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The Directors Tutorial


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The content of this powerpoint was taken from regulatory websites and formatted to facilitate presentation to bank directors.

The content of this powerpoint was taken from regulatory websites and formatted to facilitate presentation to bank directors.

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  • 1. The Director’s Tutorial
    Today, as never before, directors need to be on top of their game. They must understand their responsibility as a director of a financial institution.
    This tutorial is designed to help board members learn how to fulfill their responsibility to their shareholders and regulators, as well as create a comfort that they know and understand the processes used by regulators.
    In an effort to customize this tutorial for all end users, it will not auto advance any page.
    You will need to click on each page to forward it.
  • 2. CREDITS
    The content of this presentation was copied from the FFIEC and OCC websites.
    The content was formatted to simplify training for Bank Directors.
    Now on with the presentation…………
  • 3. Presented by: Deborah Williams
    Ace In The Hole Management, LLC
    All rights reserved 2009
    A Directors Tutorial
  • 4. Change in the financial marketplace has created a more competitive and challenging environment for all financial institutions. As a consequence of this change, the role of the financial institution board member has grown in importance and complexity.
    Recent corporate scandals, the economic impact on financial institutions and the passage/revisions of the Sarbanes-Oxley Act of 2002 have again brought the public's attention to the need for a strong and independent board of directors. While financial headlines may change, the banking industry's longstanding principles of corporate governance remain valid today.
    Financial Directors
  • 5. General Guidelines
    A financial institution’s board of directors oversees the conduct of the institution’s business. The board of directors should:
    select and retain competent management;
    establish, with management, the institution’s long- and short-term business objectives, and adopt operating policies to achieve these objectives in a legal and sound manner;
    monitor operations to ensure that they are controlled adequately and are in compliance with laws and policies;
    oversee the institution’s business performance; and
    ensure that the institution helps to meet its community’s credit needs.
    These responsibilities are governed by a complex framework of federal and state law and regulation. These guidelines do not modify the legal framework in any way and are not intended to cover every conceivable situation that may confront an insured institution. Rather, they are intended only to offer general assistance to directors in meeting their responsibilities. Underlying these guidelines is the assumption that directors are making an honest effort to deal fairly with their institutions, to comply with all applicable laws and regulations, and to follow sound practices.
  • 6. Maintain Independence
    The first step both the board and individual directors should take is to establish and maintain the board’s independence. Effective corporate governance requires a high level of cooperation between an institution’s board and its management. Nevertheless, a director’s duty to oversee the conduct of the institution’s business necessitates that each director exercise independent judgment in evaluating management’s actions and competence. Critical evaluation of issues before the board is essential.
    Directors who routinely approve management decisions without exercising their own informed judgment are not adequately serving their institutions, their stockholders, or their communities.
  • 7. Keep Informed
    Directors must keep themselves informed of the activities and condition of their institution and of the environment in which it operates. They should attend board and assigned committee meetings regularly, and should be careful to review closely all meeting materials, auditor’s findings and recommendations, and supervisory communications. Directors also should stay abreast of general industry trends and any statutory and regulatory developments pertinent to their institution. Directors should work with management to develop a program to keep members informed. Periodic briefings by management, counsel, auditors or other consultants are helpful, and more formal director education seminars should be considered.
    The pace of change in financial institutions today makes it particularly important that directors commit adequate time to be informed participants in the affairs of their institution.
  • 8. Ensure Quality Management
    The board of directors is responsible for ensuring that day-to-day operations of the institution are in the hands of qualified management. If the board becomes dissatisfied with the performance of the chief executive officer or senior management, it should address the matter directly.
    If hiring a new chief executive officer is necessary, the board should act quickly to find a qualified replacement. Ability, integrity, and experience are the most important qualifications for a chief executive officer.
  • 9. Supervise Management
    Supervision is the broadest of the board’s duties and the most difficult to describe, as its scope varies according to the circumstances of each case. Consequently, the following suggestions should be viewed as general guidelines.
    Establish Policy
    Monitor Implementation
    Provide Independent Reviews
    Heed Supervisory Reports
    Avoid Preferential Transactions
    An explanation of each of these guidelines follows:
  • 10. Establish Policies
    The board of directors should ensure that all significant activities are covered by clearly communicated written policies that can be readily understood by all employees. All policies should be monitored to ensure that they conform with changes in laws and regulations, economic conditions, and the institution’s circumstances. Specific policies should cover at a minimum:
    loans, including internal loan review procedures
    asset-liability/funds management
    profit planning and budget
    capital planning
    internal controls
    compliance activities
    audit program
    conflicts of interest
    code of ethics
  • 11. These policies should be formulated to further the institution’s business plan in a manner consistent with safe and sound practices. They should contain procedures, including a system of internal controls, designed to foster sound practices, to comply with laws and regulations, and to protect the institution against external crimes and internal fraud and abuse.
    The board’s policies should establish mechanisms for providing the board the information needed to monitor the institution’s operations. In most cases, these mechanisms will include management reports to the board.
  • 12. Monitor Implementation
    Reports should be carefully framed to present information in a form meaningful to the board. The appropriate level of detail and frequency of individual reports will vary with the circumstances of each institution. Reports generally will include information such as the following:
    the income and expenses of the institution
    capital outlays and adequacy
    loans and investments made
    past due and negotiated loans and investments
    problem loans, their present status and workout programs
    allowance for possible loan loss
    concentrations of credit
    (continued on next page)
  • 13.
    • losses and recoveries on sales, collections, or other dispositions of assets
    • 14. funding activities and the management of interest rate risk
    • 15. performance in all of the above areas compared to past performance as well as to peer groups’ performance
    • 16. all insider transactions that benefit, directly or indirectly, controlling shareholders, directors, officers, employees, or their related interests
    • 17. activities undertaken to ensure compliance with applicable laws (including, among others, lending limits, consumer requirements, and the Bank Secrecy Act) and any significant compliance problems
    • 18. any extraordinary development likely to impact the integrity, safety, or profitability of the institution
  • Reports should be provided far enough in advance of board meetings to allow for meaningful review. Management should be asked to respond to any questions raised by the reports.
    Experience has shown that certain aspects of lending are responsible for a great number of the problems experienced by troubled institutions. The importance of policies and reports that reflect on loan documentation, performance, and review cannot be overstated.
  • 19. Provide for Independent Reviews
    The board also should establish a mechanism for independent third party review and testing of compliance with board policies and procedures, applicable laws and regulations, and accuracy of information provided by management. This might be accomplished by an internal auditor reporting directly to the board, or by an examining committee of the board itself. In addition, an annual external audit is desirable even when not required by regulation. The board should review the auditors’ findings with management and should monitor management’s efforts to resolve any identified problems.
    In order to discharge its general oversight responsibilities, the board or its audit committee should have direct responsibility for hiring, firing, and evaluating the institution’s auditors, and should have access to the institution’s regular corporate counsel and staff as required. In some situations, outside directors may wish to consider employing independent counsel, accountants or other experts, at the institution’s expense, to advise them on special problems arising in the exercise of their oversight function. Such situations might include the need to develop appropriate responses to problems in important areas of the institution’s performance or operations.
  • 20. Heed Supervisory Reports
    Board members should personally review any reports of examination or other supervisory activity, and any other correspondence from the institution’s supervisors. Any findings and recommendations should be reviewed carefully. Progress in addressing problems should be tracked. Directors should discuss issues of concern with the examiners.
  • 21. Avoid Preferential Transactions
    Avoid all preferential transactions involving insiders or their related interests. Financial transactions with insiders must be beyond reproach. They must be in full compliance with laws and regulations concerning such transactions, and be judged according to the same objective criteria used in transactions with ordinary customers. The basis for such decisions must be fully documented.
    Directors and officers who permit preferential treatment of insiders breach their responsibilities, can expose themselves to serious civil and criminal liability, and may expose their institution to a greater than ordinary risk of loss.
  • 22. Statement Concerning Responsibilities of Bank Directors and Officers
    The Federal Deposit Insurance Corporation has issued this statement in response to concerns expressed by representatives of the banking industry and others regarding civil damage litigation risks to directors and officers of federally insured banks.
  • 23.             
    Duties of Directors and Officers
    Directors and officers of banks have obligations to discharge duties owed to their institution and to the shareholders and creditors of their institutions, and to comply with federal and state statutes, rules and regulations.
  • 24. Service as a director or officer of a federally insured bank represents an important business assignment that carries with it commensurate duties and responsibilities.
    Banks need to be able to attract and to retain experienced and conscientious directors and officers.
  • 25. When an institution becomes troubled, it is especially important that it have the benefit of the advice and direction of people whose experience and talents enable them to exercise sound and prudent judgment.
    Similar to the responsibilities owed by directors and officers of all business corporations, these duties include the duties of loyalty and care.
  • 26. The duty of loyalty requires directors and officers to administer the affairs of the bank with candor, personal honesty and integrity. They are prohibited from advancing their own personal or business interests, or those of others, at the expense of the bank.
    The duty of care requires directors and officers to act as prudent and diligent business persons in conducting the affairs of the bank.
  • 27. 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.
  • 28. Directors must require and management must provide the directors with timely and ample information to discharge board responsibilities. Directors also are responsible for requiring management to respond promptly to supervisory criticism. Open and honest communication between the board and management of the bank and the regulators is extremely important.
  • 29. Officers are responsible for running the day to day operations of the institution in compliance with applicable laws, rules, regulations and the principles of safety and soundness. This responsibility includes implementing appropriate policies and business objectives.
     The FDIC will not bring civil suits against directors and officers who fulfill their responsibilities, including the duties of loyalty and care, and who make reasonable business judgments on a fully informed basis and after proper deliberation.
  • 30. LAwsuits brought by the FDIC against former directors and officers of failed banks are instituted on the basis of detailed investigations conducted by the FDIC. Suits are not brought lightly or in haste.
    The filing of such lawsuits is authorized only after a rigorous review of the factual circumstances surrounding the failure of the bank. In addition to review by senior FDIC supervisory and legal staff, all lawsuits against former directors and officers require final approval by the FDIC Board of Directors or designee.   
    Procedures Followed To Institute Civil Lawsuits
  • 31. In most cases, the FDIC attempts to alert proposed defendants in advance of filing lawsuits in order to permit them to respond to proposed charges informally and to discuss the prospect of pre-filing disposition or settlement of the proposed claims.   
    The FDIC brings suits only where they are believed to be sound on the merits and likely to be cost effective. On that basis, where investigations have been completed, the FDIC has brought suit (or settled claims) against former directors and officers with respect to 24% of the banks that have failed since 1985.
  • 32. The FDIC's lawsuits are premised on the established legal principles that govern the conduct of directors and officers. Lawsuits against former directors and officers of failed banks result from a demonstrated failure to satisfy the duties of loyalty and care.
    Nature of Suits Filed
  • 33. Most suits involve evidence falling into at least one of the following categories:
      •  Cases where the director or officer engaged in dishonest conduct or approved or condoned abusive transactions with insiders.   •  Cases where a director or officer was responsible for the failure of an institution to adhere to applicable laws and regulations, its own policies or an agreement with a supervisory authority, or where the director or officer otherwise participated in a safety or soundness violation.   •  Cases where directors failed to establish proper underwriting policies and to monitor adherence thereto, or approved loans that they knew or had reason to know were improperly underwritten, or, in the case of outside directors, where the board failed to heed warnings from regulators or professional advisors, or where officers either failed to adhere to such policies or otherwise engaged in improper extensions of credit. Examples of improper underwriting have included lendingto a borrower without obtaining adequate financial information, where the collateral was obviously inadequate, or where the borrower clearly lacked the ability to pay.   
  • 34. One factor considered in determining whether to bring an action against a director is the distinction between inside and outside directors. An inside director is generally an officer of the institution, or a member of a control group. An inside director generally has greater knowledge of and direct day to day responsibility for the management of the institution.
    By contrast, an outside director usually has no connection to the bank other than his directorship and, perhaps, is a small or nominal shareholder. Outside directors generally do not participate in the conduct of the day to day business operations of the institution. The most common suits brought against outside directors either involve insider abuse or situations where the directors failed to heed warnings from regulators, accountants, attorneys or others that there was a significant problem in the bank which required correction.
    In the latter instance, if the directors fail to take steps to implement corrective measures, and the problem continued, the directors may be held liable for losses incurred after the warnings were given.
  • 36. The federal bank and thrift regulatory agencies are issuing this policy statement to improve the coordination and communication between external auditors and examiners. This policy statement provides guidelines regarding information that should be provided by depository institutions to their external auditors and meetings between external auditors and examiners in connection with safety and soundness examinations.
  • 37. In most cases, the federal bank and thrift regulatory agencies provide institutions with advance notice of the starting date(s) of full-scope or other examinations. When notified, institutions are encouraged to promptly advise their external auditors of the date(s) and scope of supervisory examinations in order to facilitate the auditors' planning and scheduling of audit work. The external auditors may also advise the appropriate regulatory agency regarding the planned dates for the auditing work on the institution's premises in order to facilitate coordination with the examiners.
    Some institutions prefer that audit work be completed at different times from examination work in order to reduce demands upon their staff members and facilities. On the other hand, some institutions prefer to have audit work and examination work performed during similar periods in order to limit the impact of these efforts on the institutions' operations to certain times during the year. By knowing in advance when examinations are planned, institutions have the flexibility to work with their external auditors to schedule audit work concurrent with examinations or at separate times.
    Coordination of External Audits and Examinations
  • 38. Consistent with prior practice, a depository institution should provide its external auditors with a copy of certain reports and supervisory documents, including:
      •  The most recent regulatory Report of Condition (i.e., "Call Reports" for banks, and "Thrift Financial Reports" for savings institutions);
      •  The most recent examination report and pertinent correspondence received from its regulator(s);
      •  Any supervisory memorandum of understanding with the institution that has been put into effect since the beginning of the period covered by the audit;
      •  Any written agreement between a federal or state banking agency and the institution that has been put into effect since the beginning of the period covered by the audit; and
    Other Information Provided By The Institution
  • 39.   •  A report of:   -- Any actions initiated or undertaken by a federal banking agency since the beginning of the period covered by the audit under certain subsections of section 8 of the Federal Deposit Insurance Act, or any similar action taken by an appropriate state bank supervisor under state law; and   -- Any civil money penalty assessed under any other provision of law with respect to the depository institution or any institution-affiliated party, since the beginning of the period covered by the audit.
  • 40.   Generally, the federal bank and thrift regulatory agencies encourage auditors to attend examination exit conferences upon completion of field work or other meetings between supervisory examiners and an institution's management or Board of Directors (or a committee thereof) at which examination findings are discussed that are relevant to the scope of the audit. When other conferences between examiners and management are scheduled (i.e., that do not involve examination findings that are relevant to the scope of the external auditor's work), the institution shall first obtain the approval of the appropriate federal bank or thrift regulatory agency in order for the auditor to attend the meetings. This policy does not preclude the federal bank and thrift regulatory agencies from holding meetings with the management of depository institutions without auditor attendance or from requiring that the auditor attend only certain portions of the meetings.
    Depository institutions should ensure that their external auditors are informed in a timely manner of scheduled exit conferences and other relevant meetings with examiners and of the agencies' policies regarding auditor attendance at such meetings.
    External Auditor Attendance at Meetings Between Management and Examiners
  • 41. Meetings and Discussions Between Auditors and Examiners
    An auditor may request a meeting with any or all of the appropriate federal bank and thrift regulatory agencies that are involved in the supervision of the institution or its holding company during, or after completion of, examinations in order to inquire about supervisory matters relevant to the institution under audit. External auditors should provide an agenda in advance to the agencies that will attend these meetings. The federal bank and thrift regulatory agencies will generally request that management of the institution under audit be represented at the meeting. In this regard, examiners generally will only discuss with an auditor examination findings that have been presented to the depository institution's management.
    In certain cases, external auditors may wish to discuss with regulators matters relevant to the institution under audit at meetings without the representation from the institution's management. External auditors may request such confidential meetings with any or all of the federal bank and thrift regulatory agencies, and the agencies may also request such meetings with the external auditor.
  • 42. Confidentiality of Supervisory Information
    While the policies of the federal bank and thrift regulatory agencies permit external auditors to have access to the previously mentioned information on depository institutions under audit, institutions and their auditors are reminded that information contained in examination reports, inspection reports, and supervisory discussions--including any summaries or quotations--is confidential supervisory information and must not be disclosed to any party without the written permission of the appropriate federal or thrift regulatory agency. Unauthorized disclosure of confidential supervisory information may subject the auditor to civil and criminal actions and fines and other penalties.
  • 43. Thank You
    This information was taken from the FDIC website, edited, formatted and presented free of charge to bank management as a training tool for directors by Ace In The Hole Management, LLC.
    Due to the lengthy content of information on the FDIC website, this presentation does not contain in its entirety the information from the website. We have selected sections which reflect expectations and requirements of financial institution directors.
    If you wish to view the FDIC website, there are several additional sections related to bank directors at
  • 44. Ace In The Hole Management, LLC1150 Vernaci LanePacific, MO 63069314.803.6593
    Presented by:
    Ace In The Hole Management, LLC, a full service consulting service focusing on the banking and financial industry.
  • 45. Issued this _______ day of __________, 2009, to
    a director of XXX bank to certify the completion of
    A learning tool provided by Ace In The Hole Management to prepare directors in fulfilling their obligation to shareholders and regulators. This tool provides insight into regulatory requirements, responsibility of bank directors and board expectations of management.
    Deborah K. Williams
    Ace In The Hole Management