Role of Bank Boards Shifts Toward Increased Management

, New York Law Journal


Clyde Mitchell

As things now stand, from a regulatory perspective, the Board of Directors (Board) of financial services institutions, particularly the larger ones, essentially is charged with "running the bank." The niceties of "supervision" versus "management" are blurred, and U.S. corporate law (basically, the States) no longer appears to be the controlling factor in directors' responsibilities as far as bank regulators are concerned.

Historical Perspective

Until very recently, corporate and bank Boards were selected and operated in a similar manner. The Chairman and/or Chief Executive Officer (CEO) generally controlled the selection process, which usually involved selecting someone important to his or her company (e.g., the CEO or a senior officer of an important customer, supplier or other entity, civic or cultural organization, or an important person in the community). Generally, being a CEO was sufficient qualification and no special background, knowledge, etc., was required.

Life was simple. The chosen director owed a fiduciary or similar duty to the company's shareholders, and as long as he or she made reasonable (from a business judgment standpoint) decisions, they were legally protected.

While a "Board package" of pertinent corporate documents was sent to each director prior to a meeting for review, the director was not expected to be an expert on the company's operations (although many were).

From a social standpoint, Board meetings, usually held once a month, involved a business lunch or dinner and perhaps occasionally a game of golf or something similar. On occasion, Board meetings were held in a U.S. or offshore location where the company had business operations (i.e., a combination of business and pleasure). The system worked.


The climate has changed for the financial services industry, and perhaps for corporate America generally (although from here on we are only dealing with the former). As far as the selection process is concerned, Federal Bank Regulators encourage selecting a director knowledgeable in the financial services industry, with a better-than-average understanding of banking concepts such as risk, capital, liquidity, computers and a myriad of other subjects inherent in the financial services industry. Such a candidate would include a banker, former regulator, accountant, bank lawyer, etc. This represents a major change.

In addition to the director's fiduciary duty to the bank's shareholders, regulatory fiat has imposed a new corporate duty owed to the bank's regulators for the benefit of its depositors and to the Federal Deposit Insurance Corporation (FDIC) on behalf of the U.S. taxpayers who back up the FDIC. As an example, regulators are not bashful about telling Boards about their concerns and, in certain instances, suggesting what a Board should be doing. Suppose you have a situation where the Board, for the protection of depositors, is asked by regulators to cause management to take (or stop taking) certain actions, and believes, in its good faith business judgment, that doing so would breach its fiduciary obligations to the shareholders of its bank. What should the Board do in such a situation?

As far as the social aspects are concerned, although there still may be evidence of that, for today's financial service directors there is much more business and far less play. The Board package of the past has been replaced by voluminous books of documents covering all aspects of the bank's business and regulatory compliance. In addition, most Boards operate on a "24/7" basis, where Boards are involved between meetings. Furthermore, Federal Bank Regulators frequently meet privately with directors, particularly those who are independent (i.e., not bank officers).

Change in Board's Role

In the past, pursuant to U.S. corporate governance laws, bank management ran the bank (or bank holding company) and the Board supervised bank management. The new approach of the Federal Reserve Board (Fed) appears to be that the Board should actually manage the bank's business as an arm of the bank's regulators.

Pursuant to a Fed 2012 guidance, a Board is expected to do the following:

• Maintain a clearly articulated corporate strategy and institutional risk appetite.

• Ensure that the firm's senior management has the expertise and level of involvement required to manage.

• Maintain a corporate culture that emphasizes the importance of compliance.

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