Financial Update (Second Quarter 2003)



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Corporate Governance in the Spotlight

By Lynn Woosley, senior financial analyst

Corporate Governance

Financial reporting and corporate governance scandals have shaken investor confidence in corporate America. In response, Congress passed the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) to reform corporate disclosure and financial reporting.

In a recent speech to the Pennsylvania Association of Community Bankers, Governor Susan Bies of the Federal Reserve System, said, “Although Sarbanes-Oxley applies only to institutions that register their shares with the Securities and Exchange Commission, its elements should be considered by virtually all commercial banks and by most other companies of any material size. They could well highlight weaknesses in your own procedures.”

The NYSE and NASDAQ stock exchanges have proposed new rules for listed companies. The rules are, in many cases, even more stringent than Sarbanes-Oxley or the provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA).

In 2002, the Federal Reserve Bank of Atlanta surveyed several publicly traded bank holding companies to assess their corporate governance practices. Jointly, these 17 holding companies owned 64 banks and thrifts and operate in urban, suburban and rural areas of 18 states and the District of Columbia. Tables 1 and 2 summarize key corporate governance statistics.

Some corporate governance experts consider the characteristics in tables 1 and 2 to be indicators of a board’s expertise, independence and commitment. For comparison purposes, similar statistics are included (when available) for a group of the largest U.S. banking companies. The differences in board size and composition appear to be primarily a function of the size and complexity of the business. A 2002 study by Korn/Ferry International and Corporate Board Member magazine indicates that the average size of public company boards is 11 directors, with 26 percent insiders. The National Association of Corporate Directors recommends that boards have nine to 15 members.

Banking companies tend to have larger boards, possibly as a result of mergers and acquisitions or state laws specifying minimum numbers of bank directors. Good governance requires an active board with adequate independence and industry and financial knowledge to provide strategic direction, risk and performance monitoring, and management oversight. Deviation from industry or peer group averages alone is not evidence of poor governance.

Related articles in this issue
Banks’ Compliance with the Sarbanes-Oxley Act
Beyond Sarbanes-Oxley: Other Corporate Governance Issues

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