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FROM THE BOARD ROOM


                     Requirements and Expectations

                                    of Bank Directors


         BY PHILIP K. SMITH and CHARLES PLUNKETT


                                                                effective supervision of bank affairs, (iii)
         The requirements and expectations for bank directors
                                                                adoption and adherence to sound policies
         seems to constantly be moving and evolving. But, at its core, members   and objectives, (iv) avoidance of self-serving
         of a Board of Directors must recognize their fiduciary responsibilities to   practices, (v) awareness of financial condition
         the shareholders and to the institution in general to oversee the overall   and management practices, (vi) maintenance
         direction of the bank and promote its health, success and viability. In   of reasonable capitalization, (vii) compliance
         helping to fulfill these duties to the shareholders, the Board of   with banking laws and regulations, and (viii)
         Directors nominates and appoints a capable team of managers to   guarantee of a beneficial influence on the
         oversee the day-to-day operations of the bank. With competent   community’s economy.
         management in place, it is not a director’s job to micromanage the
         executives, but rather to ensure that there is a sufficient and working   Understanding these various requirements
         risk management system in place so that directors have appropriate   from the regulators can be burdensome and   Philip Smith is Chairman &
         and continued oversight of the risks inherent in the banking industry.    certainly require a level of monitoring from   CEO of Gerrish Smith Tuck,
                                                                Banks. Therefore, many banks choose to   Consultants and Attorneys
         While this obligation may be intuitive to some, many members of a   enlist outside assistance, at least annually, to   an ACB Associate Member.
         Board of Directors may not be directly involved with banking other   help identify and address weaknesses   You may connect with
         than in their duties on the Board. So, it must be emphasized that the   regarding board knowledge in overall   Philip at
         risk management knowledge and responsibility is not only a moral and   enterprise risk management and other areas.    (901) 767-0900 or
         ethical duty of a director, but also, likely, a duty under state and                        psmith@gerrish.com.
         federal law. As a fiduciary of a company, the laws of the state in which   Other Considerations
         it is incorporated govern the breadth of the role as an overseer of the   As heavily regulated as banks are, the risk
         bank’s wellbeing.                                      management framework is likely heavily
                                                                geared towards managing financial risk and
         Although directors have historically not been found culpable or liable   exposure. Directors must always be cognizant
         for the failure of a company except in a narrow set of circumstances,   of other types of risks that come about from
         regulatory changes coupled with potential economic shifts may lead to   the mere operation of a business, whether it
         a broadening of the scope of a director's legal responsibility to assess   be a bank or a bakery. These risks include the
         and manage risk. Therefore, it is important for directors to address   following:
         continuing education and training needs either during normal Board   •   Risk of Fraud – While it is the executive’s
         meetings or at special training or planning sessions to remain aware of
                                                                    job to hire and monitor employee
         individual responsibilities.
                                                                    performance, as a director you should
                                                                    ensure that the Risk Officer has available
         Primary Federal Regulatory Obligations
                                                                    to them the proper tools for monitoring
         Banking is by its very nature a risk-taking business. Although the
         primary federal regulators do not currently mandate any specific form   and catching fraud, both by employees
                                                                    and outsiders.
         of a risk management system be adopted, they do strongly urge banks   •                     Charles Plunkett is an
         to continuously monitor their exposure to risk. The OCC has identified   Reputational Risk – Do you have a plan   attorney with Gerrish Smith
         several categories of risk relevant to financial institutions, including   in place in case your institution is the   Tuck, an ACB Associate
                                                                    victim of an adverse report or incident?
         credit risk, interest rate risk, liquidity risk, price risk, operational risk,            Member.  You may connect
         compliance risk, strategic risk, and reputation risk. These eight risks,   •   Risk of Disaster – Is your data backed up   with Charles at
         which are incorporated into the Risk Assessment System (“RAS”) for   off-site? Do you have a plan in place if   (901) 767-0900 or
         evaluating banks during examinations, are further incorporated into   disaster should strike one or all of your   cplunkett@gerrish.com.
         the Comptroller’s Handbook regarding Bank Supervision Process. A   branches?
         major component of their RAS system is the quality of risk   •   IT Risk – Is your website safe from computer-based attacks? How
         management already in place at the bank. The evaluation of the risk   good is the level of security offered to your internet banking
         management system focuses on the policies of the Board, the   customers?
         processes of the Board, the personnel, both within the bank and on the   •   Employment Related Risk – Do you have sufficient policies and
         Board, and the control systems that are in place. Although there is no   procedures in place to safeguard yourself in the event of an
         specific form which risk management systems must take, it is   employee lawsuit (racial discrimination, sexual harassment, etc.)?
         important that they meet the scrutiny already given them by the
         regulators.                                            Best Practices
                                                                Directors should formulate a plan that best fits their specific institution.
         The Federal Reserve Commercial Examination Manual (“Manual”) also   While a risk management plan must do certain things, there is no one
         provides key concepts related to bank management and internal   size fits all framework that will be effective. An effective plan will not
         controls. The Manual provides that directors play an important role in   only identify and communicate risks to directors, but will also respond
         overseeing the affairs of a bank, and if that role is neglected, directors   to an adverse incident in a timely and effective manner. Directors may
         may be financially liable if the bank fails or experiences other losses.   ensure that an Audit Committee has been formed to address financial
         Director responsibilities include (i) selecting competent officers, (ii)
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