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The Role of the Board of Directors

A new report from TCH analyzes the divergence between the role of the board of directors and increasing regulatory compliance-related obligations of directors, which often overlap with management’s responsibility.

By Gregg L. Rozansky

Note: The full report can be downloaded here.

As part of TCH’s ongoing efforts to promote sound corporate governance, it has issued a report to help provide recommendations relating to the respective roles of directors and management from a U.S. bank’s perspective. The report, The Role of the Board of Directors in Promoting Effective Governance and Safety and Soundness for Large U.S. Banking Organizations, analyzes the growing responsibilities and emphasis placed on a bank’s board in recent years.  

Governance has become an increasingly important cornerstone of U.S. bank supervision. Global regulators have issued updated international standards, the Office of the Comptroller of the Currency (OCC) has established “heightened standards” for national bank directors, and additional U.S. bank supervisory guidance on board effectiveness is expected in the near future. As a result, all large U.S. banking organization boards will continue to face rising expectations. Nonetheless, due in part to today’s rapidly evolving supervisory landscape, many directors and governance experts believe that implicit expectations for boards remain unclear.1 Moreover, as TCH’s 2015 Guiding Principles for Enhancing U.S. Banking Organization Corporate Governance (Governance Principles) note, any blurring of the distinction between these two roles detracts from effective governance by reducing the board’s ability to focus on its oversight functions, impairing the board’s ability to perform its oversight role, and creating uncertainty. (Note: See Bank Governance Leadership Network, “Clarifying Supervisory Expectations for Non-Executive Directors and Boards” (April 2016) ... ; see also “United States Financial Sector Assessment Program, Detailed Assessment of Observance of the Basel Core Principles for Effective Banking Supervision” (April 2015) IMF Country Report No. 15/89.)

Any blurring of the distinction between the role of the board and the role of management detracts from effective governance by potentially reducing the board’s ability to focus on its core oversight functions.
The report was developed to complement TCH’s Governance Principles and as a valuable resource for each of the financial services and supervisory communities by expressing TCH’s views on the following issues: 
  • What the core oversight responsibilities (referred to as “core board functions”) of the board of a large U.S. banking organization should include 

  • How the board may choose to approach those responsibilities

  • How regulatory authorities may help strengthen and support the ability of directors to function effectively with respect to their core board functions

The report also identifies and summarizes hundreds of U.S. bank regulatory requirements directed at bank holding company boards under U.S. federal banking laws, regulations, and agency interpretive guidance statements. 

The report notes that “TCH shares with U.S. and global regulatory authorities a common objective to promote strong and effective governance of U.S. banking organizations” and that the development of a common understanding around board functions will: 

  • Facilitate more effective execution of the board oversight function

  • Enhance bank safety and soundness

  • Encourage consistent supervisory guidance that supports and strengthens the board’s ability to focus on ... strategic risks that are fundamental to the safety, soundness and vibrancy of U.S. banking organizations.

In support of the last item, the report acknowledges the increasing attention being paid by senior U.S. regulators to concerns that a blurring of the distinction between the roles of the board and management may divert board attention from important core board functions. 

Important questions relating to bank governance addressed in the report include:

  • What are the fundamental or “core” board functions of a large U.S. banking organization relative to managerial functions?

  • How should informed and active board engagement be exhibited?

  • How may U.S. bank regulatory authorities help strengthen and support the ability of boards to function effectively?

Key points made in the report relating to these questions are summarized below. 

 

What Are “Core” Board Functions of a Large U.S. Banking Organization?

To help distinguish the board’s oversight role from managerial responsibilities at a conceptual level, the report organizes several of the board’s fundamental responsibilities into five “core board functions.” 

The five core board functions identified and described in the report are:

  • Function 1: Reviewing and approving the strategic objectives and plans

  • Function 2: Monitoring financial performance and condition

  • Function 3: Talent management for the CEO and other senior executives

  • Function 4: Overseeing the risk management and internal control frameworks, including top-tier policies and plans in fundamental areas

  • Function 5: Reinforcing, demonstrating, and communicating the “tone at the top” for the values and culture of the organization and overseeing enterprisewide approaches/programs intended to promote organizational values, culture, and reputation

As discussed in the report, how a particular organization and board determines to carry out the core functions will differ. In addition, how core functions are manifested and the circumstances to which they apply may change over time. In other words, the issues that the board will need to confront may change, but the board’s fundamental oversight role generally do not. 

What Are Appropriate Expectations for how Informed and Active Board Engagement Should be Exhibited?

Informed and active engagement in the performance of core board functions, including what at times has been referred to as “challenges” to management, may be exhibited through several different types of actions:

  • Asking informed, probing questions of management 

  • Taking steps as necessary to become satisfied that management’s initiatives have been thoroughly evaluated

  • Understanding, and being satisfied with, how responsibility and leadership are structured and decisions are made within the management team for key issues and, where appropriate, providing input or advice

  • Defining the approach to items on the board agenda, including the types of matters that should be brought to the attention of the board 

  • Reviewing and evaluating the board monitoring/oversight processes

  • Providing feedback on senior management’s performance 

The report makes the following additional points relating to this question:

  • Board effectiveness in carrying out its responsibilities is usually shown in ways other than by expressing disagreement with management proposals at board meetings, although directors must always feel free to express disagreement. 

  • Board discussions with management may take place in several forums outside of board meetings. For example, these forums may include sessions to review meeting agendas, informal board dinners with management, and functions where board members meet with broader groups of employees. 

  • A board that maintains candid communication with management should expect proposals to have been both thoughtfully reviewed prior to presentation to the board and consistent with the bank’s strategic objectives. 

  • Rather than disagreements with or opposition to management, touchstones of informed and active board engagement more typically include the board’s involvement and performance in:  
    >guiding the strategic direction of the bank;
    >maintaining a sound oversight culture;
    >communicating and demonstrating the “tone at the top”; and
    >holding management accountable for its performance. 

  • Management should provide pertinent information to the board that is clear, accurate, timely and responsive to board inquiries

How May Regulatory Authorities Help Strengthen and Support the Ability of Boards to Function Effectively?

An overarching recommendation of the report is that U.S. bank regulation should reflect and embrace the performance of the five core board functions described in the report. Important report recommendations and several related excerpts from the report include: 

How a particular organization and board determines to carry out its core functions will appropriately differ. In addition, how core functions are manifested and the circumstances to which they apply may change over time.

Recommendation 1 – Regulatory Pronouncements Should Reflect the Performance of the Core Board Functions

  • “Regulators are encouraged to include clearer statements in agency issuances ... and during the course of examinations or discussions with banking organization officials, as necessary, on the authority and utility of the board designating ... senior management and/or management committees to address matters that do not warrant board time and attention ...”

  • “[A]gencies and examiners should encourage directors to determine which policies and issues warrant board level ... attention in view of the individual institution’s circumstances.”

  • “[R]egulators are encouraged to clarify and/or adopt the position that ... it should not be necessary for the board to perform management-like responsibilities in connection with an MRA.” 

Recommendation 2 – Recognition by Regulatory Authorities that Boards May Utilize Board Committees to Address Board Responsibilities Where a Regulatory Pronouncement Generically Uses the Term “Board”

  • “TCH recommends that the agencies take steps ... to clarify that when a regulatory pronouncement generically uses the term “board”... it should be reasonable for a banking organization to adopt an interpretation of the pronouncement to mean either the full board or a board committee.” 

  • “At a minimum, clarification in this regard would recognize the appropriateness of committee level consideration and vetting of issues even in cases where the full board ultimately carries out the formal ‘approval.’”

Recommendation 3 – The Agencies Should Conduct Periodic Reviews of the Board Requirements and Standards They Promulgate

  • “TCH recommends that U.S. banking agencies conduct periodic reviews of board requirements included in their regulations ... to assess whether the requirements and standards ... meaningfully contribute to the performance of [core board functions].” 

  • “A U.S. banking agency should consider how best to take into account relevant regulations and/or guidance issued by other U.S. authorities (e.g., the Securities and Exchange Commission, the CFPB and other U.S. federal banking agencies) to promote a consistent understanding of expectations.” 

Recommendation 4 – U.S. Regulatory Agencies, Directors, and the Industry Should Participate in a Continuing Dialogue to Advance Their Common Interest in Promotion of Effective Board Governance at Large U.S. Banking Institutions 

  • “TCH believes that banking organizations and their regulators can advance the development of banking organization governance by emphasizing areas of appropriate focus for boards and management in ways that provide the most effective governance. Continued dialogue with the industry around the issues addressed in this report – should be an effective means to promote and help achieve this end.”

The full report can be downloaded here

About the Author: Gregg Rozansky is Managing Director and Senior Associate General Counsel of The Clearing House. He leads the policy efforts of TCH on a wide array of bank regulatory, compliance, and corporate governance-related issues. Prior to joining TCH in 2013, Rozansky advised financial institutions on regulatory and compliance issues while at Cleary Gottlieb Steen & Hamilton and Shearman & Sterling, focusing on cross-border transactions and the implications of global regulatory reforms and developments. Rozansky is a graduate of Harvard Law School and earned a B.A. in economics and government at Cornell University.