By Debra CopeNew directors don’t come on board every day. When they do, equipping them to be effective as quickly as possible can yield positive results for banks.
“It’s both the new director’s goal and the bank’s goal for that person to have an understanding of the business of the bank,” says John Gorman, a partner in the Washington law firm Luse Gorman. In addition, new directors need crash courses in fiduciary obligations, the bank regulatory environment, and the legal obligations for the bank’s specific corporate structure, whether public or private, mutual or stock.
Gorman notes that orienting newly appointed community bank directors to their roles has long been an informal process. However, some formal elements—such as job descriptions and director-onboarding letters—are gaining currency, particularly at publicly owned banks.
In effect, orientation begins during the director-recruitment process, because that is when prospective directors start asking questions about the company. “At the community bank level, it is not an overly complicated business model, although not without risk and challenges. Potential candidates should be able to get their arms around it,” Gorman says.
But once directors are on board, there are issues they need to grapple with quickly. Gorman offers six tips for new directors:
- Read the company’s code of ethics. This is where critical concepts such as conflicts of interest, confidentiality, fair dealing, compliance, are spelled out.
- Review the basic regulatory requirements that directly impact directors, such as insider lending rules. Another example of the legal obligations for public companies is Securities and Exchange Commission Reg FD, which was designed to stamp out selective disclosure, as well as relevant stock exchange rules.
- Prepare to learn about the complexities of bank regulation and supervision. Consumer rules, safety and soundness rules, bank regulation, and holding company regulation—a director must understand a vast array of banking regulatory concepts. Often, a bank’s law firm or regulator is an excellent source of concise information on these topics. (ABA also offers a Quick Reference Guide to Bank Regulation.)
- Be informed about the bank’s business model and the most significant risks facing the company and industry. “It’s easy if it’s a public company—just read the 10-K,” Gorman says. “For non-public companies, they can look at the call reports, but they are harder to interpret.” In those instances, it is important for the bank to provide a succinct overview.
- Understand the time commitment. How many board meetings are there, how long do they last and how much additional time must be invested before and after each meeting? What does the typical board package contain, and how much time should be devoted to reviewing it?
- What are the financial arrangements? Are there stock ownership requirements? How are directors paid?
Onboarding can be highly customized because it’s unusual for banks to add more than one new director at a time. One common practice is to schedule the new director for a half-day of meetings with different people from management, inside counsel and outside counsel.
The corporate governance and nominating committee also should stay abreast of director education programs, especially during the first three to four months of a director’s tenure, and should budget for continuing education.