Every corporation’s board of directors legally has ethical duties and obligations that they must abide by to serve as an impartial director. However, bank directors face additional industry-specific duties and obligations arising from the fact that banks put not only shareholders’ capital at risk, but also their customers’ funds. For this reason, banks are highly regulated due, in part, to the safety net they enjoy from federal deposit insurance. In turn, bank directors must also answer to the relevant federal regulators.
The general fiduciary duties that any director owes to their corporation are the duties of: loyalty, care, and good faith. Bank directors have these duties as well as four additional major responsibilities:
- Selecting and evaluating executive officers and management
At least annually the board of directors should review key management’s performance and compensation. The criteria that the board should use to evaluate management includes the bank’s: performance, financials, record of compliance with laws and regulations, criticisms contained in audit and examination reports, compliance with board-approved policies, and the timeliness, quality, and accuracy of management’s recommendations, presentations and reports.
- Effectively supervising bank affairs
Like every board of directors, they are expected to delegate day-to-day management responsibilities, however, bank board of directors cannot delegate its duty to supervise the bank’s affairs which include: attending board and committee meetings, gaining a complete understanding of the bank’s condition, active awareness of audits, and exercising independent judgment. During examinations, bank regulators may specifically criticize a director’s failure to meet these requirements. To help with this, the board of directors may use board committees as an organizational tool to ensure efficient and effective supervision of the bank’s affairs.
- Ensuring the Bank’s compliance with laws and regulations
Directors are responsible to ensure the bank does not violate the law, so much so that the directors, in their individual capacity, may be financially responsible for losses arising out of illegal actions.
- Maintaining a beneficial influence on the local economy and community
Directors have a continuing responsibility to the community to provide those banking services that will be conducive to well-balanced economic growth.
The structure of a financial institution and its board of directors has many nuances. If you need assistance understanding how to effectively organize and inform your board of directors, contact the experienced attorneys at Goosmann Law in our Sioux City, Sioux Falls, and Omaha offices.