Bank Director Duties Responsibilities and Assessments Ten Best
Bank Director Duties, Responsibilities and Assessments
Ten Best Practices for Corporate Governance • The majority of directors are independent • Board members are recruited for their relevant business, industry or financial expertise • An independent audit function (even if part time) is in place and reports directly to the audit committee • The Board has adopted a code of ethics that applies to all officers, board members and employees, and it adheres to that code • The Board has established a whistleblower process that is well-publicized and allows employees, vendors, and customers to anonymously report concerns
Ten Best Practices for Corporate Governance • Board has adopted appropriate policies and procedures to manage all significant process and services within bank • Board has established a suitable committee structure, consistent with Bank’s size and complexity, which encourages participation by independent directors • Board or audit committee verifies the bank’s financial management through annual external audit • Board and management have a formal succession plan and review it annually • Board and board committees conduct a rigorous selfassessment at least every two years
Why Adopt Best Practices • More efficient operations • Better organizational tone, which may help decrease possibility of fraud • Greater confidence in the bank by lenders, shareholders and customers • Improved ability to attract hiqh-quality directors • Increased value in the event of sale • Enhanced confidence by regulatory agencies
Basic Duties of a Bank Director • Duty of Care • Duty of Loyalty
Attributes of a Good Bank Director • The Four “I’s” q q Interest Integrity Inquisitive Independent
Ten Commandments for Bank Directors • Be honest and forthcoming in all matters related to the bank • Prepare for and attend board meetings • Leave personal and family interests, and those of associates, outside boardroom • Consider the impact of your actions on the bank, its owners, customers, employees and the community • Evaluated proposals from management and other directors carefully, objectively
Ten Commandments for Bank Directors • Think independently • Voice your opinion, even if unpopular • Insist that proposals that do not make sense to you be clarified, modified or rejected • Take personal responsibility for the safety, soundness and profitability of bank • Set an example for management, employees and competitors
Responsibilities of Directors • Provide the bank with competent management • Work with management to promote an ethical, positive corporate culture • Plan long-term direction and goals for the bank • Set out clear policies and monitor the bank’s operations for compliance • Know where the bank stands – stay abreast of the bank’s financial health
Responsibilities of Directors • Ensure the bank complies with banking laws, rules and regulations • Attend meetings and participate • Conduct periodic evaluation of individual and overall board performance • Make sure the bank understand serves the credit needs of the community • Ensure and maintain independence of the board
Board Basics to Know • What is the minimum number of directors required by law for your bank? What is a maximum number? • What is the term length for a director? • How are directors nominated and elected to the board? Does the bank have a nominating committee composed primarily of outside directors or does the CEO select the nominee? • How many board members must be present to constitute a quorum? • By law, how frequently is the board to meet?
Board Basics to Know • Is board attendance required? Are there provisions for removing directors who fail to attend meetings or who miss a specific number of meetings? • Is the board required to have specific committees? Are there specific requirements for committee membership? • Is there someone designated to take meeting minutes? Who? Are there guidelines for what is included in the minutes?
Effective Board Committee Practices • Adopt committee charters • Have appropriate balance between inside and independent directors • Choose committee chairs well • Promote full discussion • Support committee operational needs
Effective Board Committee Practices • • • Require reports to the board Maintain minutes Support access to expertise Meet in executive session Periodically assess committee member performance
Questions Pertaining to Committee Practices • Does your bank follow these common practices? • What are the reasons behind the practices it follows and does not? • For recommended practices not followed, is the reason… q a matter of cost? q a matter of personnel resources? q a matter of management preference? • If resources are an issue, are there alternative ways to accomplish the goals sought by a particular practice that are within the resource limitations
Questions for Assessing Committee Effectiveness • What board committees does your bank’s board have? • Where do committees derive their authority? q Is it by charter? q Is authority derived from statements included in bank policies or board actions included in minutes? • What major tasks are delegated to each committee of the board?
Questions for Assessing Committee Effectiveness • What is the membership composition of each committee? q Do outside or independent directors play a leadership role (committee chair) or constitute a majority of the committee, especially audit, nominating, compliance and compensation committees? • Do the committee members have the knowledge base/skill set to carry out the work of the committee? • How frequently do individual committees meet? q Do committees maintain meeting minutes? q Do meeting minutes identify specific matters addressed by the committee and the basis for actions taken in response to committee deliberations?
Questions for Assessing Committee Effectiveness • Do committees periodically report and make recommendations to the board? q Are these reports and any resulting board action recorded in board minutes? q Does this occur even though many of the committee members also sit on the board? • Have you been assigned to a committee or to a number of committees? q Do you have the requisite skill set to effectively perform your duties?
Information in Minutes that Point to Board Effectiveness • Number of board/committee meetings, noting who was present and absent • Review and approval of business strategies and policies that articulate risk tolerance and set exposure limits to important activities • Quality of board reports and other information provided directors for monitoring performance and assessing risk exposures • Discussions and actions to manage risks associated with new products, provision of services to new customers and entry into new areas
Information in Minutes that Point to Board Effectiveness • Creation of new committees with notation of new duties/responsibilities • Major board actions that are not part of normal monthly meetings and any actions that may be in violations of by-laws or banking laws and regulations • Instances of conflicts of interest or in which directors should not participate in discussions and vote on matters pertaining to their individual interests
Board Member Evaluation of Meeting Minutes • Did you find evidence of reports and other information to help the board identify problems and opportunities? • Did you find discussions or summaries of critical issues that need to be addressed by the board to fix a problem or seize an opportunity? • Could you identify who contributed to, or particpated in, discussions on these issues?
Board Member Evaluation of Meeting Minutes • Were votes recorded any abstentions noted? • Could you determine the action taken to exploit an opportunity or resolve a problem and information about the expected outcome? Did you identify reasons for no action? • Could you determine actual outcomes from actions taken, any discussion of lessons learned when actual and expected results differed any follow-up action taken?
Director Responsibility for Understanding Bank Regulation • Why regulations are important to each director… q They may apply directly to you as a director q They may raise compliance issues that could legal or regulatory consequences q They provide you with knowledge to ask questions and evaluate responses
Director Responsibility for Understanding Bank Regulation • Laws and regulations of particular interest to directors… q The Bank Secrecy Act (BSA) q Management Official Interlocks, Federal Reserve Regulation L q Loans to Executive Officers, Directors and Principal Shareholders, Federal Reserve Regulation O q Privacy of Consumer Financial Information, Federal Reserve Regulation P q Transactions with Affiliates, Federal Reserved Act, Sections 23 A and 23 B and Regulation W
Director Responsibility for Understanding Bank Regulation • Laws and regulations of particular interest to directors… q Community Reinvestment, Federal Reserve Regulation BB q Notice of Change in Directors and Senior Executive Officers, Federal Deposit Insurance Act Notices / Federal Reserve Regulation Y q Golden Parachutes and Indemnification q Change in Bank Control Act and Bank Holding Company Act q Lending Limits
Director Responsibility for Understanding Bank Regulation • Laws and regulations of particular interest to directors… q Safeguarding Customer Information, Federal Reserve Regulation H q Equal Credit Opportunity, Federal Reserve Regulation B q Loans in Special Flood Hazard Areas, Federal Reserve Regulation H q Truth in Lending, Federal Reserve Regulation Z q Real Estate Settlement Procedures (RESPA) Housing and Urban Development (HUD) Regulation X
Supervisory Actions and Acts Against Directors • Categories of supervisory actions… q Formal supervisory actions Ø Ø Ø Cease and desist orders Prompt corrective action directives Safety and soundness orders Removal and prohibition orders Civil money penalties Written Agreements q Informal supervisory actions Ø Memoranda of understanding (MOU) Ø Board resolutions Ø Board commitments
Supervisory Actions and Acts Against Directors • Actions against directors… q Cases where director engaged in dishonest conduct or approved/condoned abusive transactions with insiders q Cases where a director was responsible for a bank failing to adhere to Ø Applicable laws and regulations; Ø Its own policies or an agreement with a supervisory authority; or Ø Safety and soundness practices q Cases where a director failed to establish proper underwriting policies and monitor adherence to them
“Red Flags” or Practices of Poor Governance • Strong/dominant CEO who “runs the show”; soliciting little or no input; not tolerating opposing views • Board members don’t hold the CEO and management team accountable for actions/inactions • Board members receiving director’s packet at the beginning of a board meeting rather than in advance • Board members getting materials in advance but doing little or no advance preparation • Board packets provided to directors do not contain pertinent information or in a format that makes difficult determination of risk exposures and judgment of effectiveness of risk management
“Red Flags” or Practices of Poor Governance • Board meetings characterized by little or no discussion or board members go out of their way to avoid conflict, resulting in rubberstamp governance • Board members believe the banks exists for their personal benefit and engage in self-serving transactions at bank expense • Board members pay little attention to what happens at meetings • Board minutes are poorly kept and contain little information on matters discussed during meetings or actions taken by the board • No assessment of the board, its committees or individual director is ever performed to determine the effectiveness or contributions made to the bank’s decision making and success
Questions to Ask about the “Red Flags” • Which, if any, of these situations characterize my bank? • Which of these problems would you consider to be easy to fix, and why? • Which of these problems would you consider to be difficult to fix, and why? • How might you go about resolving/avoiding these types of situations at your bank?
Benefits from Board Self. Assessments • Confirm that board members are fulfilling their duties • Determine board strengths, as well as areas for improvement • Identify knowledge gaps or areas where board skills and expertise can be enhanced
Benefits from Board Self. Assessments • Provide a forum for board members to request additional resources or information • Determine if individual board members need to improve their performance • Evaluate whether the frequency and duration of board meetings is sufficient, relative to the board’s workload
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