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This podcast provides you the ability to listen to new regulatory guidance issued by the National Credit Union Administration, and occasionally the F D I C, the O C C, the F F I E C, or the C F P B. We will focus on new and material agency guidance, and historically important and still active guidance from past years that NCUA cites in examinations or conversations. This podcast is educational only and is not legal advice. We are sponsored by Credit Union Exam Solutions Incorporated. We also have another podcast called With Flying Colors where we provide tips for achieving success with the N C U A examination process and discuss hot topics that impact your credit union.
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This podcast is the F D I C's YouTube
Channel Corporate Governance Training.
The following is an audio
version of that training.
This podcast is educational
and is not legal advice.
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And now the Corporate Governance Training
Welcome to this video for board
members on corporate governance.
Our goal is to focus on what you,
as a director or trustee, need to
know about corporate governance,
including your key responsibilities.
In this video, we'll discuss the
individual responsibilities of directors
or trustees as they perform their roles.
We'll then provide an overview
of corporate governance.
Next, we'll discuss the main
responsibilities of the board as a whole.
Focusing on the key elements of
effective corporate governance.
Finally, we'll review some of
the regulatory requirements as
well as common questions the FDIC
receives pertaining to this topic.
Banks need strong corporate governance in
order to operate safely and soundly, with
high ethical standards, and in compliance
with all laws and regulations, including
those relating to consumer protection.
Strong corporate governance is
the foundation of safe and sound
operations, and this foundation
lies with individual board members.
In the broadest sense, directors are
responsible for the bank's overall
performance and well being and effective
supervision of the bank's affairs.
Directors guide and supervise senior
management's efforts to promote the bank,
build a solid reputation for the bank,
and understand the needs of the community.
By electing you to the board, the
shareholders, or in the case of
mutual banks, the depositors, have
placed you in a position of trust.
This means that you're responsible for
safeguarding the interest of the bank and
its stakeholders, including customers,
shareholders, employees, regulators, and
the community where the bank operates.
A director or trustee's duty to
oversee the conduct of bank business
requires independent judgment.
Board members need to make informed
decisions and critically evaluate
issues that come before the board.
In addition, directors have the fiduciary
duty to act in good faith and in a
manner that they reasonably believe
is in the best interest of the bank.
The duties of loyalty and
care are key responsibilities
of individual board members.
These duties are defined by
both federal and state laws,
although state laws do vary.
The duty of loyalty requires directors
to oversee a bank's affairs with
candor, honesty, and integrity.
Directors are prohibited from
advancing their own personal or
business interest or those of
others, at the expense of the bank.
In other words, directors have a fiduciary
duty to avoid conflicts of interest.
The duty of care requires directors
to exercise both sound business
judgment and good faith when
overseeing a bank's affairs.
That means that directors have an
obligation to use the same degree of
care that a prudent individual would
use under similar circumstances.
Now, let's move on to an
overview of corporate governance.
The definition of governance
varies, but in general, it
focuses on people, policies, and
processes that provide a bank with
strategic direction and controls.
We'll talk more about people, policies,
and processes throughout this video.
The Governance Program provides
the foundation for maintaining
effective risk management practices.
This helps the bank operate safely and
soundly while remaining profitable,
competitive, and resilient through
changing economic and market conditions.
The FDIC's view of corporate
governance is long standing.
Effective corporate governance
frameworks are functionally sound
and appropriate for the bank's
size, complexity, and risk profile.
Community banks don't need to have an
elaborate framework, and they don't
need to hire consultants in order
to maintain an effective program.
Now that we've talked about the
governance framework, let's talk a
little more about the responsibilities
of the board as a whole.
A bank's board oversees the
conduct of the bank's business.
Effective boards select, supervise,
and retain competent senior management.
Establish the bank's short and
long term business objectives.
and adopt policies to achieve those
objectives in a legal and sound manner.
Furthermore, the board is responsible for
monitoring operations and for overseeing
the bank's business performance.
All of these actions are part
of establishing effective
corporate governance.
While outside directors are not
typically involved in the day to day
operations of the bank, they establish
goals, policies, and procedures.
that guide senior management's
day to day activities.
The fundamental duties of directors
are aligned with the key elements
of a corporate governance program.
Let's begin by discussing the
importance of selecting and retaining
a Senior Management Team that
supports the strategic direction
of the bank and can appropriately
administer day to day operations.
The Board is responsible for supervising
and retaining a qualified Senior
Management Team to carry out the Board's
vision, policies, and strategic plan.
This includes ensuring that senior
management officials have the necessary
experience and knowledge to fulfill
their daily obligations and that their
performance is evaluated regularly.
Effective boards also re evaluate
the bank's senior management as
well as require staffing levels and
skill sets as conditions change,
such as when the bank engages in new
initiatives, technologies, or markets.
Or becomes exposed to emerging risks.
Although senior management is
primarily responsible for personnel
administration, including hiring
and retaining staff, the board is
responsible for providing direction and
overseeing personnel administration.
Primary components of effective
personnel administration include a
clear organizational structure with
appropriate reporting lines, position
descriptions, training and development
opportunities for bank personnel,
and sound compensation policies.
and regular evaluation of
senior management performance.
Succession planning is an important
aspect of personnel administration.
Through the FDIC's regular examination
process and community bank outreach,
we sometimes hear from directors that
finding and retaining senior managers
and their successors can be difficult.
This process can be especially challenging
for banks in small towns and rural areas.
Finding skilled staff
may also be challenging.
A management succession and
talent development plan can
help address these challenges.
These plans don't need to be
elaborate to be effective.
Their sophistication largely depends
on the size and complexity of the bank.
While the depth and scope of succession
plans vary, informed planning is an
important component of governance.
Usually, a successful succession The
board is involved in succession planning
for senior roles, while senior management
handles succession planning of lower level
management, or non management positions.
A well developed planning effort
involves three critical steps.
The first stage of succession is
identifying key senior management
positions that are critical to
the bank's continuity and success.
In this step, the time horizon for
planning is established, considering
short, medium, and long term needs.
In the next step, The board would
identify and assess potential successors.
For example, the board could
consider promoting current staff
to key management positions,
The final step of succession planning
is to consider action steps to train,
mentor, and develop personnel who
might transition into critical roles.
Directors can foster development
by providing opportunities
for cross training.
For serving on committees, for leading
special projects, and by establishing
mentoring or coaching relationships.
External development opportunities
are also a valuable tool
in developing successors.
For example, small community banks
often work with local universities and
colleges to support banking courses or to
offer jobs and internships to students.
Now, let's turn our attention to
the concept of dominant officials.
This term describes situations where
a bank official has material influence
over virtually all decisions involving
a bank's policies and operations.
A dominant official can be an
individual, family, shareholder, or
group of persons with close business
dealings or otherwise acting together,
regardless of whether the individual
or any other member of the family or
group have an executive officer title
or receive compensation from the bank.
Of note, in a situation where a bank has
a dominant official, A robust succession
plan is of even more importance.
That said, we would like to emphasize
that the presence of a dominant
official is not automatically
viewed as a supervisory concern.
For example, in some banks with limited
staff, a dominant official may emerge
because no one else at the bank has the
skills or abilities to operate the bank.
When a dominant official exists,
the key for the board is to ensure
that an effective governance
framework is maintained.
Dominant officials generally become
a supervisory concern in situations
where internal controls are weak,
high risk business strategies are
implemented, the official lacks
sufficient experience, or board
oversight is inadequate or ineffective.
Let's discuss some of the risks
directors need to be aware of when
a bank has a dominant official.
To start, the greatest risk relates to the
loss or incapacitation of that official.
If the official is away for a prolonged
period of time or leaves unexpectedly,
The bank may lose critical knowledge
and competent management, and there
may be a short or long term business
disruption, lost productivity, and
negative impacts on profitability.
And, the process to replace a dominant
official can be expensive and lengthy.
The other significant risk related to a
dominant official is that problems can
be more difficult to resolve when they
are caused by the dominant official,
or when the official is either not
responsive to corrective action, When
a bank is influenced by a dominant
official, effective boards focus on
establishing a strong control environment.
Examples of controls include maintaining
appropriate segregation of duties
and responsibilities, board member
involvement in the oversight of policies
and objectives, and establishing
independent board committees to
oversee major operational areas.
When there is a dominant official,
Directors may have to ask
tough questions and engage in
effective challenge discussions.
But in this process, each director
can ensure that the bank's
best interests are protected.
Let's move on to the next
key element of governance.
The board establishes the bank's
short and long term business
objectives and policies.
This involves understanding the
bank's risk profile, establishing
an appropriate risk appetite, and,
working with senior management,
creating a suitable strategic plan.
Let's discuss these further,
starting with the risk profile.
A community bank's risk profile is made
up of many factors, including its business
model, organizational structure, balance
sheet composition, and revenue sources.
External factors, such as the
economy and other market conditions,
All community banks are different.
Even banks that may seem
similar at first glance can have
very different risk profiles.
A bank with a higher risk profile will
need stronger risk management practices
and a higher degree of board oversight.
There are several questions that
members of the board may want to ask
when evaluating a bank's risk profile.
For example, are risks properly
identified and categorized?
Meaning, is consideration given to
high, medium, and low risk areas?
As well as to emerging risks,
are risks considered for each
functional area and across the bank?
How is the bank's risk profile
changing over time, and is
it evaluated periodically?
Are mitigating controls in
place for higher risk areas?
Is the board comfortable
with the bank's risk profile?
The answer to these questions
can help the board member better
understand the bank's risk profile.
As a board member, One of your
responsibilities is to voice your opinions
and concerns about the bank's risk profile
to other directors and senior management.
With an understanding of the risk
profile, the board can set an
appropriate risk appetite for the bank.
The risk appetite is the level of
risk the board is willing to take.
The board can define its risk
appetite by establishing a set of
objectives and risk parameters that
guide bank activities and operations.
When determining the risk appetite,
Directors need to consider the
level of acceptable risk, or
potential cost to the bank, versus
an acceptable level of reward, which
may be profits or other benefits.
Effective boards also evaluate
the impact that the risk appetite
could have on the bank's condition
during periods of economic stress.
Banks with a higher risk appetite
will likely require greater
resources in terms of capital,
allowance for losses, earnings,
and management and staff expertise.
While setting the risk appetite,
Directors can also ascertain whether
appropriate internal controls are in
place to mitigate the identified risk.
Keep in mind that the board may have
to re evaluate its risk appetite
as conditions or objectives evolve.
For example, if the risk associated
with an existing product, service,
or strategy changes, the board will
need to determine if the activity
is still appropriate for the bank.
The board may determine that the
level of risk is acceptable to the
bank and continue with the activity.
In other words, the board has determined
that the level of risk and return is
aligned with the board's risk appetite.
Or, the board may decide that the
activity needs to be discontinued,
indicating that the level of risk
exceeds the board's risk appetite.
Likewise, when a new product or activity
is considered, effective boards evaluate
the potential risks, costs, and rewards
of the new product or activity Once
the risk appetite is determined, the
board can focus on the development of
a suitable and sound strategic plan to
guide the future direction of the bank.
Every day, community banks face challenges
and opportunities as market conditions,
competition, innovation, and risks evolve.
Sound strategic planning is essential
for dealing with uncertainty and change.
For most community banks.
The strategic planning process is
designed so that the bank can answer
a few basic but important questions.
For example, Where are we now?
Where do we want to be?
How do we get there?
And how is success measured?
In order to answer these questions, board
members will need a solid understanding
of the bank's strengths, weaknesses,
opportunities, and threats, or as it
is commonly known, a SWOT analysis.
The answers to these questions are
unique to each bank and are driven
by numerous factors, including a
bank's culture, mission, and goals.
Business model and risk appetite.
Directors also need to consider the
resources available to the bank, as
well as the bank's risk profile, size,
geographic location, and customer base.
A constructive strategic planning process
involves board members, senior management.
and other individuals who have
an understanding of the bank's
operations, products, and markets.
Comprehensive plans include realistic
assumptions regarding the current
and future direction of the bank,
contain clear objectives, establish
risk limits, and set measurable goals.
Strategic plans are typically evaluated
periodically, but can also be adjusted
to address changing circumstances.
The time frame covered by strategic plans
vary, but a comprehensive plan typically
covers short, Medium and long-term periods
a three to five year planning horizon
is common for most community banks.
A board that establishes a clear
strategic vision and monitors progress
in meeting objectives provides a
strong foundation for future success.
With that, let's move on to the next
key element of corporate governance.
The adoption of policies that translate
the Board's goals, objectives, and
risk limits into operating practices.
Effective policies address all the
major operational activities of a bank,
including loans, investments, funds
management, profit and capital planning.
Key bank policies also address internal
controls, the audit program, information
technology, and compliance activities.
Policies covering human resources,
conflicts of interest, and a code
of ethics are also important.
Keep in mind that the types of
policies a bank may have and the level
of detail required for each policy
will depend on the size, complexity,
and risk profile of the bank.
To be effective, policies need to
be appropriate for the bank's size
and complexity, written and easily
understood, communicated to all employees,
Policies are often also subject to
periodic reviews by senior management
and the board, and updated as needed.
When senior management recommends
changes to policies or plans, it's
the board's duty to consider how these
changes could impact bank operations.
Effective boards take into account
customer needs, available products
and services, results of recent audits
and regulatory examinations, and
Staff expertise and external factors.
Policies and procedures are the board's
instrument to establish internal controls.
Directors should ensure that the bank
has a system of internal controls that
is appropriate for the institution,
as required by Appendix A to Part 364
of the FDIC Rules and Regulations.
Interagency guidelines establishing
standards for safety and soundness.
At a minimum, the internal control
system should establish clear lines
of authority and responsibility,
include an effective risk assessment,
provide timely and accurate financial,
operational, and regulatory reports,
Establish procedures to safeguard and
manage assets and evaluate compliance
with applicable laws and regulations.
All of these elements, working together,
help the Board's efforts to identify,
monitor, manage, and evaluate emerging
risks, as well as helping to protect
the bank against fraud and abuse.
Established policies typically include a
way to provide the Board with information
needed to monitor bank operations.
Board members can fulfill this function.
by requiring senior management to
provide appropriate information, and by
reviewing internal audits, supervisory
reports, other independent reports,
and periodic reports provided to the
Board and its designated committees.
An internal audit program allows
directors to monitor bank activities.
An effective internal audit program
is independent, sufficiently staffed
with qualified individuals, and
commensurate with bank operations.
Internal audit programs at community
banks can take different forms.
Some banks have an
internal audit department.
While others outsource this
function to a third party.
Banks with limited resources can ensure
they maintain an objective internal
audit function by implementing a
comprehensive set of independent reviews.
A bank employee or a board member
can conduct these reviews as long as
they are qualified and independent
of the function under review.
A side benefit of independent reviews
is cross training and staff development
that can be part of succession planning.
The individuals responsible for
conducting audits or independent reviews
may report conclusions directly to the
board or to a designated committee.
Directors are responsible for
evaluating audit findings and
ensuring that appropriate actions
are taken to address those findings.
Effective boards also make sure
that the audit program is reviewed
periodically and that it covers new
product lines, higher risk activities,
and emerging areas of concern.
In addition to the other internal review
reports, There are other independent
reports that directors might consider.
Common examples include the Annual
External Audit of Internal Controls and
Management Reporting Systems, Periodic
Loan Reviews, And regulatory reports of
examination board meetings are critical
for monitoring bank operations in
advance of board and committee meetings.
Directors need to receive
meaningful information with
sufficient time for review.
Generally speaking, effective
boards review reports relating
to income and expense, capital
levels, loans and investments,
problem loans and concentrations.
The board would also review
reports for losses in recoveries.
Funding Activities, Interest
Rate Risk Management, Insider
Transactions, and Compliance.
Additionally, The board would review
any other information that could
have a significant impact on the
bank, such as how your bank helps to
meet the community's credit needs.
When reviewing reports, directors
often focus their attention on any
significant changes and the reasons
for deviations from established plans.
The frequency of board meetings and
reporting is not the same for all banks.
As such, Directors need to ensure
that reports are tailored to
meet their informational needs
and have sufficient detail to
properly monitor bank operations.
With that, let's move on to the next
and last critical element of governance,
the oversight of the bank's performance.
In order to provide effective oversight,
directors need to maintain independence,
participate actively, and stay
engaged with the bank's activities.
Without doubt, one of the best ways
for directors to participate actively
in the bank's affairs is to regularly
attend board and committee meetings.
Adequate preparation and participation
in these meetings is key.
Directors need to have a sufficient
understanding of the issues presented
to enable them to exercise independent
judgment and offer their own ideas to
the board, ask questions and follow up
until they are satisfied with the answer,
voice concerns if something doesn't
seem reasonable, and and communicate
any dissent from a board's decision.
It's also very important to document board
reviews and conclusions and keep accurate
minutes of meetings, including directors
votes on matters coming before the board.
The FDIC has a long standing
commitment to keep directors
informed of regulatory matters.
The FDIC welcomes the opportunity
to speak with directors and invites
you to participate in supervisory
discussions held during examinations.
Please note that director
attendance is voluntary.
And a lack of participation in
examination meetings will not be
viewed negatively by examiners.
In addition, the FDIC often meets
with the Board at the conclusion
of an examination to discuss
examination conclusions and findings.
The invitation is intended to expand
communication and build a solid working
relationship between directors and
examiners during safety and soundness.
We've shared a lot of information
with you about your responsibilities
and effective corporate governance.
Now, let's move on to
regulatory requirements.
Directors ensure that management
adheres to applicable regulatory
requirements and that a system to
monitor compliance is in place.
The FDIC's Appendix A to Part 364,
and the Federal Reserve Board's
Regulations O and W are key regulations
that pertain to corporate governance.
Let's review these further.
The FDIC Safety and Soundness Standards
are set out in Appendix A to Part 364
of the FDIC Rules and Regulations.
Effective corporate governance programs
incorporate the standards outlined
in these interagency guidelines.
We reviewed several of these elements
in prior sections of this video,
including internal controls, lines of
authority, risk assessment, reporting
and monitoring, compliance with laws
and regulations, and internal audit.
In addition, Appendix A requires banks to
maintain prudent credit underwriting and
administration practices, have appropriate
systems to identify problem assets and
prevent asset quality deterioration,
and ensure that asset growth is prudent.
Appendix A also includes
standards for managing the
financial aspects of the bank.
and for preventing payment of excessive
compensation, fees, and benefits.
Finally, Appendix A endorses forward
looking risk management practices
that promote financial integrity.
While not covered in this video, banks
must also comply with the data protection
responsibilities detailed in Part
364, Appendix B of the FDIC Rules and
Regulations, which sets forth criteria
for a bank's information security program,
risk assessments, and board reporting.
Now, let's briefly review Regulation
O and Regulation W, which apply
to all FDIC supervised banks.
Regulation O covers transactions between
a bank and its executive officers,
directors, or principal shareholders.
In contrast, Regulation W addresses
transactions between a bank and its
affiliated business organizations.
The basis for these transactions
must be fully documented.
As a general rule, Transactions
with insiders and affiliates must be
beyond reproach and subject to the
same objective criteria offered to
ordinary customers and third parties.
Directors are responsible for ensuring
compliance with these regulations,
which may result in the adoption of
policies that prevent preferential
transactions, conflicts of interest,
inappropriate self dealing, Now,
let's review some questions the FDIC
frequently receives regarding director
responsibilities and corporate governance.
First, how can board members foster
a culture of regulatory compliance?
Let's start by saying that directors
are not expected to be personally
knowledgeable of all laws and regulations.
Let's But they need to make certain
that high ethical standards and
compliance with all laws and regulations,
including those relating to consumer
protection, The tone for our culture
of compliance is set at the top.
Effective boards also adopt policies,
procedures, and controls that are
consistent with regulatory requirements.
This includes processes for
monitoring bank activities and
detecting noncompliance, as well
as personnel training that promotes
compliance in daily operations.
In addition, Staying apprised of
compliance related matters is a
key aspect of board oversight.
Violations of laws and regulations
can reflect negatively on the board
and management, and can expose a
bank to financial and other risks.
If violations occur, directors
need to ensure that comprehensive,
corrective actions are implemented
as quickly as possible.
and that processes are reviewed
and updated as necessary
to prevent reoccurrence.
Another question we receive is
whether board members can be held
personally liable for a bank's
noncompliance with laws and regulations.
Regulatory enforcement actions
against bank directors are rare.
Similarly, most civil actions
involve former directors of failed
banks where there was a demonstrated
failure of the directors to satisfy
their duty of loyalty or care.
Depending on state law, Directors may be
personally liable for breaches of trust,
fraud, gross negligence, negligence, abuse
of power, and asset misappropriation.
In all cases, they Legal actions
are not taken lightly, and the
FDIC will only pursue such actions
after rigorous investigation.
Board members who fulfill their duties
and responsibilities are unlikely to
face legal actions initiated by the FDIC.
The last question we'll cover
today is, are there any common
areas of risk or concern
pertaining to corporate governance?
Potential signs of risk or concern may
include reluctance from senior management
to engage with directors, Repeat audit
or examination deficiencies, frequent
exceptions to policy, deviation from
established plans, or board members
receiving insufficient information.
It may also include situations
where fluctuations in financial
trends, personnel management issues,
or consumer complaints are noted.
As we conclude our discussion on
corporate governance, we'd like
to remind you that the FDIC has
additional videos and resources.
which can be found on the
Banker Resource Center at www.
fdic.
gov.
Directors can also keep up with industry
developments by participating in trade
association events and by staying abreast
of local, regional, and national news.
If you have questions or comments, please
contact your bank's Risk Management Case
Manager or Compliance Review Examiner or
email the FDIC at supervision at fdic.
gov.
Thank you for viewing this video.
We hope you found it both
useful and informative.