Publications & Resources

January/February 2012
Compliance & Risk Management

The Role of a Board of Directors: Musings of a Banker/Reformed Corporate Lawyer CEO

By Richard Beard, Bank of American Fork

In the wake of the Great Recession, boards of directors have become subject to additional requirements both formally and informally being imposed by regulators. While I support the premise that boards need to be responsible for their bank, my concerns lie in how that responsibility should be carried out and divided between management and the board.

Historically, the role of boards in corporate governance was to oversee, direct and strategize from the top down. This role began to change with the corporate scandals in the early part of the decade, including at Enron and WorldCom. As a consequence of such governance failures and accounting frauds, Sarbanes-Oxley Act (SOX) was enacted in 2002. SOX sought to prevent the defrauding of shareholders by imposing more requirements and liabilities on boards in public companies.

In similar fashion, bank boards – both public and private – are now subject to increased duties and liabilities being imposed in many cases by informal examiner-mandated requirements. Examiners presume that the board should be involved in the material operations of the bank. Through the examination process, they have increasingly pushed boards to be intimately involved with day-to-day operations.

Regulators need to realize what bankers already know: forcing boards to be heavily involved in operational issues is not an effective way to create more oversight or responsibility; it merely distracts them from the most important issues of oversight, risk management, strategic direction and profitability.

Corporate law is generally state law. Many states’ corporate law operates on the premise that boards of directors should focus on high-level issues and leave execution and operations to management. An effective corporate code that provides guidance for appropriate duties for directors already exists with the Model Business Corporation Act (MBCA), adopted by 32 states including Arizona, Hawaii, Idaho, Montana, Oregon, Utah, Washington and Wyoming.

The MBCA states, “The business and affairs of the corporation shall be managed by or under the direction, and subject to the oversight, of its board of directors.”[1] In some closely held corporations, boards may be involved in the day-to-day business and affairs. It is not reasonable or practical to expect this in large organizations. For this reason, operational management is delegated to executive officers and other professional managers. In fact, the MBCA specifically states that “a director is entitled to rely…on one or more officers or employees of the corporation whom the director reasonably believes to be reliable and competent.”[2]

The MBCA recognizes the roles and responsibilities of boards of directors and also the operational role of management. It clarifies that a director’s role is to formulate direction, policy and oversight and to ensure the direction is correct, as opposed to implementing policies and conducting other daily operational tasks.

Despite the clarity with which the MBCA outlines a board’s duties, regulators on both the federal and state level are increasingly imposing requirements for boards that may not be in accordance with state corporate law and instead force boards of directors to be more active in operational issues. Some examples include directives that all policies – even operational ones, such as those for wire transfers – must be signed by the board; that boards approve all construction loans, even those for minor amounts; and that the board conduct reviews of all substandard loans.

The problem with regulatory agency practices is that examiners don’t necessarily understand corporate governance distinctions between operational management and directors’ functions. They are taking what have historically been state-regulated affairs and turning them into federal matters, with a default recommendation that everything must go to the board.

Adding to this problem is the bias towards directors being independent, non-employees. Non-employee directors often have other full-time employment obligations that prevent them from being involved for unlimited time periods in operational duties.  

If management is not performing operational matters adequately, the first line of questioning should not be, “Should the board take specific action on an operational matter?” but rather, “Should management take such action?” If the answer is “yes” and management didn’t, then the question to the board should be, “Do you have the right management?”

Increased operational requirements imposed on boards by formal or informal direction from regulators is damaging – not strengthening – governance of banks. It is a legal fiction that boards know or should know every intimate detail of operations. The MBCA and historical practice support this view of corporate governance and demonstrate that strategy and overall direction are critical functions of a board, while managing the day-to-day minutia of a bank is not.

Instead, directors should delegate management responsibilities and ensure that the right management is in place to carry out this duty and that proper reporting systems are in place to monitor such performance. This will allow boards to spend their limited time on oversight and direction, including succession planning for operational senior executives, which are critical to the success of banks.

Perhaps the old, corporate, country lawyers’ advice to banks still makes sense in our highly regulated industry: boards should have noses in and fingers out of banks.

Richard Beard is president and CEO of $860 million-asset Bank of American Fork, Utah’s largest community bank. He can be reached at (801) 642-3002 or richard.beard@bankaf.com. 

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