Publications & Resources

October/November 2004
Focus: Directors Issues

Directors Job Description

By Richard Sprayregen

Part time Job Available: Director of $250 Million Community Bank

Educational Requirements: High School or GED; College preferable but not required

Travel: Minimal

Business Experience: Commercial business, economics, insurance, and real estate; knowledge of small business operations valuable

Some familiarity with complex federal banking regulations; rules of FDIC and State Banking Department, knowledge of generally accepted accounting principles and the new Sarbanes Oxley Act; knowledge of public company disclosures helpful but not required

Candidates: Must be familiar with Roberts Rule of Order and must submit to comprehensive background investigation by the FBI

Compensation: Varies depending upon a variety of factors

Congratulations!

You’ve been selected to serve as one of six directors of a community bank. We have based this selection on your qualifications, knowledge of the business community, and your high ethical standing and character.

Set forth below is a brief discussion of your new job and those issues with which you will be held to be familiar.

Bank Boards of Directors are Different

Directors serve as ombudsmen for the Federal Deposit Insurance Corporation (FDIC) and the shareholders. The Board of Directors (BOD) sets policies and procedures which promote safe banking operations, and carefully monitors the integrity, conduct, and behavior of bank Management with respect to all regulatory requirements.

To succeed in its role and document its responsibility, the BOD is charged with developing and implementing the processes necessary to formally appraise bank performance and supervise management. These responsibilities include, but are not limited to:

Assuring bank compliance with laws and regulations
Assuming responsibility for regulatory criticisms in audit or examination reports
Assuming responsibility for management’s responsiveness and compliance with BOD directives

Planning and Policy Administration

The BOD establishes the overall financial and operational goals of the bank. It must ensure that the bank has the personnel, and financial, technological, and organizational capacities to achieve those goals. The bank’s long term strategic plan is created jointly by the BOD and bank management. The plan captures the general philosophy of the BOD and discusses the planned overall future of the bank. From that long term plan, the BOD directs management to submit detailed department- and task-specific plans to the BOD. From these department specific plans, management creates forecasts and budgets which become the yardstick by which progress and performance are measured.

A considerable amount of legislation describes the kind of written policies to which the bank must adhere regarding certain bank activities. Three of the most significant are:

Loan portfolio management —includes identifying how much of the bank’s funds may be allocated to lending; the types of loans to be made; the concentrations of loans of varying types; the geographic lending area; permissible purchased loans; overall loan underwriting criteria; loan approval criteria; post funding loan quality review programs; and determining the criteria necessary to assess the adequacy of the allowance for loan losses (ALLL)
Funds management policy—includes a quantification of the BOD tolerance for interest rate and liquidity risks; the maximum amount of bank capital that may be placed at risk; asset/liability guidelines that identify what sorts of products might be used to manage interest rate risk and liquidity concerns; and of course, a contingency plan to address unforeseen liquidity pressures.
Investment policy —identifies investments the bank may hold, their duration and the overall quality ratings of investment instruments.

Directors’ Individual Responsibilities

Regulators usually characterize evidence of bank director diligence in five areas:

Attendance —Members of the board are obliged to attend all scheduled BOD meetings. Poor attendance may have to be disclosed to a bank’s shareholders. Absence from a meeting may not excuse a director from the responsibility of knowing about, and acting in accordance with what took place at the meeting.
BOD meeting materials—Although bank management may be responsible for providing directors with proper information, a director remains responsible for carefully reviewing all such data in advance of the BOD meeting.
Activity vs. Passivity—Member of the board must be actively engaged in asking questions and requesting further information with respect to any item in the BOD package that appears vague or is not clearly understood.
Regulatory and audit reports—Directors must carefully read these independent reports, which assist directors in knowing how those not affiliated with bank management are evaluating bank operations, and compliance with regulations. Failure to evaluate operations may deem a director negligent in his or her responsibility.
Independence —Independent objective judgment properly exercised is vital to the successful performance of a director’s duties.

Bank directors are dedicated professionals who both serve the interests of the bank’s shareholders, and maintain a well run institution that serves the financial needs of its community.

The regulatory environment is much more dynamic than ever before. Regulators want to make certain that directors are acquainted with significant new rules and regulations, that often are issued almost on a weekly basis. Many of these can significantly impact a director's viewpoints and decisions. We strongly suggest that community bank directors regularly attend educational programs that will serve to keep them abreast of such relevant regulatory developments.

Richard Sprayregen is director of financial institutions services for Moss Adams LLP in Los Angeles. He can be reached at 310-481-1277 or Richard.sprayregen@mossadams.com.