The April 2016 edition of the FDIC Supervisory Highlights is entitled, “A Community Bank Directors Guide to Corporate Governance”. It, along with the FDIC’s “Pocket Guide for Directors”, provides community bank directors a lot of valuable information that they should utilize in performing their obligations as directors of their institution. The OCC offers “Duties and Responsibilities of Directors” handbook as well as several other bank management handbooks. NCUA offers the “Federal Credit Union Handbook”, which covers a wide range of subjects and is a general reference guide that can help a credit union’s board of directors carry out its duties. We recommend that all community banks provide their directors copies of the available publications.
The directors of most institutions are successful butchers, bakers and candlestick makers, but they are not bankers. From their business experience, they understand the mechanics of borrowing money and maintaining a deposit account. They also know how to read and understand a financial statement, but they may not empirically understand the business of banking or their obligations as financial institution directors.
A director’s first obligation is to maintain his or her independence. Many directors feel some obligation to management because it was probably the management of the institution that recommended them for a director position. Nonetheless, a director has the obligation to express his or her opinion and exercise his or her best judgment on issues that come before the board and not be a rubber stamp for management. If there is something that a director does not understand, he or she should ask questions and not be satisfied with the answer until they obtain a clear understanding. Also, don’t defer your opinion to other directors who may have a louder voice or more apparent expertise. Each director has an equal vote and should have equal input on any issue being discussed.
That said, the most important responsibility of a board of directors is to select and retain competent management. The board of directors does not manage the institution and should be cautious not to try to do so. Its job is to provide a framework for management to work within, and the level of success of the institution is dependent on the quality of its management. A part of the board’s responsibility to select and retain competent management is its obligation to assure that the institution has a talent development program and a succession plan. If members of your management team are highly successful, there is probably another institution that recognizes that success and would like to have them as members of their management team. Are you prepared to react to a 30-day notice that one of your critical employees is leaving?
Next is the obligation of the board of directors to provide a clear governance framework that incorporates sound objectives, policies and risk limits. The FDIC guidance spends a great deal of time on risk management, primarily because that is its principal concern. As long as an institution’s risk management is good, it generally doesn’t have to worry about its insurance fund. At a minimum, the FDIC, like all other regulators, expects an institution’s board to implement strong standards for credit risk, asset concentration both by product and by borrower and interest rate risk. I have always believed that a better word for risk management is risk appetite.
How much risk is a board of directors willing to take with the institution’s and its shareholder’s assets? Individual board members may have markedly different risk tolerances with their own assets, and they may have some percent of their net worth that they are willing to crap shoot with hoping for the big win. They need to understand that banking is the business of taking risks, but the risks have to be very measured. In banking, it is a lot better to hit a lot of singles than to strike out frequently looking for the home run.
Finally, it is the responsibility of the board of directors, working with management, to develop a strategic plan for the institution. Many institutions have an annual board of directors’ retreat to develop a strategic plan. That is then cast in stone until the next retreat. I have always believed that a strategic plan should be more dynamic that that. Long range planning is fine, but as rapidly as the world and financial markets are changing today, the long range plan should be tweaked or amended as conditions change. Then, the board should measure the institution’s progress against the strategic plan.
Membership on a financial institution’s board of directors is both an honor and a responsibility. Board members should educate themselves on what those responsibilities are and how to perform them. Whether you are regulated by the FDIC, OCC, FRB, NCUA, CFPB, etc., the guidances offered by the agencies are an excellent reference for all. The FDIC guidances are a good place to start and to review periodically.