Financial Update (First Quarter 2004)


 Directors Under
 More Scrutiny

 Fed Studies Checks
 and E-payments

 Mexican Secondary
 Mortgage Market

 Fed Emphasizes
 CIBCA Compliance

 Guynn Stresses
 Long-Term Policy

 Kohn Says U.S. Is
 Key in World

 New Tool for

 New Sixth
 District Directors

 Two Newsletters


 Did You Know?

 Data Bank

 Circular Letters



Director Accountability Higher in Wake
of Recent Corporate Scandals

Recent governance scandals, and the regulatory responses that followed, have focused new attention on the role of corporate directors. Scrutiny of directors and expectations of their accountability have never been greater. Today, integrity and oversight responsibilities prevail over directors’ ability to generate business.

All corporate directors have a legal and fiduciary obligation to protect shareholder interests. But banks’ crucial role in the U.S. economy and federal deposit insurance subsidies give bank directors the added responsibility of ensuring that banks operate safely and soundly and with adequate capital for the risks they assume. A banking governance failure of the magnitude of what has occurred recently in other industries could severely disrupt the financial and payment systems.

Managing Risk in Today’s Environment

Because each bank is unique, governance standards must be appropriate for the size of the institution and the nature, scope, and risk of its activities. Whatever a bank’s characteristics, though, the following are key elements of good corporate governance for its directors.

Five elements of good corporate structure

1. Directors should have the skills, integrity, knowledge, and experience appropriate to fulfill their responsibilities. This is especially important in light of recent evidence of nonbank boards whose members failed to understand material financial transactions and their risks.
2. Directors must be trustworthy and guard the confidentiality of proprietary, regulatory, and customer information. Trust is particularly important for bank directors given the nature and sensitivity of the information banks hold.
3. Directors must commit adequate time and attention to overseeing the bank’s activities. Such oversight requires participating regularly at board and committee meetings; understanding the company’s mission, objectives, business lines, and risks; and reviewing audit and regulatory reports and ensuring that weaknesses are addressed.
4. Directors, not management, determine the company’s risk appetite and strategic direction. The board then must hire competent management and establish the committee structures needed to carry out the corporate strategy. Directors also must evaluate management’s performance and ensure that compensation is aligned with shareholder interests and is not detrimental to the organization’s safety and soundness. Establishing proper management compensation may be better achieved when a majority of directors is independent from management.
5. Directors must be diligent in managing conflicts of interest between the institution and its board, management, principal shareholders, and affiliates. Adopting a code of ethics is strongly encouraged, as is documenting policies, transactions, and exceptions to policies involving insiders.

A solid foundation
While director responsibilities are far more exhaustive in practice, a board that observes these principles has a solid foundation for building a culture of good corporate governance.

By Lynn Woosley, senior financial analyst, with Brian Bowling, director of Policy and Supervision Studies in the Atlanta Fed’s Supervision and Regulation Department.

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