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- Hi. I'm Tom Dujenski,
and I'm the Regional Director for the FDIC's Atlanta Region.
It is my pleasure to welcome you
to this presentation on Corporate Governance.
This video is one of several that were developed
as part of the FDIC's Community Banking Initiative.
Corporate governance is essential
to maintaining trust and public confidence
in the banking system.
A corporate governance structure
sets forth the plans, policies, and procedures
for making prudent decisions on corporate affairs.
Consequently, effective corporate governance
is part of the foundation for a safe and sound operation.
Corporate governance cannot exist
without the dedicated service
of committed and informed directors.
The industry, regulation, and economy
create a dynamic environment for banks and their boards.
The longstanding principles of corporate governance
enable directors to appropriately respond.
This presentation will review corporate governance principles
that are vital to a director's role
in setting the direction of the bank.
The presentation focuses on three areas.
In the first segment, we will review your role
as a bank director, the associated responsibilities,
and the importance of independent decision-making.
In the second segment, we will provide direction
on the supervision of bank operations.
The third segment will provide guidance
to help directors stay informed.
Joining me today to present this topic
are Deputy Regional Director John Henrie,
Assistant Regional Director Nikita Smith,
and Field Supervisor Margaret Myers.
When you have finished viewing this video,
you will have a better understanding
of your responsibility to establish risk
and compliance management systems
to support safe and sound bank operations.
I am now going to turn the presentation over
to Nikita Smith for a discussion
of director roles and responsibilities.
- Thank you, Tom. In this segment,
I would like to review roles and responsibilities
of a bank director,
and the importance of independent decision-making.
The quality of management,
which includes the board of directors,
is an important element
in the successful operation of a bank.
Directors establish goals, objectives,
and risk limits for the bank.
Senior management is responsible for implementing
policies and procedures that translate this information
into prudent operating standards.
When fulfilling their responsibilities,
directors and officers have a duty
to exercise loyalty and care.
A duty of loyalty requires directors
to administer the affairs of the bank
with candor, honesty, and integrity.
This means that directors must be concerned with
the safety of deposits
and the influence the bank has on the community.
Directors and officers must place performance of duties
above personal objectives.
A duty of care requires directors and officers
to exercise sound business judgment
when conducting bank operations.
In other words, they have an obligation
to employ the same degree of care
that a prudent individual would use
under similar circumstances.
Serving as a director is an important responsibility.
As members of the Board,
directors are responsible for selecting officers
who are qualified to administer bank operations.
The board is also responsible
for determining the bank's strategic direction,
including long- and short-term objectives.
The Board must adopt operating policies
to guide management in achieving these objectives
in a legal and sound manner.
The policies and objectives of the directorate
should include provisions for adherence
to the Interagency Guidelines Establishing Standards
for Safety and Soundness
set forth in Part 364, Appendix A,
of the FDIC Rules and Regulations.
These standards set specific guidelines
for the safe operation of banks in the following areas:
internal controls and information systems;
internal audit system; loan documentation;
credit underwriting; interest rate exposure;
asset growth; asset quality; earnings;
and compensation, fees, and benefits.
The board should also establish a system
that monitors management's adherence
to established policies and applicable regulations.
The resulting reports must keep directors informed
of the bank's business performance
and management's compliance with policies and risk limits.
This includes making sure that the bank meets
the credit needs of its community.
Effective corporate governance
requires a high level of cooperation
between a bank's board and its management team.
Supervision by directors does not mean
that a board should be performing managerial tasks.
Rather, directors should ensure that board policies
are adhered to and its objectives achieved.
Regular attendance at board meetings is essential.
It is important for directors to be active,
to ask questions,
and to exercise independent judgment.
Independent decision-making means that directors
will have a high level of cooperation
and trust with management.
This should be complemented
by credible, well-documented discussions
of management presentations and proposals.
If directors dissent from the majority,
they should ensure that their negative vote is recorded
in the minutes along with reasons for their action.
Directors who routinely approve management decisions
without exercising their own informed judgment
are not adequately serving their banks,
their stockholders, or their communities.
In addition, board members that exercise
independent judgment can help prevent "One-Person Banks."
A "One-Person Bank" occurs
when the bank's principal officer or stockholder
dominates virtually all phases of the bank's
policies and operations.
Often this situation stems from the personality make-up
of the principal officer or ownership control.
It usually occurs when a board of directors
is not engaged.
Some bank directors, when first elected,
have minimal technical knowledge of banking
and could feel dependent upon others
more knowledgeable in banking matters.
This situation may allow a bank officer
to achieve a position of dominance.
There are other "One-Person Bank" situations
where there are limited staff
to fill various roles within the bank.
In these cases, an officer may dominate
certain aspects of policy or operations
because he or she is filling multiple roles.
There are at least two potential dangers
inherent in a "One-Person Bank".
First, incapacitation of the dominant officer
may result in a management void.
Second, problem situations resulting from mismanagement
are more difficult to solve
through normal supervisory efforts.
This is because the bank's problems
are often attributed to the one individual
that dominates the bank
and has the most influence regarding corrective action.
Board members who fail to exercise independent judgment
that ultimately results in a "One-Person Bank"
are not fulfilling their fiduciary responsibilities.
This is a concern to supervisory authorities.
These concerns can be mitigated
by actions taken by the board.
The Management Section of the FDIC Risk Management
Manual of Examination Policies
provides a comprehensive listing of mitigating controls
for "One-Person Banks."
Some examples of mitigating controls
include segregation of duties
and having a sufficient number of outside, independent,
and engaged directors.
Achieving a proper level of independence
for board committees overseeing major risk areas
is also a good control.
In the next segment, John Henrie will cover
how directors can properly supervise bank operations.
- Thank you, Nikita. I would like to talk with you
about the proper supervision of bank operations.
Effective bank supervision begins with the development
of an appropriate strategic plan.
This plan should be supported by a solid framework of policies
and effective monitoring procedures
to ensure that risk limits are followed
and performance objectives are met.
Additionally, effective bank supervision
includes avoiding preferential transactions.
Let's talk about each of these areas in more depth.
A vital part of your responsibilities
is the development of a strategic plan
that sets the future direction of the bank.
The strategic planning process should involve board members,
bank management, and other individuals
who have an understanding of the bank's operations,
products, and markets.
Their efforts should focus on developing a strategic plan
that is based on realistic assumptions
regarding current and future market areas.
The strategic plan should also include clear objectives,
measurable goals, and well-defined risk limits
that are actively monitored and reported to board members
and bank management.
A board that establishes a clear strategic vision
and monitors management's progress
will provide a strong foundation for future success.
To be effective, the strategic plan
should be a dynamic document that can be revised
to address changing circumstances or new strategies.
The board should regularly evaluate established objectives
in light of market, regulatory, and economic changes
to ensure strategic objectives are realistic
and consistent with existing conditions.
The Board should provide a framework of written policies
and operating procedures that clearly define
its desired risk profile for the bank on a company-wide
and a business-unit basis.
These policies and procedures should include provisions
that require adherence to the Interagency Guidelines
Establishing Standards for Safety and Soundness
set forth in Appendix A of Part 364
of the FDIC Rules and Regulations.
These standards, which provide specific guidelines
for a bank's safe and sound operation,
are discussed in further detail within the appropriate sections
of the FDIC's Risk Management Manual of Examination Policies.
It is important that risk management practices
and corporate culture are commensurate with
the board's desired risk profile.
In addition to developing a well-constructed strategic plan
and defining a bank's risk profile,
you should monitor management's execution
of the strategic plan and adherence to the bank's
established risk profile.
There are many ways a board can monitor
a bank's strategic performance and risk profile.
Written reports, management discussions,
and periodic testing have been commonly used by bank boards.
Management reports can be tailored
to address your specific informational needs,
including operating performance, financial data,
and policy exceptions.
The appropriate level of detail and frequency of reports
will depend on the unique circumstances of your bank.
As a Director, you should ensure
that management reports provide sufficient detail
to allow you to properly monitor performance
and to ensure appropriate risk limits are not exceeded.
You should carefully review these reports
and regularly meet with your management team
to recognize accomplishments and to discuss concerns.
It is essential that information provided to the board
be reliable and accurate.
Regardless of how strong your strategic planning efforts are,
how reasonable your risk profile is,
or how well you supervise your management team,
there is one matter that can undermine all you do,
and that is self-dealing.
When done properly, a bank can maintain business relationships
with insiders or their related interests.
However, in some cases, banks have entered into transactions
that provide preferential terms or conditions
to these parties.
Such preferential transactions are often a root cause
of significant financial losses.
Even if these transactions do not lead to losses,
preferential transactions can harm the bank's reputation,
result in violations of law,
and undermine accountability shared among the board,
management, and employees.
The board should avoid all preferential transactions
involving insiders or their related interests.
To do this, the board should establish
clear and firmly enforced codes of conduct
governing such transactions.
The board should also ensure that financial transactions
with insiders are in full compliance
with laws and regulations, and these transactions
are rigorously and independently reviewed.
These regulations include Part 215
of the Federal Reserve Board's Regulation O.
Regulation O governs loans to executive officers,
directors, and principal shareholders of member banks.
It requires that these loans be made on substantially
the same terms and underwriting standards
that are prevailing at the time
for comparable transactions with persons
who are not covered by the regulation.
Aggregate lending limits and prior approval requirements
are also imposed by Regulation O.
In addition, payment of overdrafts of directors
or executive officers is generally prohibited
unless part of a written, preauthorized
interest-bearing credit plan or by transfer of funds
from another account at the bank.
Section 337.3 of the FDIC Rules and Regulations
makes Regulation O applicable to state nonmember banks
and sets forth requirements for approval of loans to insiders.
Specifically, prior approval of the bank's board of directors
is necessary if a loan to any bank executive officer,
director, principal shareholder,
or their related interest exceeds the amount
specified in the regulation when aggregated with the amount
of all loans to that person.
This approval must be granted
by a majority of the bank's directors
and the interested parties must abstain
from participating directly or indirectly in the voting.
The basis for such transactions should be fully documented
in the board minutes.
In addition, internal audits should include
reviews of insider transactions.
Now that we have covered
the importance of strategic planning,
identifying and controlling risks,
performance monitoring,
and reviewing insider transactions,
Margaret Myers will now discuss
how you can be an informed director
in fulfilling these responsibilities.
- Thank you, John.
In this segment of the Corporate Governance presentation,
I would like to speak with you
about ways you can keep informed as a director.
The pace of change in banks today
makes it particularly important that directors
commit adequate time to be informed.
To effectively oversee a bank's performance
and meet the community's credit and deposit needs,
directors must be informed of the bank's activities,
condition, and operating environment.
Directors should regularly attend full board
and assigned committee meetings.
They should carefully review all meeting materials,
auditor's findings and recommendations,
and supervisory communications
for both risk management and consumer protection.
Directors should work with management
to develop a program to keep Board members informed.
The program should include comprehensive board packages
that management provides to the directors in advance,
allowing sufficient time for your review.
These packages typically include financial statements
and other financial reports with key ratios
that show comparisons to policy parameters,
budget projections, and identified peer groups.
Packages should also include new business activities
and products, investment activities,
lending activities, insider transactions,
and consumer protection reports.
Results of any completed audit reports and documentation
on any deviations from policies are also typically included.
Directors can also be informed through periodic briefings
by management, counsel, auditors, and others.
Additionally, directors should review
findings and recommendations in reports of examination
from their regulator.
Ultimately, the Board and management are responsible for
determining the actions they will take
to address the examination findings,
as well as findings noted in audit reports
and in-house reviews.
Directors must stay abreast of general industry trends,
economic conditions, and any regulatory developments
pertinent to their bank.
There are several ways to do this.
Industry trade associations hold conferences,
publish papers, and offer educational materials.
Additionally, the FDIC offers excellent resources
on our website on a number of subjects
including risks and new regulations.
The FDIC frequently sends Financial Institution Letters,
or FILs, to each bank to alert directors and officers
of important information.
The FDIC also publishes research papers and articles
on a variety of banking issues.
Many of these publications are specifically written
for the banking community, not just for industry analysts.
Directors should also build a good communication channel
with the bank regulators by keeping the regulator informed
about the direction the bank is headed
and about any changes they might make
to the business plan.
FDIC staff members are available
to offer assistance or recommend enhancements
to the overall planning process.
The FDIC has a special section on its website at www.fdic.gov
that is dedicated to providing resources
for directors and officers.
The Directors' Resource Center can be viewed by first clicking
Regulations and Examinations,
then Resources for Bank Officers and Directors,
and finally Directors' Resource Center.
Content on that webpage addresses current issues
faced by the banking industry, including the factors
that contributed to the recent financial crisis
and other challenges that some banks face.
This information includes videos,
materials from prior directors' colleges and outreach events,
regulatory guidance, relevant banking news,
and much more.
Directors are encouraged to use the Directors' Resource Center
as a source along with other training programs.
Education of the Board, management, and staff
is essential to maintaining an effective risk management
and compliance management program.
The Board and management should establish
a regular training schedule
for directors, management, and staff,
as well as third-party service providers, where appropriate.
FDIC has established a program to increase director involvement
in its examination process.
The program is intended to expand communication
between outside directors and examiners
during the course of safety and soundness,
compliance, and other specialty examinations.
Examiners invite directors, through senior management,
to participate in examination discussions.
We strongly encourage directors to participate in this program
at their next examination.
Now let's return to Tom Dujenski.
- Thanks, Margaret.
This information session was designed to help you
better understand corporate governance
and the critical role that it plays
in an organization's effectiveness.
As a board member, it is important
that you clearly understand your role and responsibilities,
keep informed, and use independent decision-making
to set the strategic direction and risk appetite for the bank.
Board members also have a responsibility
to ensure bank management achieves operational goals
and stays within established risk limits.
By doing this, directors can effectively manage
the risks associated with these operations.
Please remember that this video is part of a series
entitled the Virtual Directors' College Program.
Other videos can be found
on the Directors' Resource Center webpage,
including the New Director Education Series.
Additional sources of information
include the FDIC's Statement of Policy Concerning
the Responsibilities of Bank Directors and Officers,
and the Pocket Guide for Directors.
If you have any comments or questions,
please submit them to supervision@fdic.gov.
We appreciate your time and attention.
Thanks for joining us.