| Subject: |
Board and Directorship Responsibilities |
This bulletin is intended to be a guide for bank directors--both
new ones as well as seasoned ones. It covers the basic principles
of a bank Board's function and responsibilities but it is not
all inclusive. It highlights the areas that the Bureau perceives
to be minimal requirements for the functioning of a bank Board
of Directors.
The actions of bank Board of Directors have come under increased
attention in recent years. However, one of the earliest decisions
regarding Board responsibility was rendered by a Kentucky court
prior to 1830 and is stated as follows:
"Bank directors are not merely agents, such as cashiers
or clerks; they are trustees for the stockholders. As to creditors,
they not only act for the bank, but in a qualified sense, they
are the bank itself. It is the duty of the Board to exercise
a general supervision over the affairs of the bank, and to direct
and control its subordinate officers. The community has a right
to assume that the directorate does its duty. They invite the
public to deal with the corporation, and when anyone accepts
the invitation he has the right to expect reasonable diligence
and good faith at their hands, and if they fail in either, they
are responsible for the result. It is the duty of bank directors
to use ordinary diligence to acquaint themselves with the business
of the bank."
A pronouncement of the Supreme Court of the United States which,
incidentally, is one of the most often cited cases on the subject
of director responsibility is stated, in part, as follows:
"Directors must exercise ordinary care and prudence
in the administration of the affairs of a bank, and this includes
something more than officiating as figureheads. They are entitled
under the law to commit the banking business, as defined, to
their duly authorized officers, but this does not absolve them
from the duty of reasonable supervision, nor ought they be permitted
to be shielded from liability because of want of knowledge of
wrongdoing, if that ignorance is the result of gross inattention."
Because of the nature of the business, directors of a bank have
been placed in a position of trust and honor. Their selection
to this position implies the highest confidence of the bank stockholder
in the individual's integrity, business sense and morality, and
a person who is capable of fostering the public trust. The business
of banking being what can be termed a "Quasi-Public" industry
requires a higher degree of accountability from those who choose
to serve as directors of such institutions. Both statutory and
common law have placed the responsibility for bank management
firmly on the members of a bank's Board of Directors. The management
of the bank's daily affairs may be delegated to an officer, but
delegation of responsibility for consequences resulting from unsound
or imprudent policies and practices cannot be transferred.
The general rule, then, is that a bank's Board of Directors
must act in good faith and with ordinary care and diligence
in the administration of the bank's affairs. The Board must
maintain general supervision over the affairs of the bank and
have a general knowledge of the manner in which its business
is conducted.
This bulletin, in addition to emphasizing the liabilities
associated with being a bank Board member, is to inform you
of what the Bureau perceives the Board function to be and the
responsibilities relative thereto. The following points set
forth, as a minimum, the standards and conduct under which a
Board should function:
- SOCIAL AND CORPORATE RESPONSIBILITY -- The business of banking
is recognized as a public trust and, accordingly, the Board
has a responsibility to foster this trust. This activity may
manifest itself in the form of new business development, support
of community projects and generally assuming a leadership
role in developing and sustaining the public's confidence.
- DIRECTION -- The ultimate responsibility for direction of
a bank's affairs lie with the Board of Directors. In keeping
with this responsibility the Board is not to be led or simply
to monitor results after the fact but should be satisfied
that adequate policies, procedures, management and planning
are in place. Care should be taken, however, not to assume
responsibility for conducting the bank's operations. Conversely,
management should not usurp the director's role. The Board
should direct and management should manage.
- COMPOSITION -- Membership should be representative of the
community the bank serves and be composed of both inside and
outside directors. In this regard it is agreed that outside
(non-banking) directors should be in the majority. Ideally,
no one individual or group should dominate or impose their
judgments on others. A Board which operates with a philosophy
of mutual freedom and respect will, naturally, foster effective
direction.
- QUALIFICATIONS -- Many factors render an individual capable
of serving as a bank director, but ideally the individual
should possess characteristics which not only will benefit
the community but the bank as well. The individual may have
good business sense, be well known and respected in the community
and may be a substantial shareholder. In connection with the
latter situation, major shareholders have attempted and sometimes
do dominate the Board. Such a situation may not be in the
bank's nor other stockholders' best interest. Accordingly,
it is the responsibility of the Board of Directors to insure
that the bank's affairs are directed by the entire Board and
not by any one member or a group of members.
- TRAINING -- It is the responsibility of each director to
be aware of changes in the industry and to be reasonably knowledgeable
of the bank's operation. Ignorance does not absolve directors
from potential liability. The director must keep well informed
of the bank's affairs at all times.
- ATTENDANCE -- Board members cannot fulfill their responsibilities
when not attending Board meetings on a regular basis. Directors
absenting themselves from Board meetings cannot shield themselves
from liability by pleading ignorance of transactions in which
they did not participate, when such ignorance results from
negligent inattention.
- POLICY -- Formulation of policy is a major Board function.
Such action constitutes a formal statement of intentions,
limitations and controls that dictate a specific course of
action. Policies should be in written form, be approved by
the Board, receive periodic review for possible updating and
be reaffirmed at least annually. The Board should also make
certain that its policies are fully understood and being adhered
to by those who are subject to such policies. (See Bank Bulletin
No. 17)
- COMMITTEES -- By law certain committees are required, but
as a minimum there should be a loan committee, an investment
committee and an examination or audit committee. As banks
grow larger and expand their services, additional committees
may then become necessary. The perimeters and authority under
which committees function along with their actions remain,
however, the ultimate responsibility of the full Board.
- COMPLIANCE -- To maintain integrity and a safe and sound
banking environment it is the responsibility of the board
to assure that compliance with banking law and regulation
and the directives of regulatory authorities is strictly adhered
to.
- INSURANCE -- To provide adequate insurance coverage for
contingencies which should receive at least annual review
for reaffirmation and possible restructuring. (See Bank Bulletin
No. 14)
- EXAMINATIONS AND AUDITS -- The Board or a committee thereof
is responsible for reviewing all reports of examination and
audits performed by outside sources and causing to be made
any changes which are necessary to correct the deficiencies
contained therein. (See Bank Bulletin No. 19)
- MANAGEMENT -- To provide competent management and subordinate
personnel and to assure adequate management succession.
- INTERNAL CONTROL -- Establish procedures for conducting
audits whether it be by an internal auditor and/or a committee
of the Board or by an outside accounting firm. (Examinations
conducted by regulatory authorities are no substitute for
an audit.) (See Bank Bulletin No. 19)
- MANAGEMENT INFORMATION SYSTEM -- Establish a system whereby
the bank's affairs are presented to the Board in a manner
which will allow reasonable comprehension of the information
presented and which presents fairly the bank s activities.
- CONTINUITY -- Maintain the bank as a viable institution,
by providing adequate capital, liquidity, asset mix and liability
management.
- REPRESENTATION -- The Board is charged with the responsibility
of representing all shareholders equally, whether they be
majority or minority, and safeguarding all depositors, whether
they be large or small.
- CONFIDENTIALITY -- Confidences exposed at a Board meeting
or otherwise gained as a result of the banking function must
not be divulged.
- INSIDER ACTIVITIES -- The Board should guard against insider
abuse, avoiding preferential interest rates and exercising
extra care in granting credit to fellow directors and their
interests. Any transaction, in fact, involving an insider
should be treated with due care and in a manner which would
avoid any question of impropriety. Above all, each director
should possess the integrity not to use his/her position for
personal gain. (See Bank Bulletin No. 18)
- DEPOSITORS -- The Board must not lose sight of its primary
responsibility, which is to protect the depositors. They,
by far, provide most of the funds on which a bank operates
and, therefore, command the Board s primary concern.
- RETIREMENT -- The Board should establish a retirement plan
for directors. (This is a sensitive area and one which each
Board should deal with individually.) In any event, directors
have an obligation to step down when it becomes obvious that
contributions are no longer at a level commensurate with the
responsibilities of the position or when other interests or
conflicts are affecting the director s ability to give proper
service.
- RECORDS OF BOARD ACTION -- It is the responsibility of the
Board to insure that adequate minutes and other records of
Board actions, including pertinent discussions, dissenting
opinions, etc., be maintained.
- HOLDING COMPANY AFFILIATION -- Bank holding companies have
become a strong force in recent years. This movement, as well,
has not been without its particular problems. In this connection
each bank is still considered a unit and responsible for its
own activities and to the community it serves. The Boards,
therefore, of these affiliated type organizations must function
accordingly and not place complete reliance on the parent
company for direction and policy determination. (See Bank
Bulletin No. 11)
The above fairly represent the major Board and directorship responsibilities.
Several texts on this matter have been written, one of which was
developed by the American Bankers Association and is entitled
"Focus on the Bank Director--THE JOB." This booklet is extremely
informative and an excellent guide for a bank s Board and its
membership and is available through the American Bankers Association,
1120 Connecticut Avenue, N.W., Washington, D.C. 20036
All directors are strongly urged to make this text a part
of their training effort and to keep it as a ready reference.
Additionally, a part of the training effort is to become familiar
with banking law and regulation. While it is not reasonable
to expect complete familiarity with all laws and regulations
under which a bank operates, it is reasonable to expect, however,
that a general knowledge of banking law and regulation will
be maintained.
Serving as a bank director can be a rewarding and fulfilling
experience for the individual who accepts the election or appointment
to this position. Dr. Paul S. Nadler, professor of business
administration, Rutgers University, summed it up very well in
a report entitled "What It Means To Be a Director" by stating:
"Bank directors face contingent liabilities and many
responsibilities, but the position, as well, provides opportunities
for public and private satisfaction. If a director is truly
doing his job and has delved into all the areas that bank Board
service entails, membership on the Board can be well worth the
price."
It is incumbent on each director to conscientiously work at being
a director. No one is immune from potential liability; nevertheless,
if honesty and diligence to duty prevails on your Board, the word
"liability" should exist only as it relates to the bank's normal
course of business activities.
It is requested that the Board of Directors of each bank develop
a "Board and Directorship Policy" which should set forth, as
a minimum, the issues cited in this bulletin and the Board's
perception of how it views its role in guiding the affairs of
the bank. This policy, to be completed by March 31, 1979, should
be included in the Board's policy book which, along with other
policies established to date, will be subject to review by representatives
of the Bureau.
| Signed: |
Richard J. Francis, Commissioner |
| |
Gifford Knudsen, Director, Bank & Trust Division |
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| Dated: |
October 5, 1978 |
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