The Role of outside Directors: Recommendations for Change

By Apfelberg, Robert S. | American Banker, March 17, 1994 | Go to article overview

The Role of outside Directors: Recommendations for Change


Apfelberg, Robert S., American Banker


REGULATORS have increased their attacks. It is not surprising that newspapers refer to bank directors as an endangered species.

New regulations, legal threats, shareholder activism, and changing practices in nonbank corporate governance are putting conflicting pressures on the outside directors of banks and savings and loans.

Recently there have been disturbing changes in the attitudes of shareholders, regulators, and the courts.

Major pension and mutual funds have begun acquiring substantial blocks of bank securities, bringing with them the influence of the emerging changes in nonbank corporate governance rules.

Regulators have increased their legal attacks on directors of failed banks, and appear to have an unlimited legal budget and the support of Congress and the administration.

Show of Force

Investigators customarily hired by the regulators have indicated that they routinely recommend suing failed banks' directors in cases where: (1) the directors have substantial personal net worths, (2) the board minutes are sufficiently general and nondescriptive to create a prima facie case for director inactivity or omission, or (3) the directors have directors and officers professional liability insurance coverage.

They candidly admitted they obtained further investigatory assignments by participating in regulatory agency recoveries while ignoring the costs expended.

Their personal rationale for these actions was to create vivid public examples that would send clear messages to bank directors and discourage future inappropriate conduct.

With such a strong show of force by regulators it is not surprising that newspapers are replete with articles referring to bank directors as an endangered species.

Overhaul Needed

In an attempt to assuage potential bank directors' fears and to provide clear guidelines for director conduct, the Office of Thrift Supervision and FDIC each issued an official statement on directors' and officers' responsibilities.

Careful analysis of these statements, which were surprisingly similar, reveals the need for most boards to undergo a major overhaul of activities, composition, and structure. Both the FDIC and OTS require the following conduct:

"This means that directors are responsible for selecting, monitoring, and evaluating competent management; establishing business strategies and policies; monitoring and assessing the progress of business operations; establishing and monitoring adherence to policies and procedures required by statute, regulation, and principles of safety and soundness; and for making business decisions on the basis of fully informed and meaningful deliberation."

Duties of Management

Bank management's responsibilities are stated as follows:

"Officers are responsible for implementing the policies and business objectives set by the board; for running the day-to-day operations for the institution consistent with those policies and objectives and in compliance with applicable laws, rules, regulations and the principles of safety and soundness.

Directors must require and management must provide the directors with timely and ample information of discharge board responsibilities."

The clearest interpretation of these guidelines is that bank directors can no longer safely rely upon senior management as their sole source of information and advice regarding the Bank's operations and activities.

Bank directors are apparently required to go beyond observing only the information which management typically provides. Instead, it appears that now directors are being held to a higher standard, thereby requiring them to develop independent sources of information and analysis.

Directors now appear to have an increased affirmative duty to: (1) be fully aware of the bank's actual operations, including the bank's products and services, (2) initiate appropriate business strategies and policies, and (3) monitor and evaluate management through personal involvement experience, expertise, and advice from professional advisers. …

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