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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)
A RKANSAS | 29 | Fall 2024
COMMUNITY BANKER