Prepared by Terry L. Stroud – February 2020
A Part Time Job with Full Time Responsibility – Board of Directors
Before getting into the specifics of this article, I would like to pose the following question:
How does an effective board of directors overcome the limitations associated with the part-time role where the requirements placed upon them are becoming more and more complex?
This is a problem that is becoming increasingly difficult to fully understand. My career has led me to numerous countries and many different cultures in assisting Central Banks deal with regulating a highly politicized industry. However, one thing most of these countries have in common is that as the financial services industry continues to evolve, the duties of the directors are becoming more and more complex and demanding which brings me to a very important point that I continue to encounter in my engagements with Central Banks.
The above noted dilemma is highlighted by the fact that most board members only spend 1-2 days each month/quarter attending to the affairs of their bank. Because of these limitations, the Central Banks and to some extent the general business community must assist the board by establishing guidelines to help with this oversight process.
The desired outcome is to minimize this dilemma by taking the following actions:
- Ensure the majority of the directors are independent of the daily activities of the bank;
- Ensure the board has established an independent audit function that reports directly to the audit committee;
- The board has adopted a written code of ethics that each director must sign annually;
- The board has a suitable committee structure consistent with its size and complexity; and
- Approved written standards for ensuring the bank’s transactions with insiders/affiliates are sound and considered only from the bank’s interest.
Analyzing Board Performance
As I continue to highlight in my lectures, evaluating the effectiveness of the board of directors (and management) is probably the most difficult job many Central Banks must confront since you are dealing with people. In many cases the relevant concerns deal with sensitive, emotional, and personal issues of very prominent people.
Therefore, the Central Bank staff should, at a minimum, perform the following reviews:
- Board Minutes – one of the primary sources of information an inspector needs to evaluate a board of directors and its actions are contained in the bank’s minutes including both regular and committee meetings.
- Management Reports – the adequacy of management’s reports to the board should be thorough, accurate and cover all aspects of the bank’s operations;
- Attendance and performance – the minutes should provide adequate evidence of regular attendance by the individual directors. It is my personal opinion that all directors should attend at least 75 percent of all regularly scheduled board meetings – this is my minimum benchmark for acceptable attendance;
- Accurate representation – board minutes should be maintained in such detail that a complete and accurate representation of meeting discussions, including all dissenting opinions and votes; and
- Review and Sign – each director should have the opportunity to review and, if appropriate, modify all minutes before they are ratified by the full board.
In conclusion, the above comments reflect the types of activities the boards should be taking in discharging their responsibility. And let us not forget, a board’s most important responsibility is to select a capable Chief Executive Officer that is given the latitude he/she needs to run the day-to-day activities of the bank; therefore, the board must be certain this is the right person to lead the bank.
Where governance is strong, the board addresses and corrects problems early before they pose a threat to the bank’s viability. Where it is weak or nonexistent can result in the bank’s failure.
