Bank experts say rocky relationships between executives and their boards are a recipe for problems at an institution. iStock illustration

Eastern Bank executives’ developing battle with an activist investor is throwing the spotlight on the challenges even small bank and credit union executives can run into as they manage relationships with their boards and other stakeholders.

HoldCo Asset Management, which reportedly has a 3 percent stake in the bank, is pushing for Eastern to sell itself to a regional bank. The investment firm has waged insurgencies at other publicly-traded banks, and led a battle that forced Texas-based Comerica Bank to sell itself to Ohio-based Fifth Third Bank in a $10.9 billion deal last month.

And it has threatened a proxy fight in next year’s elections for five members of Eastern’s 15-person board of directors. If it wins, that could create friction between Eastern’s executive team and its board at a crucial time as it prepares to absorb Brockton-based HarborOne and protect its spot as the holder of the biggest Boston-area deposit-share among locally-based banks.

Eastern Bank did not return a request to comment for this story.

Board, Execs Need Synergy

But it’s not just executives at public banks that have to worry about spats with their boards of directors. Mutual banks and credit unions are vulnerable to many of the same problems that arise when a leadership team and a board or other stakeholders have disagreements, experts say.

“If the interaction between the board and leadership is not respectful nor constructive, the bank’s performance will founder,” said Arthur Loomis, president of bank consultancy Loomis & Co. “Many banks ultimately have been sold when the relationship between the board and leadership frays.”

When disagreements play out in public it can harm morale among bank employees, said Keith Reagan, executive director of Boston-based Darling Consulting Group, another bank consultancy.s

“With anything that’s being played out publicly like that is going to cause questions in people’s minds, and that can’t be good for morale because then you could have people picking sides,” Reagan said. “It’s probably never going to lead to the outcome that you want.”

In a market where smaller institutions are increasingly looking to combine to secure their future, mergers need synergy between the board and leadership to work, said Metro Credit Union President and CEO Robert Cashman.

A healthy relationship between an executive and their board is one of constructive tension, experts say. They must be aligned on strategy, but shouldn’t blindly follow each other. iStock illustration

“As you bring organizations together, you need to have that synergy,” he said. “Those conversations shouldn’t just happen after a decision is made. They really should be taking place right at the very beginning to make sure that there’s a synergy between institutions and organizations. Do they share the same values, outlook, what’s good for the members, what’s good for the community, what’s good for the employees? Having those done too late in the game is problematic.”

While it is important to have synergy between the board and leadership, Reagan argued that it is also important for the two sides to challenge one another in how they think and operate.

“It’s important that there’s synergy and alignment, but effective challenge is critical, to have different viewpoints,” he said. “If everybody thinks the same way, that can be a challenge, too. So, alignment with effective challenge, I think, is where you can get some really great things done.”

Board Members Serve Key Role

When executives at a credit union or a mutual bank have a disagreement with their board, the power dynamic between the two affects how a resolution is reached.

Sam Lattof

Additionally, the structure of an organization can impact how conflicts arise or are resolved. While credit unions or institutions that are not publicly traded can solve problems behind closed doors, publicly traded banks do not have the luxury.

“The C-suite works for the board of directors so they tend to wield a little bit more power and can get their way,” Reagan said. “But again, if you have very different opinions, it’s not going to be good for the institution. Board members serve a really important role. They bring strategic skill sets, they bring strategic connections. Those are really important to help the C-suite but without those synergies and effective challenge, you probably just get a lot of fighting that is not going to be good in the boardroom.”

For any executive today, it’s important to have strong strategic planning and communication to reach an amicable solution, he said.

“In this kind of world that we’re living in right now, where there’s extreme volatility, things can change, and the communication of strategic goals remains critical,” Reagan said. “Things can change temporarily, as long as you’re not deviating from the overall strategic goal. Those that do the best from my perspective, those that do the best from a board and C suite perspective and reach their strategic goals are the ones that communicate the best. If you can communicate well, you’re probably going to rise above the rest.”