Insights: Article

Developing a Corporate Governance Structure

By Jeff Campbell

August 01, 2016

As has been the case for years, community banks continue to serve as the primary economic driver of cities and towns across the country. However, because the bank regulatory and legal atmosphere has become more daunting, the ability to recruit and retain individuals to serve as directors of a bank can be challenging.

In its April 2016 Supervisory Insights publication, the Federal Deposit Insurance Corporation dedicated the entire edition to Corporate Governance of a Community Bank. Much of the information referred to the 1988 FDIC’s Pocket Guide for Directors, which is a set of common-sense principles that describe a framework for corporate governance that still applies today. And while those core principles have not changed significantly, today’s bank director can benefit from the corporate governance lessons and experiences of others as industry conditions and challenges evolve.

Corporate Governance?
Although definitions of corporate governance vary, the focus often times is on relationships, policies and processes that provide strategic direction and controls for an organization. The structure is designed to provide for safe and sound operations, as well as a framework to remain profitable and resilient through challenging economic and market conditions. It’s important to recognize that there is no one-size-fits-all approach to corporate governance. A key element in developing a corporate governance structure is to make sure it is appropriate for the size, complexity and risk profile of the bank.

Board and Management: Working Together Independently
Board members and senior management are key to the overall success of the bank. The challenge can be in finding ways to work collectively while maintaining independence. The board and individual directors should establish and maintain their independence. A bank director is responsible for overseeing the conduct of the bank’s business using independent judgement. That requires board members to appropriately challenge senior management opinions, recommendations and assessments when appropriate. Not having that ability or expectation, but routinely deferring to management’s decisions without exercising their own informed judgements, is an indication that a director is not adequately serving their institutions, their stockholders or their communities. The results can put the bank on a path to increased regulatory scrutiny. 

Bank Culture Starts at the Top
History shows that bank directors who established and maintained strong foundations built from the top down in oversight of the bank’s operations provided critical insight in supervisory efforts. This sends a clear message from the bank’s board to the staff that the board values a strong risk management culture that includes a strong ethical culture, i.e., that the interests of the customers, investors and community take precedence over short-term profits. Trust and public confidence are at the center of a bank’s success. Without them, the ability to attract depositors and investors can be challenging.

Board Effectiveness: How are you doing?
As with any successful organization, the ability to critically self-assess plays a valuable role in rating bank management, including the performance of the board of directors. These “report cards” will help answer questions that address relationships amongst board members, the need for additional training, contributions of individual board members, skills and competency of board members, the need for changes to board committees, along with any number of other areas that specifically measure performance of both individual board members and the functional value of the board as a whole.

The days of a board meeting consisting of approving expense checks and loans along with a few policies are a distant memory. Today’s directors are expected to keep themselves informed of the activities and condition of the bank. Ongoing education and staying abreast of industry trends and regulatory developments are expected. Putting in place a corporate governance framework will help members navigate their way to being a valuable member of the bank’s board of directors.

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