Leadership, Governance, Independence, and Bank Performance:

An Executive Summary for Community Banks

By Thomas M. Woodruff, DM

Introduction
This report summarizes the results of a 2007 study of community banks located in the
Kansas City Region of the FDIC which includes the states of Iowa, Kansas, Minnesota,
Missouri, Nebraska, North Dakota, and South Dakota. By regulatory definition, community
banks have total assets less than one billion dollars, comprise approximately 93% of the bank
organizations in the U.S, are closely held, and concentrate the depository and loan services
provided on the communities served.

The study examined leadership types, board governance types, and director
independence, and compared these components to each other and to key indicators of bank
performance. The theoretical expectations of this study were that more empowering leadership
contributes to more involved board governance, higher levels of director independence, and
better bank performance. The results of the study were significant and produced some
unexpected results. The following sections highlight some of the more interesting results.

Internet Presence
Every bank in the sample population was checked through the FDIC system for contact
names and email contact information. Some of the websites were very well constructed and easy
to navigate. Others did market the bank services in the most favorable light and were not easy to
navigate. Statistics relating to the internet presence of community banks indicate the following:
• There are 1,873 community banks in the region
• 1,098 banks either did not have web sites or did not have contact names on the web site
• 775 banks had contact names available
o 361 banks had direct email addresses for the executives
o 277 banks had general email addresses for the bank
o 137 had only web site forms to complete
This is an area where community banks can improve their marketing presentation.

Strategic Board Relationships

Bank regulations approved since the early 1990s have encouraged banks to attract more
independent directors and to allow these directors more voice in strategic bank decisions. This
study suggested that strategic board relationships that develop between executive management
and outside directors may be defined more by the leadership type of the executive than by
regulations, and that this in turn molds the board governance type that is employed.

In the study there were five types of leadership presented with five types of board
governance. The belief was that a more authoritative leader would likely relate to less
independent directors with less input than a more empowering leader who is open to more
independent directors and broader input into strategic direction. The results of the study indicated
that more empowering leadership indeed predicted more involved board governance; however
more authoritative leadership did not predict more passive board governance. The following
figure reflects the theoretical matching of leadership types with board governance types and the
table summarizes the results of the study.

Figure 1: Matching leadership types with board governance types

Table 1: Leadership type and board governance type

Board governance types

Leadership Passive Authenticating Participating Causal Total
type Agency
Authoritative 6% 0% 0% 0% 6%
Elemental 5% 9% 1% 0% 15%
Practical 11% 17% 11% 0% 39%
Optimizing 0 5% 17% 4% 26%
Empowering 0 1% 9% 4% 14%
Total 22% 32% 38% 7% 100%
 Study findings indicate that a relationship exists between leadership types and board
governance types in community banks. Matching leadership types with governance types may
also provide a vehicle to promote better communication within the boardroom and the
organization. The implications of this finding may relate more to recruiting bank executives and
outside directors than to bank performance. However, this study found that the observed
evolution to less dominant leadership and more involved board governance had an unexpected
negative influence on corporate performance.

Leadership, Board Governance, Director Independence and Bank Performance

The results of this study implied that community banks are pursuing more independent
directors and that the result may not have a positive effect on bank performance. The results
reflected that 40% of this sample of community banks indicated more empowering leadership
types and that the level of director independence was higher in these banks (Figure 2). In the
study, independence was measured by adding 11 components of board process with potential
scores ranging from 11 to 44.

35.0
33.0
Independence

31.0
29.0
27.0
25.0
23.0
21.0
19.0
Authoritative Elemental Practical Optimizing Empowering
Leadership

Figure 2: Director Independence by leadership type

If leadership is the driving force for board effectiveness and corporate performance, then
either the underlying theory is wrong for community banks or the results are an artifact of this
population. These results do not support the underlying theory that more empowering leaders,
more involved board governance, and higher levels of director independence relate to better bank
performance. The findings of this study show that more authoritative leaders, more passive board
governance, and less director independence produce better bank performance. Figure 3 presents
the average ROA for the banks in the study by leadership type.
 2.7
2.2
1.7
1.2
ROA

0.7
0.2
-0.3
-0.8
-1.3
Authoritative - Elemental - Practical - Optimizing - Empowering
Leadership

Figure 3: Average ROA by leadership type

These findings suggest that the theorized benefits to corporate performance of more
empowering leadership, more involved governance, and more independent directors, may not
exist for community banks. The same may be true for family-owned and other closely held
organizations. These results suggest that organizational theories relating to closely held
organizations need to be broadened and differentiated from publicly traded organizations. More
research is needed to test the results of this study and to expand this understanding.

Prior research suggested that more empowering leadership was positively related to
governance and may indeed encourage more involved board governance and higher levels of
director independence which collectively produced better corporate performance. This is the first
study to provide evidence that more empowering leadership does encourage more involved
governance and higher levels of director independence in this sample of community banks. The
unexpected conclusion, however, was that collectively and independently these three desired
characteristics of strategic board relationships produced lower corporate performance in these
community banks. The findings suggest that the more collaborative strategic board relationships
recommended by Sarbanes-Oxley and current bank regulations do not have the positive influence
on bank performance that are intimated with these guidelines. Future research is needed to
replicate the relationships tested here in larger, publicly held banks, and in a broader national
population of banks.

Community bank leaders, community bank directors, and community bank regulators
should reflect on the accuracy of current theory and professional guidance relating to strategic
board relationships and performance in community banks. These stakeholders should also
consider that performance of closely held community banks may be driven more by leadership
type than by more involved board governance or higher levels of director independence. This
outcome may create a substantial barrier to material reforms designed to increase director
independence and involvement in board governance.
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About the Author

The author and his wife currently live in Walker, Minnesota. Dr. Woodruff has a solid
history as a bank executive and director. He currently serves as Chief Strategy Officer for a
group of companies based in Walker where he coordinates banking relationships, legal
relationships, and is actively involved in acquisitions. Dr. Woodruff is available for questions,
consultations, and presentations.

Contact Information
Dr. Thomas M. Woodruff
Bank Leadership
PO Box 326
Walker, MN 56484
512-709-8988
dr.tmwoodruff@gmail.com