Publications & Resources

April/May 2004
Focus: Training & Management Development

Director Education: What is a Director Supposed To Know?

By Jeffrey C. Gerrish

Bank and bank holding company directors are in a unique position of having a prestigious job with significant legal and social liability. How are they supposed to know what to do, even if they understand their basic obligations?

The basic duties of a director fall into two categories: (1) the duty of care (a standard higher than the normal corporate or not-for-profit director due to the fact that the institution takes money from the public), and (2) the duty of loyalty (the duty not to misappropriate corporate opportunities or act in a conflict of interest with the organization).

The overriding duty, however, of the directors is to enhance the value for their shareholders. This means growing earnings per share at a reasonable rate of 8% to 10% a year or so, maintaining an adequate return on equity (target north of 15%), providing liquidity for the shares (the ability of a shareholder to sell his/her shares of stock when they want at a fair price) and providing cash flow off the shares or a means for shareholders to obtain cash flow (a cash dividend or a stock dividend with a repurchase plan or an ESOP purchase).

Within these categories, directors are obligated to establish policies and procedures for everything from loans to asset/liability management. Directors are also obligated to develop business for the organization, to establish appropriate corporate governance policies and to engage in long-term planning for the organization. A director education policy is one of those “best practices” for corporate governance and a part of the board’s obligation to prepare for the long term and to have qualified directors for the organization.

What should be considered in a director education policy? It does not have to be long, but it should address at least the following issues:

Is director education mandated, required, suggested, recommended or encouraged? You pick the “verb”!
Will the directors be evaluated based on whether they obtain the requisite director education annually (a director evaluation system - beyond the scope of this article - is also a best practice for corporate governance)?
What type of education qualifies as director education? Does it have to be external? Does it have to be a trade association seminar? Can it be audiotapes, videotapes or Internet training?
Will it qualify if the board brings somebody into the boardroom to meet with the board? There are many banks doing this simply due to its cost effective nature.
Who pays for the training? The systems on this vary all over the board from the bank paying everything, including the cost of the training plus travel, to simply the bank paying the cost of the training, or in some cases, the director absorbing all the costs as a net from his or her director’s fee.

Be proactive in the area of director education. It is good for your bank, good for your directors and will make you look real smart to the regulators. Set up a director education policy and follow it.

Jeffrey C. Gerrish is chairman of Gerrish & McCreary Consultants L.L.C. and a member of the Memphis based law firm of Gerrish & McCreary, P.C., Attorneys. The two firms have assisted over 900 community banks in 47 states with mergers and acquisitions, bank holding company formations and use, acquisition and ownership planning for boards of directors, strategic planning for boards of directors, regulatory matters, ESOPs and other matters of importance to community banks. He can be reached at (901) 767-0900.