The Board of Governors of the Federal Reserve System has published proposed guidance aimed at setting supervisory expectations and effectiveness standards for the board of directors of certain regulated banks and holding companies. The product of a multi-year review of board practices which focused on the largest banks, the report concludes generally that the lines between management and board tasks are becoming increasingly more difficult to distinguish and that boards spend significant time on “non-core tasks” and are further challenged by information flow issues. The proposal contains three primary parts:
- Guidance Addressing Board Effectiveness for Larger Institutions: Applying only to boards of bank holding companies and savings and loan holding companies with total consolidated assets exceeding $50 billion, with some exceptions, including systematically important nonbank financial companies as designated by the Financial Stability Oversight Counsel -- the consortium of federal financial regulators -- the guidance details five attributes for effective boards in hopes of helping companies better distinguish between board and management duties. The attributes include: (1) setting clear, aligned, and consistently directions with regard to firm strategy and acceptable risk-taking; (2) the active management of information and board deliberations to provide for informed judgment; (3) holding senior management accountable; (4) supporting the stature and independence of the risk management and internal audit functions; and (5) maintaining a capable board composition and governance framework. The guidance permits, but does not prescribe a format for board self-assessments.
- Refocusing of Existing Board Supervisory Guidance for Banks and Savings and Loan Holding Companies: Applying to all bank holding companies and savings and loan holding companies of all sizes, the second part of the proposal aims to revisit the existing general framework for board effectiveness.
- Clarifications of the Federal Reserve Board’s Expectations of Relating to Supervisor Findings: Lastly, the Federal Reserve Board proposes to revise guidance which clarifies supervisory communications to institutions concerning examination and inspection findings which require corrective action. The most significant revision removes the requirement to refer all Matters Requiring Attention (MRAs) and Matters Requiring Immediate Attention (MRIAs) to the Board and instead allows management to take care of the situation, with two exceptions. According to a survey by the OCC, just 36% of MRAs issued dealt with credit risk-related issues in 2013.
Boards are faced with increasing pressure and responsibility, and the level of regulatory scrutiny has increased Board focus on financial services firms to the point where such boards are perhaps more involved in management-level oversight. While not applicable to all companies, the recognition by a major federal regulator that the lines between board and management responsibilities are increasingly blurred is significant. The move also provides insight into the impact of increasing federalization of corporate governance in lieu of traditional state corporate law.