Back to the Basics
Directors College Raises the Standards for Corporate Governance
By Alison Cohen
Directors College comes to Connecticut this Fall on September 30th and October 7th
Corporate news keeps leaking from the business section to the front page, and none of it is good news. Scandals involving executives run amok, and the boards of directors who weren’t doing their duty resurrect memories of the bad old days of the failed savings and loans of the late 1980s and 1990s.
“There is no doubt that the highly publicized corporate governance failures such as Enron and Tyco and the other well publicized examples of questionable integrity have reminded directors of the enormous responsibility they have to shareholders, depositors, customers, employees and other stakeholders,” says Ralph Volpe, accounting partner with McGladrey & Pullen.
Bad as they might be, scandals aren’t the only challenge facing banks. Rapid changes in the financial marketplace have created a more competitive, challenging and riskier environment for institutions. As a result, bank directors face complex and technical responsibilities.
“Now, more than ever, directors once valued for their general business judgment must also become quasi bank professionals sensitive to issues such as risk management, investment practices, compliance and more,” says Mary Ellen O’Neill, a director with the Connecticut Department of Banking. “Directors are held to a higher standard. They have fiduciary responsibilities to uphold and are the first line of defense in making sure their banks are operating in a safe and sound manner.”
Additionally, directors are expected to understand and comply with a large body of regulatory demands, including but definitely not limited to the provisions of the Sarbanes-Oxley Act and the SEC regulations promulgated since its enactment, Check 21 and Connecticut’s White Collar Criminal Act.
“The scandals that ensnared Enron, Tyco and others showed that many directors of many publicly traded national companies were filling their fiduciary responsibilities to their shareholder and the public in a superficial manner. These were not the first scandals which raised the issue of director responsibility for corporate governance, but they were the ones which raised the concern to a level wherein the credibility of all publicly traded companies were in question,” says Merrill Jay Forgotson, president & CEO of Cornerstone Bancorp, Inc. “The NYSE, AMEX and NASDAQ promulgated rules on corporate governance which implicitly and explicitly raised the need for further emphasis on director education.”
In recognition of those increased demands for an informed and proactive board of directors, a new emphasis is being placed on giving directors the education necessary to ensure that they understand the risks and rewards of running a bank and are up to the task of corporate governance.
“Responsible directors know they cannot discharge their duties unless they are more knowledgeable about the businesses they oversee and the regulatory and legal environment in which these businesses operate,” Volpe says.
Forgotson adds that it is an underlying assumption of the regulators that a board must be educated as to all components of bank operations and the rating system in order to perform their duties appropriately. This, he emphasizes, requires that they not be passive, but take an active role on directing a bank’s executive officers. To fulfill this fiduciary role, directors must be knowledgeable as to current bank operations, and be remain current at all times as to changes in regulations and other standards affecting their institution.
This begs the question of what should comprise a director’s education. From O’Neill’s perspective, in addition to understanding the basic elements of a director’s role and responsibilities, they must also be well informed about interest rate risk, information technology-related topics such as E-banking, security protocol and customer privacy matters. Information needs are even greater for De Novo banks, she adds. There, a new board of directors needs to understand what they are approving—such as investment and lending policies, and formulation of budget & strategic planning—and be in a position to ask questions and/or challenge management. Continued de novo banking, she continues, will likely drive a need for additional education and training opportunities.
Volpe sees the current educational needs as general financial management, corporate governance, strategic planning, and specific industry environmental issues.
Forgotson, O’Neill and Volpe agree that the educational needs will change over time. They stress the importance of periodic reassessments and adjustments to reflect the complexity and changing nature of financial products and services.
“We are in an environment of continual regulatory change. This dictates that director education be ongoing and that materials utilized be regularly updated,” explains Forgotson. “The need for director education will continue to grow over the next two to five years. This is as a result of anticipated changes in the regulatory environment as well as the evolution of banking into new products and services. Directors are going to have to continue to enhance their knowledge of day-to-day bank operations while continuing to allow their executives to run those operations. The need for expanded director knowledge of bank financials, security, state and federal laws, asset liability management and SEC regulations will require updating director education at least annually.”
Forgotson also believes director education should be a high priority at all Connecticut financial institutions, not just those which are publicly traded. He gets no argument whatsoever on this point from Bryan Bowerman, chairman and CEO of Farmington Savings Bank. Bowerman already ensures that his directors have the same quality of educational opportunities and believes all private banks would be wise to follow suit.
How that education is delivered can take many forms, ranging from traditional classroom settings to conference workshops and seminars to distance learning options.
”I believe that each of these delivery models will be valuable and appropriate for different audiences,” says Volpe. While distance learning and Web-based training offers the most flexibility and timeliness because it is freed from the logistics of setting up meeting places, Volpe believes that most directors will prefer receiving training with other directors from other institutions within a trade organization sponsored event.
O’Neill says the content and the mode of delivery should be relevant to the attendees, reflecting the differences between seasoned and knowledgeable directors and newcomers.
“Conferences and seminars are a good means of delivering information. Classroom settings or progressive education on topics (such as modeling techniques) may be more appropriate,” she says. “Distance learning or online courses are alternative methods that may be more appropriate depending on the student’s needs. Utilizing the experience of industry experts is a good way to educate and motivate directors, especially if the training session provides for specific business application.”
Doctors, lawyers and teachers must meet continuing education requirements, but no one was ready to impose that on bank directors despite the critical need they see for directors to be well informed.
“I believe that continuing education is critical for all persons who serve as bank directors, but I would not impose a universal standard,” says Forgotson. “I think the appropriate method to insure that a board of directors is adequately educated is for each institution to include an annual educational requirement for directors in their corporate governance charter. It must always be remembered that that document is dynamic and should be regularly enhanced in response to the needs of the institution and the public.”
Volpe adds the caveat that regulators fully expect that directors will pursue training as needed to discharge their duties.
“A regulatory requirement for annual training could develop if the results of the new corporate governance mandates under SOX prove to be ineffective,” he warns.
Banks looking for resources to ensure that their directors have the necessary level of education and training need look no farther than Hartford, O’Neill says.
“The Connecticut Department of Banking is proud to be proactive in initiating educational forums to help bank directors perform their fiduciary responsibilities,” she says. “Currently, the department of banking is in the process of planning another training session for bank directors to be held in early June. This program will focus on what's expected of banks for compliance with the new federal legislation known as Check 21; white-collar crime; committee structures; stock options and retaining key employees. The session, which will once again be open to chief executive officers at banks, will also include an opportunity for bank directors to sound off about their roles, the pressures they are under, the rewards of the job and how their performance as a board is evaluated.”
Additionally, the Department’s Bank Examiners meet with a bank’s full board to deliver findings at the conclusion of the examination and to answer any questions board members might have. The department staff may be called upon at any time as a point of reference for bank directors.
Forgotson says Cornerstone Bank has established a combination of in-house approaches as well external programs such as the CBA director education program.
“Cornerstone Bank includes director education as a regular part of its monthly board meetings. We have purchased training modules from American Community Bankers for each of our directors and we are in the process of obtaining online education for our directors,” he says. “We have had our outside attorneys provide education to the board at regular meetings and will be bringing in experts in various subjects as needed. In addition to that, executive management supplies directors with articles and other reading materials on various changes in banking, such as Check 21.
Volpe singled out other currently available resources, including state associations such as CBA, networking groups such as the CCBA, and training organizations dedicated to the banking industry such as the Center for Financial Training that can be tapped by banks seeking to expand their options.
The bottom line remains that directors owe it to their bank, its customers and themselves to be as informed as possible. The reputation they save may be their own.
The following organizations provide resources for directors and offer industry expertise in a variety of formats:
Federal Deposit Insurance Corp. (FDIC), www.fdic.gov
- “Director’s Corner” – offers a “Pocket Guide for Directors”
- Roundtable discussions
- Symposia and Conferences
- “Director’s College” program
Connecticut Bankers Association (CBA), www.ctbank.com
- offered Directors’ Education Series”
- planning an “Directors & Senior Officers Symposium” in May 2004
Conference of State Bank Supervisors (CSBS), www.csbs.org
- Executive Education Programs