 and hybrid working models were also highly topical throughout the pandemic. Of course, financial institutions’ disclosures also highlight the need to educate directors on firm-specific products, services and lines of business.

Some topics are for the full board, while others are for specific board committees. Other committee-specific educational activities are conducted routinely, e.g., new accounting matters or evolving ESG reporting standards within the audit committee setting.


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Orienting new directors

While board and committee sessions should address current and future-oriented topics, individual directors — particularly those who are first-time directors, new to a board or new to a sector — may need more baseline learning to bring them up to speed. Individual directors should proactively communicate their education needs to board leaders.

Orientation can take numerous forms:

  • Getting to know the company and sector: Typically, new directors undertake orientation activities within the first three to six months. Those directors meet with various executives leading key lines of business, regions and relevant functions (e.g., risk, compliance, and internal and external audit), so they acquire a solid understanding of the organization’s unique strategy, business, operating model and governance, as well as key industry and regulatory frameworks and priorities. Onboarding involves a combination of written materials, presentations, site visits and meetings with executives and other relevant board members.
  • Getting to know committee roles: Orientation can be done at the committee level, as directors join new committees. Indeed, some boards purposefully assign new board members to specific committees that they feel provide those directors the best insight into the company and its operations — typically the audit committee or risk committee. Orientation plans align with committee responsibilities. For example, those joining the audit committee likely meet with the chief financial officer, controller, treasurer, head of internal audit and lead external audit partners. Meeting the chief risk officer may also be beneficial, especially because risk matters often cross both audit and risk committees. Some firms offer additional orientations for new committee chairs.
  • Learning through committee assignments and mentoring: A minority of boards adopt a leading practice of assigning new directors (notably those new to being a board member) a board “mentor” to aid in their transition being on the board and/or being a director.

Making education substantive and inclusive of various perspectives

Overall, there are no annual regulatory minimum director education requirements, although specific companies may set their own standards. The amount of time dedicated to director education varies across companies and board members. There are, of course, typically mandatory annual board trainings (e.g., on ethics and conflicts of interest), but these, too, vary by company. Individual directors may have continuing professional education requirements to maintain their professional licenses.

At a minimum, boards typically hold an annual board education of two to three hours, covering a range of relevant topics, as well as embedding education-type sessions in committee agendas across the year. Sometimes, annual joint committee meetings — in financial services, notably between audit and risk committees — are scheduled in which education elements are included that are relevant to both committees (e.g., on compliance, cybersecurity).

Full board and committee sessions should anchor the company-specific director education program. Additionally, board and committee leaders should set the expectation for self-directed participation in externally provided continuing education programs on an ongoing basis to enhance director performance, and they should reimburse directors for reasonable expenses of such participation.

Substantive director educational programs incorporate external perspectives, not just those of management. Boards increasingly bring in outsiders to present on specific topics. The choice of topics where outsiders are used, which outsiders are used and the frequency of how often this is done varies significantly across organizations. The driver is to expose the board — or specific committees — to outside, independent perspectives. Oftentimes, relevant management is present, so they can provide the board or committee with their own perspective on the topic or comment on what the organization is doing about the issues being discussed.

Mixing virtual with in-person

The experience of governing during the COVID-19 pandemic made many boards realize that today’s virtual business environment makes bespoke education for boards and committees easier to schedule and conduct, and in some ways, it is more effective. Prior to COVID-19, most formal training occurred within the boundaries of formal board and committee meetings. However, increasingly, firms are scheduling educational activities outside of the regular board-committee meeting cycle, which allows for a deeper dive into education topics without taking away from already-crowded meeting agendas. After all, before the large-scale move to working virtually during the pandemic, training oftentimes got squeezed as other, more time-sensitive topics overran.

Of course, convening in person still matters. Directors value seeing senior management in person to build rapport and read body language during meetings. They appreciate interacting with other directors in person; indeed, having onboarded new directors virtually during the pandemic, boards have seen the limitations of relationship-building through virtual formats. Directors like to “walk the halls” to meet employees directly and get a first-hand feel for the environment, culture and mood.

Educational opportunities provided externally benefit from being a mix of both virtual and in person. Fact-rich webinar-style trainings can be valuable to consume new information, but in-person discussions with peers have potent value to directors in helping them validate their thinking, as well as board and committee priorities, compared to directors of similar institutions.

Structuring expansive education

In some ways, board training was fairly informal prior to COVID-19. Some organizations had developed a comprehensive board and committee training program that was reviewed annually for substance and relevance. But for many firms, other than official new-director orientation, training was a little too episodic, rote or rushed. Now, the range of topics covered, the mix of internal and external perspectives provided, and the variety of formats used for financial services director training is changing and for the better, and more firms are implementing robust board and committee educational programs.



Summary

Financial services boards are formalizing and expanding the quality and breadth of director training available for new and existing directors. The need for boards to adapt to operating during COVID-19, coupled with more regulatory scrutiny on board effectiveness (and the role of education in supporting effectiveness), means board education is now viewed as an essential platform for effective oversight and challenge.

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