Benchmark Your Bank’s Corporate Governance Practices
Spotlight on Bank Corporate Governance. As the regulators and industry focus more sharply on bank corporate governance issues following the financial crisis, The Clearing House on June 24th published its excellent “Updated Guiding Principles on Enhancing U.S. Banks’ Corporate Governance” (“TCH Governance Principles”).
The TCH Governance Principles are designed to facilitate more effective board oversight, enhance bank safety and soundness, promote confidence in banks, and encourage consistent supervisory guidance. AABD recommends that boards of directors and senior bank officers of banks of all sizes read it.
Commenting in January 2015 on the TCH Governance Principles in draft form, AABD recommended more delineation of the Board’s responsibility for oversight, as distinct from management’s responsibility for the day-to-day operations. AABD’s suggestions included emphasizing:
- The significance of regulatory “guidance” and the need for boards of directors to pay special attention to such guidance;
- The importance of board allocation of time given that the regulatory overburdening of bank directors may detract from their fundamental responsibilities to guide their institutions strategically and evaluate management;
- The decision-making process in smaller banks often includes board or board committee review and approval of individual loans which require sufficient reporting and documentation to support the decisions reached by such boards or their committees;
- The use and advantages of third party review of board performance;
- Recognition that the board of directors and its committees are social bodies that depend on candid and informed communication and that fostering that culture is essential;
- Adequate formal training of board members such as that offered by AABD in its Bank Director Certification Program; and
- Flexibility for each banking organization to tailor its governance practices to its business and risk profile.
The recent emphasis on improving the corporate governance of banking institutions mirrors the global emphasis that has been given on this topic since the financial crisis of 2007-08. For example, the Basel Committee on Banking Supervision published a consultative document in July 2015 titled “Guidelines: Corporate Governance Principles for Banks.” One of the primary objectives of this revision is to explicitly reinforce and expand the collective oversight and risk governance responsibilities of the board. Another important objective is to emphasize key components of risk governance such as risk culture, risk appetite, and their relationship to a bank’s risk capacity. The revised guidelines delineate the specific roles of the board, board risk committees, senior management, and the control functions including the CRO and internal audit and distinguish the role of the board from the role of senior management. Another key emphasis of the guidelines is strengthening banks’ overall checks and balances.
In reaction to the 2012 G30 publication, “Toward Effective Governance of Financial Institutions“, the supervisory community and Financial Stability Board community urged the G30 to provide additional insights into how interactions between boards and supervisors could be enhanced. In 2013 the Group of 30 published a report titled “A New Paradigm for Financial Institution Boards and Supervisors“. This report finds that it is time to establish a new paradigm for this interaction, built on mutual trust and transparency so supervisors and boards are better able to fulfill their responsibilities. This report, among other things, concludes that:
- Boards and supervisors should adopt a paradigm of trust-based interaction based on clear mutual expectations, with a focus on examining business model vulnerabilities, governance effectiveness, and culture. The goal is effective two-way communication, predictability, and no surprises from either party.
- Boards and chairs need to recognize that supervisory interaction takes time and good preparation, and they must shift to a pro-active mindset. Leadership by the board chair and chairs of key committees is essential for board effectiveness and productive supervisory relations.
- Supervisors should be clearer about their objectives, and knowledgeable about sound governance practices in areas of greatest value to engagement with boards.
- National governments must recognize the need for stature and adequate resourcing and staffing for prudential supervisors
In July 2015, the Group of 30 issued another report of note, “Banking Conduct and Culture,” which addresses, among other things, the role of the board of directors in setting and overseeing its bank’s culture.
It is recommended that banks and savings institutions of all sizes benchmark their current practices against these reports. It may be that federal banking agencies will consider these reports as representing best practices for meeting regulatory and supervisory expectations regarding risk management and governance practices.
As the only national trade association in the U.S. representing directors of banking organizations, AABD continues to monitor and comment upon changes in law, regulation, or practice that impact their role in corporate governance.