| Contents Financial Institution Directors
General Guidelines
Maintain Independence
Keep Informed
Ensure Qualified Management
Supervise Management
Avoid Preferential Transactions
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Institution Directors |
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Change in the financial marketplace has created a more competitive and challenging environment for all financial institutions. As a consequence of this change, the role of the financial institution board member has grown in importance and complexity. Recent corporate scandals and the passage of the Sarbanes-Oxley Act of 2002 have again brought the public's attention to the need for a strong and independent board of directors. While financial headlines may change, the banking industry's longstanding principles of corporate governance remain valid today. This Pocket Guide has been developed by the Federal Deposit Insurance Corporation to provide directors of financial institutions with accessible and practical guidance in meeting their duties and responsibilities in a changing environment. These guidelines have been endorsed by the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the Office of Thrift Supervision. We hope this Pocket Guide will help to make the director's job one that can be approached with clarity, assurance and effectiveness. If you are helped in meeting these goals, then the larger goal of maintaining confidence in the safety and soundness of our financial system will also be advanced. For more information on corporate governance and other issues of interest to financial institution directors, please visit the "Directors' Corner" on our website at www.fdic.gov. Sincerely,
Sheila C. Bair
Chairman, Federal Deposit Insurance Corporation
Martin J. Gruenberg
Thomas J. Curry
John C. Dugan
John M. Reich
Federal Deposit Insurance Corporation
Washington, D.C.
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| General Guidelines |
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| A financial
institution’s board of directors oversees the conduct of the institution’s
business. The board of directors should: |
- select and retain competent management;
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- establish, with management, the institution’s
long- and short-term business objectives, and adopt operating policies to achieve these
objectives in a legal and sound manner;
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- monitor operations to ensure that they are
controlled adequately and are in compliance with laws and policies;
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- oversee the institution’s business performance;
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- ensure that the institution helps to meet its
community’s credit needs.
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| These responsibilities
are governed by a complex framework of federal and state law and regulation. These
guidelines do not modify the legal framework in any way and are not intended to cover
every conceivable situation that may confront an insured institution. Rather, they are
intended only to offer general assistance to directors in meeting their responsibilities.
Underlying these guidelines is the assumption that directors are making an honest effort
to deal fairly with their institutions, to comply with all applicable laws and
regulations, and to follow sound practices. |
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| Maintain Independence |
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| The first step both
the board and individual directors should take is to establish and maintain the
board’s independence. Effective corporate governance requires a high level of
cooperation between an institution’s board and its management. Nevertheless, a
director’s duty to oversee the conduct of the institution’s business
necessitates that each director exercise independent judgment in evaluating
management’s actions and competence. Critical evaluation of issues before the board
is essential. Directors who routinely approve management decisions without exercising
their own informed judgment are not adequately serving their institutions, their
stockholders, or their communities. |
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| Keep Informed |
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| Directors must keep
themselves informed of the activities and condition of their institution and of the
environment in which it operates. They should attend board and assigned committee meetings
regularly, and should be careful to review closely all meeting materials, auditor’s
findings and recommendations, and supervisory communications. Directors also should stay
abreast of general industry trends and any statutory and regulatory developments pertinent
to their institution. Directors should work with management to develop a program to keep
members informed. Periodic briefings by management, counsel, auditors or other consultants
are helpful, and more formal director education seminars should be considered. The pace
of change in financial institutions today makes it particularly important that directors
commit adequate time to be informed participants in the affairs of their institution. |
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| Ensure Qualified Management |
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| The board of directors
is responsible for ensuring that day-to-day operations of the institution are in the hands
of qualified management. If the board becomes dissatisfied with the performance of the
chief executive officer or senior management, it should address the matter directly. If
hiring a new chief executive officer is necessary, the board should act quickly to find a
qualified replacement. Ability, integrity, and experience are the most important
qualifications for a chief executive officer. |
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| Supervise Management |
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| Supervision is the
broadest of the board’s duties and the most difficult to describe, as its scope
varies according to the circumstances of each case. Consequently, the following
suggestions should be viewed as general. Establish
Policies. The board of directors should ensure that all significant
activities are covered by clearly communicated written policies that can be readily
understood by all employees. All policies should be monitored to ensure that they conform
with changes in laws and regulations, economic conditions, and the institution’s
circumstances. Specific policies should cover at a minimum: |
- loans, including internal loan review procedures
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- asset-liability/funds management
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- profit planning and budget
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| These policies should
be formulated to further the institution’s business plan in a manner consistent with
safe and sound practices. They should contain procedures, including a system of internal
controls, designed to foster sound practices, to comply with laws and regulations, and to
protect the institution against external crimes and internal fraud and abuse. Monitor implementation.
The board’s policies should establish mechanisms for providing the board the
information needed to monitor the institution’s operations. In most cases, these
mechanisms will include management reports to the board. These reports should be carefully
framed to present information in a form meaningful to the board. The appropriate level of
detail and frequency of individual reports will vary with the circumstances of each
institution. Reports generally will include information such as the following: |
- the income and expenses of the institution
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- capital outlays and adequacy
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- loans and investments made
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- past due and negotiated loans and investments
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- problem loans, their present status and workout
programs
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- allowance for possible loan loss
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- losses and recoveries on sales, collections, or
other dispositions of assets
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- funding activities and the management of interest
rate risk
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- performance in all of the above areas compared to
past performance as well as to peer groups’ performance
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- all insider transactions that benefit, directly or
indirectly, controlling shareholders, directors, officers, employees, or their related
interests
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- activities undertaken to ensure compliance with
applicable laws (including, among others, lending limits, consumer requirements, and the
Bank Secrecy Act) and any significant compliance problems
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- any extraordinary development likely to impact the
integrity, safety, or profitability of the institution
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| Reports should be
provided far enough in advance of board meetings to allow for meaningful review.
Management should be asked to respond to any questions raised by the reports. Experience
has shown that certain aspects of lending are responsible for a great number of the
problems experienced by troubled institutions. The importance of policies and reports that
reflect on loan documentation, performance, and review cannot be overstated.
Provide for independent reviews. The board also should establish a mechanism
for independent third party review and testing of compliance with board
policies and
procedures, applicable laws and regulations, and accuracy of information
provided by management. This might be accomplished by an internal auditor
reporting directly to the
board, or by an examining committee of the board itself. In addition,
an annual external audit is desirable even when not required by regulation.
The board should review the auditors’ findings
with management and should monitor management’s efforts to resolve
any identified problems.
In order to discharge its general oversight responsibilities, the board or its audit
committee should have direct responsibility for hiring, firing, and evaluating the
institution’s auditors, and should have access to the institution’s regular
corporate counsel and staff as required. In some situations, outside directors may wish to
consider employing independent counsel, accountants or other experts, at the
institution’s expense, to advise them on special problems arising in the exercise of
their oversight function. Such situations might include the need to develop appropriate
responses to problems in important areas of the institution’s performance or
operations.
Heed supervisory reports. Board members should personally review any reports of
examination or other supervisory activity, and any other correspondence from the
institution’s supervisors. Any findings and recommendations should be reviewed
carefully. Progress in addressing problems should be tracked. Directors should discuss
issues of concern with the examiners. |
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| Avoid Preferential Transactions |
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| Avoid all preferential
transactions involving insiders or their related interests. Financial transactions with
insiders must be beyond reproach. They must be in full compliance with laws and
regulations concerning such transactions, and be judged according to the same objective
criteria used in transactions with ordinary customers. The basis for such decisions must
be fully documented. Directors and officers who permit preferential treatment of insiders
breach their responsibilities, can expose themselves to serious civil and criminal
liability, and may expose their institution to a greater than ordinary risk of loss. |
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