Serving as a Director in Today's Environment

Serving as a Director in Today's Environment

June 2005
By Jerome M. Schwartz Recent headlines are causing directors to focus more on the responsibilities and advisability of serving on corporate boards. The headlines have included reports of outside directors sharing personally in paying large settlements of shareholder lawsuits, and government agencies bringing actions against directors. News coverage of corporate failures like Enron and WorldCom, and the recent adoption of the Sarbanes-Oxley Act have heightened the focus of directors on their responsibilities. Directors of financial institutions have a broader constituency than directors of most business corporations. As is the case for directors of other businesses, directors of financial institutions owe a duty to their shareholders to create and increase shareholder value. However, directors of financial institutions have additional constituencies – their depositors, the FDIC that insures the deposits, and the community the institution serves. Director Responsibilities The primary responsibilities of the board of directors include: • selecting and retaining competent management, and setting their compensation; • establishing, with management, the institution's business objectives; • adopting policies and procedures to achieve the objectives; • monitoring the institution's operations to ensure they are adequately controlled, and in compliance with laws and policies; • overseeing the institution's business performance; • ensuring that the institution helps meet its community's credit needs; and • for public companies, overseeing compliance with the reporting and other requirements imposed by federal securities laws. Standard of Care for Director Actions Directors are required to perform their duties with loyalty and care, and in the best interests of the institution. Bank regulators have said that the duty of loyalty requires directors to administer the affairs of the institution with candor, personal honesty and integrity; and prohibits directors from advancing their own personal or business interests or those of others at the expense of the institution. They have also said that the duty of care requires that directors act as prudent and diligent business persons in conducting the affairs of the institution. The Michigan Banking Code requires that bank directors discharge their duties in good faith and with the degree of diligence, care and skill that an ordinary prudent person would exercise under similar circumstances in a like position. There are a number of steps that will help directors fulfill their responsibilities. Directors should keep informed of the activities and condition of their institution. They should review materials provided to them for board meetings and attend the meetings. Directors should receive regular reports from management about the institution's operations and business. The reports should be easy to understand and include the right amount of detail. The reports should cover the institution's financial condition, performance and capital; loans, including past due and problem loans; investments; credit concentrations; funding activities and interest rate risk; transactions that directly or indirectly would benefit insiders; compliance with applicable law and regulations; and any significant events that are likely to affect the safety, soundness, or ongoing profitability of the institution. Directors should follow industry trends and be aware of major regulatory developments. They should review the institution's financial statements, and reports of auditors and supervisory agencies that are addressed to them. Briefings by management and other consultants may be helpful, and where appropriate, directors may wish to attend director education seminars. In performing their duties, directors should exercise independent judgment. They should carefully evaluate matters. While cooperation between management and the Board is essential, directors should apply their own critical analysis when considering issues. Where a proposed course of action appears problematic or the director does not have enough information to make an informed decision, the director should ask questions and obtain the relevant information before taking action. While directors have an obligation to be informed and apply independent judgment, the day to day operation of the business should be left to management. Where advice of counsel, independent auditors, or other independent advisors would be helpful, such advice should be obtained. When problems develop for a financial institution, they often involve transactions with management, directors, or significant shareholders. Transactions with insiders should be carefully reviewed for compliance with laws and regulations. They should be objectively evaluated applying the same criteria as would be applied in evaluating transactions with independent parties. Directors Serve their Community Serving the community as a director of a financial institution is more than just fulfilling the responsibilities of a board member. Directors make important contributions to their communities. Through their decisions, directors enable entrepreneurs and investors to finance their businesses, and individuals to finance their homes and consumer purchases. Directors, with management, have a major role in allocating the financial resources and meeting the needs of the community.
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