Duties and Responsibilities of Directors Effective …

1 Duties and Responsibilities of DirectorsEffective date April 2013 Section are placed in a position of trust by thebank s shareholders, and both statutes and com-mon law place responsibility for the affairs of abank firmly and squarely on the board of direc-tors. The board of Directors of a bank shoulddelegate the day-to-day routine of conductingthe bank s business to its officers and employ-ees, but the board cannot delegate its respon-sibility for the consequences of unsound orimprudent policies and practices, whether theyinvolve lending, investing, protecting againstinternal fraud, or any other banking activity.

2 Theboard of Directors is responsible to the bank sdepositors, other creditors , and shareholders forsafeguarding their interests through the lawful,informed, efficient, and able administration ofthe institution. In the exercise of their Duties , Directors are governed by federal and statebanking, securities, and antitrust statutes, aswell as by common law, which imposes aliability on Directors of all corporations. Direc-tors who fail to discharge their Duties com-pletely or who are negligent in protecting theinterests of depositors or shareholders may besubject to removal from office, criminal pros-ecution, civil money penalties imposed by bankregulators, and civil liability.

3 See section 5040of this manual, Formal Corrective Actions, which describes those enforcement powers ingreater SELECTIONThe affairs of each state member bank areoverseen by its board of Directors . The initialdirectors are elected by the shareholders at ameeting held before the bank is authorized tocommence business. Thereafter, they are electedat meetings held at least annually on a dayspecified in the bank s bylaws. The directorshold office for a stated tenure, generally rangingfrom one to three years, or until their successorsare elected and have qualified.

4 No state memberbank is to have less than five or more than25 Directors as specified in section 31 of theBanking Act of 1933. Various laws govern theelection, number, qualifications, oath, liability,and removal of Directors and officers, as well asthe disclosure requirements for their outsidebusiness interests. Other laws pertain to certainrestrictions, prohibitions, and penalties for secu-rities dealers serving as Directors , officers, oremployees; director interlocks; purchases ofassets from, or sales to, Directors ; commissionsand gifts for procuring loans; embezzlement;abstraction; willful misapplication; false entries;political contributions; and other matters.

5 Theexaminer must be familiar with these laws andthe related regulations and INDEPENDENCED irectors must exercise their independentjudgment when managing the bank s affairs. Aresponsible board will not merely rubber-stampmanagement s recommendations, but will reviewthem carefully before deciding whether they arein the bank s best interests. A board that isexcessively influenced by management, a singledirector, or a shareholder, or any combinationthereof, may not be fulfilling its responsibilitiesto depositors, other creditors , and sharehold-ers.

6 Diversification of the board of Directors isimportant and can be accomplished by includingdirectors with no ownership or family-ownershipinterest in the bank and who are not employedby the bank s board of Directors may include oneor more advisory Directors . Advisory directorsgenerally do not vote but may provide additionalinformation or advice to the voting Directors . Anadvisory director who functions in that capacityis generally not subject to the same regulatoryrequirements as voting members and has lessliability for the board s actions.

7 However, if anadvisory director exercises a degree of influenceor control over the board or the bank that is notcommensurate with that status, it is appropriatefor examiners to subject that individual to thesame standards as voting Directors . Such aperson might also be subject to the same liabilitystandards as a voting RESPONSIBILITIESD irectors play a critical role in overseeing theaffairs of the bank . Directors should understandthat if they neglect to carry out their fiduciaryduties and Responsibilities , they may be finan-cially liable if the bank fails or experiences examiner sometimes has to remind bankCommercial bank Examination ManualApril 2013 Page 1directors of the extent of their Duties and respon-sibilities.

8 Unless bank Directors realize theimportance of their positions and act accord-ingly, they are failing to discharge their obliga-tions to the shareholders, depositors, other credi-tors, and the of Competent ExecutiveOfficersOne of the board s most important Duties is toselect and appoint executive officers who arequalified to administer the bank s affairs effec-tively and soundly. The board is also responsiblefor removing officers who do not meet reason-able standards of honesty, competency, execu-tive ability, and efficiency.

9 The responsibility forselecting executive officers also entails retainingthem and ensuring that competent successorscan be promoted or hired to fill unanticipatedvoids. The board is responsible for evaluatingthe performance of the chief executive officerand approving the CEO s compensation. Inmany banks, the board also approves compen-sation for other executive state member bank that has been charteredor undergone a change of control within the lasttwo years, that is not in compliance with theminimum capital adequacy guidelines or regu-lations of the Board, or that is in an otherwisetroubled condition must provide 30 days writ-ten notice to its regulating Reserve bank beforeit can add a director, promote an internal staffmember to senior executive officer.

10 Or employ anew senior executive Supervision of bank AffairsThe type and degree of supervision required of abank s board of Directors to ensure a bank issoundly managed involve reasonable businessjudgment and competence and sufficient timeto become informed about the bank s ultimately are responsible for thesoundness of the bank . If negligence is involved,a director may be personally liable. The respon-sibility of Directors to supervise the bank saffairs may not be delegated to the active exec-utive officers or anyone else.