WEBVTT NOTE This file was generated by Descript 00:00:00.460 --> 00:00:02.210 Samantha: Hello this is Samantha Shares. 00:00:02.800 --> 00:00:07.030 This podcast is the F D I C's YouTube Channel Corporate Governance Training. 00:00:07.520 --> 00:00:09.990 The following is an audio version of that training. 00:00:10.550 --> 00:00:13.700 This podcast is educational and is not legal advice. 00:00:14.240 --> 00:00:18.300 We are sponsored by Credit Union Exam Solutions Incorporated, whose 00:00:18.300 --> 00:00:21.410 team has over two hundred and Forty years of National Credit 00:00:21.410 --> 00:00:23.250 Union Administration experience. 00:00:23.820 --> 00:00:27.610 We assist our clients with N C U A so they save time and money. 00:00:27.920 --> 00:00:31.880 If you are worried about a recent, upcoming or in process N C U A 00:00:31.880 --> 00:00:36.170 examination, reach out to learn how they can assist at Mark Treichel DOT COM. 00:00:36.680 --> 00:00:40.880 Also check out our other podcast called With Flying Colors where we provide tips 00:00:40.880 --> 00:00:43.460 on how to achieve success with N C U A. 00:00:44.183 --> 00:00:46.053 And now the Corporate Governance Training 00:00:46.340 --> 00:00:49.240 Welcome to this video for board members on corporate governance. 00:00:49.920 --> 00:00:53.860 Our goal is to focus on what you, as a director or trustee, need to 00:00:53.860 --> 00:00:57.130 know about corporate governance, including your key responsibilities. 00:00:58.130 --> 00:01:02.500 In this video, we'll discuss the individual responsibilities of directors 00:01:02.500 --> 00:01:04.680 or trustees as they perform their roles. 00:01:05.210 --> 00:01:07.710 We'll then provide an overview of corporate governance. 00:01:08.300 --> 00:01:11.620 Next, we'll discuss the main responsibilities of the board as a whole. 00:01:11.920 --> 00:01:15.230 Focusing on the key elements of effective corporate governance. 00:01:15.820 --> 00:01:19.170 Finally, we'll review some of the regulatory requirements as 00:01:19.170 --> 00:01:23.420 well as common questions the FDIC receives pertaining to this topic. 00:01:24.420 --> 00:01:28.500 Banks need strong corporate governance in order to operate safely and soundly, with 00:01:28.500 --> 00:01:33.310 high ethical standards, and in compliance with all laws and regulations, including 00:01:33.310 --> 00:01:35.190 those relating to consumer protection. 00:01:36.190 --> 00:01:39.140 Strong corporate governance is the foundation of safe and sound 00:01:39.160 --> 00:01:43.040 operations, and this foundation lies with individual board members. 00:01:44.040 --> 00:01:47.670 In the broadest sense, directors are responsible for the bank's overall 00:01:47.680 --> 00:01:51.770 performance and well being and effective supervision of the bank's affairs. 00:01:52.770 --> 00:01:56.670 Directors guide and supervise senior management's efforts to promote the bank, 00:01:57.240 --> 00:02:01.620 build a solid reputation for the bank, and understand the needs of the community. 00:02:02.620 --> 00:02:06.320 By electing you to the board, the shareholders, or in the case of 00:02:06.320 --> 00:02:10.420 mutual banks, the depositors, have placed you in a position of trust. 00:02:10.930 --> 00:02:14.590 This means that you're responsible for safeguarding the interest of the bank and 00:02:14.590 --> 00:02:20.970 its stakeholders, including customers, shareholders, employees, regulators, and 00:02:20.970 --> 00:02:22.990 the community where the bank operates. 00:02:23.990 --> 00:02:27.760 A director or trustee's duty to oversee the conduct of bank business 00:02:27.770 --> 00:02:29.460 requires independent judgment. 00:02:30.370 --> 00:02:33.680 Board members need to make informed decisions and critically evaluate 00:02:33.700 --> 00:02:35.340 issues that come before the board. 00:02:36.340 --> 00:02:40.570 In addition, directors have the fiduciary duty to act in good faith and in a 00:02:40.570 --> 00:02:43.900 manner that they reasonably believe is in the best interest of the bank. 00:02:44.900 --> 00:02:47.920 The duties of loyalty and care are key responsibilities 00:02:47.920 --> 00:02:49.520 of individual board members. 00:02:49.950 --> 00:02:53.240 These duties are defined by both federal and state laws, 00:02:53.460 --> 00:02:55.230 although state laws do vary. 00:02:56.230 --> 00:03:00.280 The duty of loyalty requires directors to oversee a bank's affairs with 00:03:00.300 --> 00:03:02.550 candor, honesty, and integrity. 00:03:03.550 --> 00:03:06.580 Directors are prohibited from advancing their own personal or 00:03:06.580 --> 00:03:10.185 business interest or those of others, at the expense of the bank. 00:03:11.185 --> 00:03:15.725 In other words, directors have a fiduciary duty to avoid conflicts of interest. 00:03:16.725 --> 00:03:20.655 The duty of care requires directors to exercise both sound business 00:03:20.655 --> 00:03:23.905 judgment and good faith when overseeing a bank's affairs. 00:03:24.775 --> 00:03:28.485 That means that directors have an obligation to use the same degree of 00:03:28.485 --> 00:03:32.845 care that a prudent individual would use under similar circumstances. 00:03:33.845 --> 00:03:36.875 Now, let's move on to an overview of corporate governance. 00:03:37.875 --> 00:03:41.005 The definition of governance varies, but in general, it 00:03:41.005 --> 00:03:45.285 focuses on people, policies, and processes that provide a bank with 00:03:45.285 --> 00:03:47.235 strategic direction and controls. 00:03:47.975 --> 00:03:52.105 We'll talk more about people, policies, and processes throughout this video. 00:03:53.105 --> 00:03:56.195 The Governance Program provides the foundation for maintaining 00:03:56.235 --> 00:03:58.435 effective risk management practices. 00:03:59.145 --> 00:04:03.555 This helps the bank operate safely and soundly while remaining profitable, 00:04:03.715 --> 00:04:08.525 competitive, and resilient through changing economic and market conditions. 00:04:09.525 --> 00:04:12.475 The FDIC's view of corporate governance is long standing. 00:04:13.310 --> 00:04:15.800 Effective corporate governance frameworks are functionally sound 00:04:15.820 --> 00:04:19.970 and appropriate for the bank's size, complexity, and risk profile. 00:04:20.970 --> 00:04:24.480 Community banks don't need to have an elaborate framework, and they don't 00:04:24.480 --> 00:04:27.650 need to hire consultants in order to maintain an effective program. 00:04:28.650 --> 00:04:32.170 Now that we've talked about the governance framework, let's talk a 00:04:32.170 --> 00:04:35.050 little more about the responsibilities of the board as a whole. 00:04:36.050 --> 00:04:39.190 A bank's board oversees the conduct of the bank's business. 00:04:39.810 --> 00:04:44.170 Effective boards select, supervise, and retain competent senior management. 00:04:44.970 --> 00:04:47.940 Establish the bank's short and long term business objectives. 00:04:48.720 --> 00:04:53.190 and adopt policies to achieve those objectives in a legal and sound manner. 00:04:54.190 --> 00:04:59.360 Furthermore, the board is responsible for monitoring operations and for overseeing 00:04:59.360 --> 00:05:01.000 the bank's business performance. 00:05:01.810 --> 00:05:04.780 All of these actions are part of establishing effective 00:05:04.810 --> 00:05:05.920 corporate governance. 00:05:06.660 --> 00:05:09.960 While outside directors are not typically involved in the day to day 00:05:09.980 --> 00:05:14.130 operations of the bank, they establish goals, policies, and procedures. 00:05:15.130 --> 00:05:18.210 that guide senior management's day to day activities. 00:05:19.210 --> 00:05:22.810 The fundamental duties of directors are aligned with the key elements 00:05:22.820 --> 00:05:24.120 of a corporate governance program. 00:05:25.120 --> 00:05:28.310 Let's begin by discussing the importance of selecting and retaining 00:05:28.320 --> 00:05:31.660 a Senior Management Team that supports the strategic direction 00:05:31.680 --> 00:05:35.750 of the bank and can appropriately administer day to day operations. 00:05:36.750 --> 00:05:40.700 The Board is responsible for supervising and retaining a qualified Senior 00:05:40.700 --> 00:05:45.650 Management Team to carry out the Board's vision, policies, and strategic plan. 00:05:46.435 --> 00:05:50.215 This includes ensuring that senior management officials have the necessary 00:05:50.215 --> 00:05:55.445 experience and knowledge to fulfill their daily obligations and that their 00:05:55.445 --> 00:05:57.715 performance is evaluated regularly. 00:05:58.715 --> 00:06:02.295 Effective boards also re evaluate the bank's senior management as 00:06:02.295 --> 00:06:05.955 well as require staffing levels and skill sets as conditions change, 00:06:06.565 --> 00:06:10.675 such as when the bank engages in new initiatives, technologies, or markets. 00:06:11.230 --> 00:06:12.980 Or becomes exposed to emerging risks. 00:06:13.980 --> 00:06:17.250 Although senior management is primarily responsible for personnel 00:06:17.250 --> 00:06:21.910 administration, including hiring and retaining staff, the board is 00:06:21.910 --> 00:06:26.140 responsible for providing direction and overseeing personnel administration. 00:06:27.070 --> 00:06:31.030 Primary components of effective personnel administration include a 00:06:31.030 --> 00:06:35.490 clear organizational structure with appropriate reporting lines, position 00:06:35.490 --> 00:06:39.510 descriptions, training and development opportunities for bank personnel, 00:06:39.520 --> 00:06:42.320 and sound compensation policies. 00:06:42.870 --> 00:06:46.590 and regular evaluation of senior management performance. 00:06:47.590 --> 00:06:51.300 Succession planning is an important aspect of personnel administration. 00:06:52.110 --> 00:06:56.140 Through the FDIC's regular examination process and community bank outreach, 00:06:56.600 --> 00:07:00.470 we sometimes hear from directors that finding and retaining senior managers 00:07:00.660 --> 00:07:02.330 and their successors can be difficult. 00:07:03.330 --> 00:07:07.520 This process can be especially challenging for banks in small towns and rural areas. 00:07:08.260 --> 00:07:10.490 Finding skilled staff may also be challenging. 00:07:11.490 --> 00:07:14.630 A management succession and talent development plan can 00:07:14.630 --> 00:07:16.270 help address these challenges. 00:07:16.840 --> 00:07:19.920 These plans don't need to be elaborate to be effective. 00:07:20.380 --> 00:07:24.780 Their sophistication largely depends on the size and complexity of the bank. 00:07:25.500 --> 00:07:30.210 While the depth and scope of succession plans vary, informed planning is an 00:07:30.210 --> 00:07:32.020 important component of governance. 00:07:33.020 --> 00:07:35.880 Usually, a successful succession The board is involved in succession planning 00:07:35.890 --> 00:07:40.190 for senior roles, while senior management handles succession planning of lower level 00:07:40.190 --> 00:07:42.490 management, or non management positions. 00:07:43.490 --> 00:07:46.980 A well developed planning effort involves three critical steps. 00:07:47.520 --> 00:07:51.190 The first stage of succession is identifying key senior management 00:07:51.190 --> 00:07:55.080 positions that are critical to the bank's continuity and success. 00:07:55.830 --> 00:08:00.300 In this step, the time horizon for planning is established, considering 00:08:00.300 --> 00:08:02.960 short, medium, and long term needs. 00:08:03.960 --> 00:08:07.855 In the next step, The board would identify and assess potential successors. 00:08:08.545 --> 00:08:11.975 For example, the board could consider promoting current staff 00:08:11.985 --> 00:08:13.375 to key management positions, 00:08:14.375 --> 00:08:18.975 The final step of succession planning is to consider action steps to train, 00:08:19.035 --> 00:08:23.375 mentor, and develop personnel who might transition into critical roles. 00:08:24.045 --> 00:08:27.275 Directors can foster development by providing opportunities 00:08:27.275 --> 00:08:28.255 for cross training. 00:08:28.780 --> 00:08:33.700 For serving on committees, for leading special projects, and by establishing 00:08:33.710 --> 00:08:36.030 mentoring or coaching relationships. 00:08:36.810 --> 00:08:40.310 External development opportunities are also a valuable tool 00:08:40.310 --> 00:08:41.950 in developing successors. 00:08:42.590 --> 00:08:47.160 For example, small community banks often work with local universities and 00:08:47.160 --> 00:08:53.090 colleges to support banking courses or to offer jobs and internships to students. 00:08:54.090 --> 00:08:57.430 Now, let's turn our attention to the concept of dominant officials. 00:08:58.200 --> 00:09:02.210 This term describes situations where a bank official has material influence 00:09:02.250 --> 00:09:06.370 over virtually all decisions involving a bank's policies and operations. 00:09:07.370 --> 00:09:12.120 A dominant official can be an individual, family, shareholder, or 00:09:12.120 --> 00:09:16.070 group of persons with close business dealings or otherwise acting together, 00:09:16.660 --> 00:09:20.650 regardless of whether the individual or any other member of the family or 00:09:20.650 --> 00:09:24.970 group have an executive officer title or receive compensation from the bank. 00:09:25.970 --> 00:09:30.860 Of note, in a situation where a bank has a dominant official, A robust succession 00:09:30.860 --> 00:09:32.700 plan is of even more importance. 00:09:33.700 --> 00:09:37.490 That said, we would like to emphasize that the presence of a dominant 00:09:37.490 --> 00:09:41.760 official is not automatically viewed as a supervisory concern. 00:09:42.240 --> 00:09:47.400 For example, in some banks with limited staff, a dominant official may emerge 00:09:47.430 --> 00:09:52.150 because no one else at the bank has the skills or abilities to operate the bank. 00:09:52.850 --> 00:09:57.120 When a dominant official exists, the key for the board is to ensure 00:09:57.120 --> 00:10:00.110 that an effective governance framework is maintained. 00:10:01.110 --> 00:10:05.350 Dominant officials generally become a supervisory concern in situations 00:10:05.350 --> 00:10:09.090 where internal controls are weak, high risk business strategies are 00:10:09.100 --> 00:10:13.680 implemented, the official lacks sufficient experience, or board 00:10:13.700 --> 00:10:16.250 oversight is inadequate or ineffective. 00:10:17.250 --> 00:10:20.350 Let's discuss some of the risks directors need to be aware of when 00:10:20.350 --> 00:10:22.060 a bank has a dominant official. 00:10:22.990 --> 00:10:27.730 To start, the greatest risk relates to the loss or incapacitation of that official. 00:10:28.680 --> 00:10:32.680 If the official is away for a prolonged period of time or leaves unexpectedly, 00:10:33.145 --> 00:10:37.365 The bank may lose critical knowledge and competent management, and there 00:10:37.365 --> 00:10:42.005 may be a short or long term business disruption, lost productivity, and 00:10:42.045 --> 00:10:43.805 negative impacts on profitability. 00:10:44.805 --> 00:10:49.185 And, the process to replace a dominant official can be expensive and lengthy. 00:10:50.185 --> 00:10:53.955 The other significant risk related to a dominant official is that problems can 00:10:53.965 --> 00:10:57.055 be more difficult to resolve when they are caused by the dominant official, 00:10:57.535 --> 00:11:03.450 or when the official is either not responsive to corrective action, When 00:11:04.450 --> 00:11:09.010 a bank is influenced by a dominant official, effective boards focus on 00:11:09.010 --> 00:11:11.400 establishing a strong control environment. 00:11:12.280 --> 00:11:16.500 Examples of controls include maintaining appropriate segregation of duties 00:11:16.500 --> 00:11:21.610 and responsibilities, board member involvement in the oversight of policies 00:11:21.610 --> 00:11:25.930 and objectives, and establishing independent board committees to 00:11:25.930 --> 00:11:28.400 oversee major operational areas. 00:11:29.400 --> 00:11:32.405 When there is a dominant official, Directors may have to ask 00:11:32.475 --> 00:11:35.455 tough questions and engage in effective challenge discussions. 00:11:36.455 --> 00:11:39.965 But in this process, each director can ensure that the bank's 00:11:39.965 --> 00:11:41.585 best interests are protected. 00:11:42.585 --> 00:11:45.495 Let's move on to the next key element of governance. 00:11:46.145 --> 00:11:49.185 The board establishes the bank's short and long term business 00:11:49.185 --> 00:11:50.855 objectives and policies. 00:11:51.465 --> 00:11:55.785 This involves understanding the bank's risk profile, establishing 00:11:55.795 --> 00:12:00.065 an appropriate risk appetite, and, working with senior management, 00:12:00.375 --> 00:12:02.485 creating a suitable strategic plan. 00:12:03.240 --> 00:12:06.590 Let's discuss these further, starting with the risk profile. 00:12:07.590 --> 00:12:12.190 A community bank's risk profile is made up of many factors, including its business 00:12:12.190 --> 00:12:17.630 model, organizational structure, balance sheet composition, and revenue sources. 00:12:18.630 --> 00:12:22.200 External factors, such as the economy and other market conditions, 00:12:23.200 --> 00:12:25.180 All community banks are different. 00:12:25.680 --> 00:12:28.980 Even banks that may seem similar at first glance can have 00:12:28.990 --> 00:12:30.830 very different risk profiles. 00:12:31.440 --> 00:12:35.830 A bank with a higher risk profile will need stronger risk management practices 00:12:36.060 --> 00:12:38.090 and a higher degree of board oversight. 00:12:39.090 --> 00:12:42.270 There are several questions that members of the board may want to ask 00:12:42.270 --> 00:12:44.150 when evaluating a bank's risk profile. 00:12:44.840 --> 00:12:48.950 For example, are risks properly identified and categorized? 00:12:49.620 --> 00:12:53.950 Meaning, is consideration given to high, medium, and low risk areas? 00:12:54.430 --> 00:12:58.160 As well as to emerging risks, are risks considered for each 00:12:58.170 --> 00:13:00.180 functional area and across the bank? 00:13:01.180 --> 00:13:04.970 How is the bank's risk profile changing over time, and is 00:13:04.970 --> 00:13:06.830 it evaluated periodically? 00:13:07.790 --> 00:13:11.210 Are mitigating controls in place for higher risk areas? 00:13:11.880 --> 00:13:15.230 Is the board comfortable with the bank's risk profile? 00:13:16.020 --> 00:13:19.070 The answer to these questions can help the board member better 00:13:19.090 --> 00:13:20.930 understand the bank's risk profile. 00:13:21.930 --> 00:13:25.795 As a board member, One of your responsibilities is to voice your opinions 00:13:25.915 --> 00:13:30.725 and concerns about the bank's risk profile to other directors and senior management. 00:13:31.725 --> 00:13:35.325 With an understanding of the risk profile, the board can set an 00:13:35.325 --> 00:13:37.535 appropriate risk appetite for the bank. 00:13:38.535 --> 00:13:42.405 The risk appetite is the level of risk the board is willing to take. 00:13:43.175 --> 00:13:46.665 The board can define its risk appetite by establishing a set of 00:13:46.665 --> 00:13:51.595 objectives and risk parameters that guide bank activities and operations. 00:13:52.595 --> 00:13:56.040 When determining the risk appetite, Directors need to consider the 00:13:56.040 --> 00:14:00.220 level of acceptable risk, or potential cost to the bank, versus 00:14:00.260 --> 00:14:04.240 an acceptable level of reward, which may be profits or other benefits. 00:14:05.240 --> 00:14:08.980 Effective boards also evaluate the impact that the risk appetite 00:14:09.040 --> 00:14:12.820 could have on the bank's condition during periods of economic stress. 00:14:13.820 --> 00:14:16.810 Banks with a higher risk appetite will likely require greater 00:14:16.810 --> 00:14:21.360 resources in terms of capital, allowance for losses, earnings, 00:14:21.730 --> 00:14:23.780 and management and staff expertise. 00:14:24.780 --> 00:14:28.590 While setting the risk appetite, Directors can also ascertain whether 00:14:28.590 --> 00:14:32.280 appropriate internal controls are in place to mitigate the identified risk. 00:14:33.280 --> 00:14:37.290 Keep in mind that the board may have to re evaluate its risk appetite 00:14:37.290 --> 00:14:39.480 as conditions or objectives evolve. 00:14:40.290 --> 00:14:44.950 For example, if the risk associated with an existing product, service, 00:14:44.980 --> 00:14:49.200 or strategy changes, the board will need to determine if the activity 00:14:49.220 --> 00:14:51.100 is still appropriate for the bank. 00:14:51.970 --> 00:14:55.190 The board may determine that the level of risk is acceptable to the 00:14:55.190 --> 00:14:57.480 bank and continue with the activity. 00:14:58.230 --> 00:15:03.230 In other words, the board has determined that the level of risk and return is 00:15:03.230 --> 00:15:05.400 aligned with the board's risk appetite. 00:15:06.300 --> 00:15:10.370 Or, the board may decide that the activity needs to be discontinued, 00:15:10.810 --> 00:15:14.630 indicating that the level of risk exceeds the board's risk appetite. 00:15:15.630 --> 00:15:20.450 Likewise, when a new product or activity is considered, effective boards evaluate 00:15:20.500 --> 00:15:28.180 the potential risks, costs, and rewards of the new product or activity Once 00:15:29.180 --> 00:15:33.130 the risk appetite is determined, the board can focus on the development of 00:15:33.130 --> 00:15:37.240 a suitable and sound strategic plan to guide the future direction of the bank. 00:15:38.020 --> 00:15:43.840 Every day, community banks face challenges and opportunities as market conditions, 00:15:43.920 --> 00:15:47.212 competition, innovation, and risks evolve. 00:15:47.212 --> 00:15:51.988 Sound strategic planning is essential for dealing with uncertainty and change. 00:15:51.988 --> 00:15:53.725 For most community banks. 00:15:54.725 --> 00:15:58.145 The strategic planning process is designed so that the bank can answer 00:15:58.175 --> 00:16:00.495 a few basic but important questions. 00:16:01.155 --> 00:16:03.435 For example, Where are we now? 00:16:04.415 --> 00:16:05.305 Where do we want to be? 00:16:06.305 --> 00:16:07.165 How do we get there? 00:16:08.075 --> 00:16:09.525 And how is success measured? 00:16:10.525 --> 00:16:14.875 In order to answer these questions, board members will need a solid understanding 00:16:14.895 --> 00:16:20.035 of the bank's strengths, weaknesses, opportunities, and threats, or as it 00:16:20.035 --> 00:16:22.605 is commonly known, a SWOT analysis. 00:16:23.605 --> 00:16:26.825 The answers to these questions are unique to each bank and are driven 00:16:26.825 --> 00:16:30.755 by numerous factors, including a bank's culture, mission, and goals. 00:16:31.215 --> 00:16:33.255 Business model and risk appetite. 00:16:34.125 --> 00:16:38.065 Directors also need to consider the resources available to the bank, as 00:16:38.065 --> 00:16:43.425 well as the bank's risk profile, size, geographic location, and customer base. 00:16:44.425 --> 00:16:49.505 A constructive strategic planning process involves board members, senior management. 00:16:49.840 --> 00:16:52.560 and other individuals who have an understanding of the bank's 00:16:52.560 --> 00:16:54.890 operations, products, and markets. 00:16:55.820 --> 00:16:59.680 Comprehensive plans include realistic assumptions regarding the current 00:16:59.710 --> 00:17:04.560 and future direction of the bank, contain clear objectives, establish 00:17:04.560 --> 00:17:07.200 risk limits, and set measurable goals. 00:17:08.060 --> 00:17:12.800 Strategic plans are typically evaluated periodically, but can also be adjusted 00:17:12.800 --> 00:17:15.000 to address changing circumstances. 00:17:16.000 --> 00:17:20.420 The time frame covered by strategic plans vary, but a comprehensive plan typically 00:17:20.420 --> 00:17:26.290 covers short, Medium and long-term periods a three to five year planning horizon 00:17:26.290 --> 00:17:28.060 is common for most community banks. 00:17:29.060 --> 00:17:33.380 A board that establishes a clear strategic vision and monitors progress 00:17:33.380 --> 00:17:37.750 in meeting objectives provides a strong foundation for future success. 00:17:38.750 --> 00:17:42.280 With that, let's move on to the next key element of corporate governance. 00:17:43.055 --> 00:17:47.485 The adoption of policies that translate the Board's goals, objectives, and 00:17:47.485 --> 00:17:49.605 risk limits into operating practices. 00:17:50.605 --> 00:17:55.075 Effective policies address all the major operational activities of a bank, 00:17:55.415 --> 00:18:01.085 including loans, investments, funds management, profit and capital planning. 00:18:02.075 --> 00:18:07.715 Key bank policies also address internal controls, the audit program, information 00:18:07.715 --> 00:18:10.405 technology, and compliance activities. 00:18:11.195 --> 00:18:15.625 Policies covering human resources, conflicts of interest, and a code 00:18:15.625 --> 00:18:17.555 of ethics are also important. 00:18:18.475 --> 00:18:22.595 Keep in mind that the types of policies a bank may have and the level 00:18:22.595 --> 00:18:27.105 of detail required for each policy will depend on the size, complexity, 00:18:27.135 --> 00:18:28.825 and risk profile of the bank. 00:18:29.825 --> 00:18:33.365 To be effective, policies need to be appropriate for the bank's size 00:18:33.395 --> 00:18:39.065 and complexity, written and easily understood, communicated to all employees, 00:18:40.065 --> 00:18:44.155 Policies are often also subject to periodic reviews by senior management 00:18:44.215 --> 00:18:46.745 and the board, and updated as needed. 00:18:47.745 --> 00:18:51.935 When senior management recommends changes to policies or plans, it's 00:18:51.935 --> 00:18:56.495 the board's duty to consider how these changes could impact bank operations. 00:18:57.355 --> 00:19:01.985 Effective boards take into account customer needs, available products 00:19:01.985 --> 00:19:06.885 and services, results of recent audits and regulatory examinations, and 00:19:07.245 --> 00:19:10.155 Staff expertise and external factors. 00:19:11.155 --> 00:19:15.645 Policies and procedures are the board's instrument to establish internal controls. 00:19:16.445 --> 00:19:20.005 Directors should ensure that the bank has a system of internal controls that 00:19:20.005 --> 00:19:25.235 is appropriate for the institution, as required by Appendix A to Part 364 00:19:25.265 --> 00:19:27.165 of the FDIC Rules and Regulations. 00:19:28.115 --> 00:19:31.335 Interagency guidelines establishing standards for safety and soundness. 00:19:32.335 --> 00:19:36.135 At a minimum, the internal control system should establish clear lines 00:19:36.135 --> 00:19:40.755 of authority and responsibility, include an effective risk assessment, 00:19:41.175 --> 00:19:46.185 provide timely and accurate financial, operational, and regulatory reports, 00:19:46.820 --> 00:19:51.810 Establish procedures to safeguard and manage assets and evaluate compliance 00:19:51.820 --> 00:19:54.040 with applicable laws and regulations. 00:19:55.040 --> 00:19:59.020 All of these elements, working together, help the Board's efforts to identify, 00:19:59.220 --> 00:20:03.730 monitor, manage, and evaluate emerging risks, as well as helping to protect 00:20:03.770 --> 00:20:05.580 the bank against fraud and abuse. 00:20:06.580 --> 00:20:10.760 Established policies typically include a way to provide the Board with information 00:20:10.760 --> 00:20:12.830 needed to monitor bank operations. 00:20:13.790 --> 00:20:15.860 Board members can fulfill this function. 00:20:16.090 --> 00:20:20.560 by requiring senior management to provide appropriate information, and by 00:20:20.560 --> 00:20:25.610 reviewing internal audits, supervisory reports, other independent reports, 00:20:25.880 --> 00:20:30.140 and periodic reports provided to the Board and its designated committees. 00:20:31.140 --> 00:20:34.910 An internal audit program allows directors to monitor bank activities. 00:20:35.700 --> 00:20:39.660 An effective internal audit program is independent, sufficiently staffed 00:20:39.660 --> 00:20:43.340 with qualified individuals, and commensurate with bank operations. 00:20:44.340 --> 00:20:47.660 Internal audit programs at community banks can take different forms. 00:20:48.660 --> 00:20:50.470 Some banks have an internal audit department. 00:20:50.900 --> 00:20:53.480 While others outsource this function to a third party. 00:20:54.480 --> 00:20:58.940 Banks with limited resources can ensure they maintain an objective internal 00:20:58.960 --> 00:21:03.540 audit function by implementing a comprehensive set of independent reviews. 00:21:04.260 --> 00:21:08.650 A bank employee or a board member can conduct these reviews as long as 00:21:08.650 --> 00:21:12.020 they are qualified and independent of the function under review. 00:21:12.940 --> 00:21:17.010 A side benefit of independent reviews is cross training and staff development 00:21:17.170 --> 00:21:19.070 that can be part of succession planning. 00:21:20.070 --> 00:21:23.790 The individuals responsible for conducting audits or independent reviews 00:21:23.820 --> 00:21:28.060 may report conclusions directly to the board or to a designated committee. 00:21:28.920 --> 00:21:32.200 Directors are responsible for evaluating audit findings and 00:21:32.200 --> 00:21:35.900 ensuring that appropriate actions are taken to address those findings. 00:21:36.900 --> 00:21:40.510 Effective boards also make sure that the audit program is reviewed 00:21:40.530 --> 00:21:44.950 periodically and that it covers new product lines, higher risk activities, 00:21:45.010 --> 00:21:46.980 and emerging areas of concern. 00:21:47.980 --> 00:21:51.870 In addition to the other internal review reports, There are other independent 00:21:51.880 --> 00:21:53.740 reports that directors might consider. 00:21:54.580 --> 00:21:58.260 Common examples include the Annual External Audit of Internal Controls and 00:21:58.260 --> 00:22:04.035 Management Reporting Systems, Periodic Loan Reviews, And regulatory reports of 00:22:04.035 --> 00:22:10.025 examination board meetings are critical for monitoring bank operations in 00:22:10.025 --> 00:22:12.155 advance of board and committee meetings. 00:22:12.365 --> 00:22:15.335 Directors need to receive meaningful information with 00:22:15.335 --> 00:22:16.775 sufficient time for review. 00:22:17.655 --> 00:22:21.645 Generally speaking, effective boards review reports relating 00:22:21.645 --> 00:22:26.295 to income and expense, capital levels, loans and investments, 00:22:26.445 --> 00:22:28.965 problem loans and concentrations. 00:22:29.585 --> 00:22:32.525 The board would also review reports for losses in recoveries. 00:22:33.055 --> 00:22:37.365 Funding Activities, Interest Rate Risk Management, Insider 00:22:37.365 --> 00:22:39.325 Transactions, and Compliance. 00:22:40.025 --> 00:22:43.615 Additionally, The board would review any other information that could 00:22:43.615 --> 00:22:47.405 have a significant impact on the bank, such as how your bank helps to 00:22:47.405 --> 00:22:48.925 meet the community's credit needs. 00:22:49.925 --> 00:22:54.115 When reviewing reports, directors often focus their attention on any 00:22:54.115 --> 00:22:58.595 significant changes and the reasons for deviations from established plans. 00:22:59.575 --> 00:23:03.805 The frequency of board meetings and reporting is not the same for all banks. 00:23:04.445 --> 00:23:08.255 As such, Directors need to ensure that reports are tailored to 00:23:08.255 --> 00:23:12.045 meet their informational needs and have sufficient detail to 00:23:12.045 --> 00:23:14.265 properly monitor bank operations. 00:23:15.265 --> 00:23:19.775 With that, let's move on to the next and last critical element of governance, 00:23:20.375 --> 00:23:22.385 the oversight of the bank's performance. 00:23:23.385 --> 00:23:28.355 In order to provide effective oversight, directors need to maintain independence, 00:23:28.675 --> 00:23:32.645 participate actively, and stay engaged with the bank's activities. 00:23:33.385 --> 00:23:37.915 Without doubt, one of the best ways for directors to participate actively 00:23:37.915 --> 00:23:42.665 in the bank's affairs is to regularly attend board and committee meetings. 00:23:43.665 --> 00:23:47.315 Adequate preparation and participation in these meetings is key. 00:23:48.135 --> 00:23:51.935 Directors need to have a sufficient understanding of the issues presented 00:23:51.935 --> 00:23:55.945 to enable them to exercise independent judgment and offer their own ideas to 00:23:56.125 --> 00:24:00.615 the board, ask questions and follow up until they are satisfied with the answer, 00:24:01.435 --> 00:24:05.395 voice concerns if something doesn't seem reasonable, and and communicate 00:24:05.435 --> 00:24:07.285 any dissent from a board's decision. 00:24:08.285 --> 00:24:13.315 It's also very important to document board reviews and conclusions and keep accurate 00:24:13.315 --> 00:24:17.555 minutes of meetings, including directors votes on matters coming before the board. 00:24:18.555 --> 00:24:22.055 The FDIC has a long standing commitment to keep directors 00:24:22.055 --> 00:24:24.155 informed of regulatory matters. 00:24:24.745 --> 00:24:28.595 The FDIC welcomes the opportunity to speak with directors and invites 00:24:28.595 --> 00:24:32.985 you to participate in supervisory discussions held during examinations. 00:24:33.955 --> 00:24:36.765 Please note that director attendance is voluntary. 00:24:37.095 --> 00:24:40.915 And a lack of participation in examination meetings will not be 00:24:40.915 --> 00:24:43.035 viewed negatively by examiners. 00:24:44.035 --> 00:24:47.825 In addition, the FDIC often meets with the Board at the conclusion 00:24:47.845 --> 00:24:51.615 of an examination to discuss examination conclusions and findings. 00:24:52.445 --> 00:24:56.455 The invitation is intended to expand communication and build a solid working 00:24:56.455 --> 00:25:00.055 relationship between directors and examiners during safety and soundness. 00:25:01.055 --> 00:25:04.585 We've shared a lot of information with you about your responsibilities 00:25:04.605 --> 00:25:06.285 and effective corporate governance. 00:25:06.895 --> 00:25:09.555 Now, let's move on to regulatory requirements. 00:25:10.485 --> 00:25:14.175 Directors ensure that management adheres to applicable regulatory 00:25:14.175 --> 00:25:18.285 requirements and that a system to monitor compliance is in place. 00:25:19.095 --> 00:25:24.275 The FDIC's Appendix A to Part 364, and the Federal Reserve Board's 00:25:24.325 --> 00:25:29.675 Regulations O and W are key regulations that pertain to corporate governance. 00:25:30.065 --> 00:25:31.355 Let's review these further. 00:25:32.355 --> 00:25:37.715 The FDIC Safety and Soundness Standards are set out in Appendix A to Part 364 00:25:37.745 --> 00:25:39.975 of the FDIC Rules and Regulations. 00:25:40.795 --> 00:25:44.455 Effective corporate governance programs incorporate the standards outlined 00:25:44.455 --> 00:25:46.195 in these interagency guidelines. 00:25:47.015 --> 00:25:50.565 We reviewed several of these elements in prior sections of this video, 00:25:50.985 --> 00:25:56.600 including internal controls, lines of authority, risk assessment, reporting 00:25:56.600 --> 00:26:01.400 and monitoring, compliance with laws and regulations, and internal audit. 00:26:02.400 --> 00:26:07.210 In addition, Appendix A requires banks to maintain prudent credit underwriting and 00:26:07.210 --> 00:26:12.530 administration practices, have appropriate systems to identify problem assets and 00:26:12.530 --> 00:26:17.560 prevent asset quality deterioration, and ensure that asset growth is prudent. 00:26:18.260 --> 00:26:21.000 Appendix A also includes standards for managing the 00:26:21.000 --> 00:26:22.645 financial aspects of the bank. 00:26:22.945 --> 00:26:27.395 and for preventing payment of excessive compensation, fees, and benefits. 00:26:28.105 --> 00:26:32.595 Finally, Appendix A endorses forward looking risk management practices 00:26:32.635 --> 00:26:34.415 that promote financial integrity. 00:26:35.415 --> 00:26:39.635 While not covered in this video, banks must also comply with the data protection 00:26:39.635 --> 00:26:44.895 responsibilities detailed in Part 364, Appendix B of the FDIC Rules and 00:26:44.895 --> 00:26:49.865 Regulations, which sets forth criteria for a bank's information security program, 00:26:50.265 --> 00:26:52.535 risk assessments, and board reporting. 00:26:53.535 --> 00:26:58.495 Now, let's briefly review Regulation O and Regulation W, which apply 00:26:58.495 --> 00:27:01.115 to all FDIC supervised banks. 00:27:01.925 --> 00:27:06.445 Regulation O covers transactions between a bank and its executive officers, 00:27:06.555 --> 00:27:08.825 directors, or principal shareholders. 00:27:09.635 --> 00:27:14.595 In contrast, Regulation W addresses transactions between a bank and its 00:27:14.595 --> 00:27:16.935 affiliated business organizations. 00:27:17.805 --> 00:27:21.355 The basis for these transactions must be fully documented. 00:27:22.255 --> 00:27:26.170 As a general rule, Transactions with insiders and affiliates must be 00:27:26.170 --> 00:27:29.900 beyond reproach and subject to the same objective criteria offered to 00:27:29.900 --> 00:27:32.130 ordinary customers and third parties. 00:27:33.130 --> 00:27:36.730 Directors are responsible for ensuring compliance with these regulations, 00:27:37.070 --> 00:27:40.350 which may result in the adoption of policies that prevent preferential 00:27:40.350 --> 00:27:52.325 transactions, conflicts of interest, inappropriate self dealing, Now, 00:27:53.325 --> 00:27:57.365 let's review some questions the FDIC frequently receives regarding director 00:27:57.365 --> 00:27:59.735 responsibilities and corporate governance. 00:28:00.735 --> 00:28:04.875 First, how can board members foster a culture of regulatory compliance? 00:28:05.875 --> 00:28:10.085 Let's start by saying that directors are not expected to be personally 00:28:10.085 --> 00:28:12.485 knowledgeable of all laws and regulations. 00:28:12.485 --> 00:28:16.345 Let's But they need to make certain that high ethical standards and 00:28:16.345 --> 00:28:21.025 compliance with all laws and regulations, including those relating to consumer 00:28:21.025 --> 00:28:29.060 protection, The tone for our culture of compliance is set at the top. 00:28:29.840 --> 00:28:35.080 Effective boards also adopt policies, procedures, and controls that are 00:28:35.080 --> 00:28:37.570 consistent with regulatory requirements. 00:28:38.320 --> 00:28:41.730 This includes processes for monitoring bank activities and 00:28:41.730 --> 00:28:46.080 detecting noncompliance, as well as personnel training that promotes 00:28:46.080 --> 00:28:48.340 compliance in daily operations. 00:28:49.150 --> 00:28:53.320 In addition, Staying apprised of compliance related matters is a 00:28:53.330 --> 00:28:55.540 key aspect of board oversight. 00:28:56.540 --> 00:29:00.550 Violations of laws and regulations can reflect negatively on the board 00:29:00.590 --> 00:29:03.920 and management, and can expose a bank to financial and other risks. 00:29:04.920 --> 00:29:08.810 If violations occur, directors need to ensure that comprehensive, 00:29:08.810 --> 00:29:11.789 corrective actions are implemented as quickly as possible. 00:29:12.330 --> 00:29:15.490 and that processes are reviewed and updated as necessary 00:29:15.530 --> 00:29:16.760 to prevent reoccurrence. 00:29:17.760 --> 00:29:21.110 Another question we receive is whether board members can be held 00:29:21.130 --> 00:29:25.390 personally liable for a bank's noncompliance with laws and regulations. 00:29:26.390 --> 00:29:29.870 Regulatory enforcement actions against bank directors are rare. 00:29:30.570 --> 00:29:34.340 Similarly, most civil actions involve former directors of failed 00:29:34.350 --> 00:29:38.230 banks where there was a demonstrated failure of the directors to satisfy 00:29:38.250 --> 00:29:40.040 their duty of loyalty or care. 00:29:40.990 --> 00:29:45.935 Depending on state law, Directors may be personally liable for breaches of trust, 00:29:46.425 --> 00:29:53.775 fraud, gross negligence, negligence, abuse of power, and asset misappropriation. 00:29:54.775 --> 00:29:59.060 In all cases, they Legal actions are not taken lightly, and the 00:29:59.060 --> 00:30:02.620 FDIC will only pursue such actions after rigorous investigation. 00:30:03.620 --> 00:30:07.550 Board members who fulfill their duties and responsibilities are unlikely to 00:30:07.550 --> 00:30:09.760 face legal actions initiated by the FDIC. 00:30:09.760 --> 00:30:15.240 The last question we'll cover today is, are there any common 00:30:15.260 --> 00:30:18.850 areas of risk or concern pertaining to corporate governance? 00:30:19.590 --> 00:30:24.430 Potential signs of risk or concern may include reluctance from senior management 00:30:24.440 --> 00:30:29.865 to engage with directors, Repeat audit or examination deficiencies, frequent 00:30:29.915 --> 00:30:35.365 exceptions to policy, deviation from established plans, or board members 00:30:35.365 --> 00:30:37.085 receiving insufficient information. 00:30:38.085 --> 00:30:41.405 It may also include situations where fluctuations in financial 00:30:41.405 --> 00:30:45.905 trends, personnel management issues, or consumer complaints are noted. 00:30:46.905 --> 00:30:50.235 As we conclude our discussion on corporate governance, we'd like 00:30:50.235 --> 00:30:54.165 to remind you that the FDIC has additional videos and resources. 00:30:54.595 --> 00:30:59.048 which can be found on the Banker Resource Center at www. 00:30:59.048 --> 00:31:00.054 fdic. 00:31:00.055 --> 00:31:00.515 gov. 00:31:01.225 --> 00:31:05.715 Directors can also keep up with industry developments by participating in trade 00:31:05.725 --> 00:31:11.145 association events and by staying abreast of local, regional, and national news. 00:31:11.825 --> 00:31:16.025 If you have questions or comments, please contact your bank's Risk Management Case 00:31:16.025 --> 00:31:22.735 Manager or Compliance Review Examiner or email the FDIC at supervision at fdic. 00:31:22.755 --> 00:31:23.175 gov. 00:31:24.015 --> 00:31:25.935 Thank you for viewing this video. 00:31:26.285 --> 00:31:29.155 We hope you found it both useful and informative.