NACD raises concerns over bank governance proposal

The National Association of Corporate Directors (NACD) has raised concerns over plans to implement corporate governance guidelines for a range of banks that it says may impact boards outside the industry.

The Federal Deposit Insurance Corporation (FDIC) has proposed guidelines that would ‘establish standards’ for corporate governance and risk management that would apply to non-member banks – those that are not members of the US Federal Reserve System, usually state-chartered banks – and others such as state-licensed insured branches of foreign banks with consolidated assets of $10 bn or more.

The FDIC says it observed during the 2008 financial crisis and in bank failures last year that financial institutions with poor corporate governance and risk-management practices were more likely to collapse. The proposal includes – for the banks it applies to – a description of boards’ general obligations to ensure good corporate governance.

The plan establishes an expectation for board composition, stating that there should be at least a majority of independent directors on the board and diversity of members. ‘Diversity of demographic representation, opinion, experience and ownership level is key to a board composition that can oversee management, address a variety of risks and challenge others when necessary,’ the FDIC writes.

Among other things, the proposed guidelines spell out various board duties, such as:

• Setting an appropriate tone for the institution
• Responsibility for the strategic plan and direction of the institution
• Writing and adopting a code of ethics applicable to all directors, management and employees
• Providing active oversight of management.

NACD objections
‘We commend and thank the FDIC for its continued dedication to maintaining stability and public confidence in America’s banking system,’ NACD president and CEO Peter Gleason says in a statement. ‘While its proposed guidance is well intended, we are concerned about the precedents this rulemaking could set for sectors beyond banking. We encourage the FDIC to recast its guidelines as voluntary.’

In a letter to the FDIC, Gleason and NACD chair Sue Cole note that parts of the proposed guidance are consistent with their group’s own recommendations, but say that as a regulatory mandate ‘the proposal may have unintended consequences’. The NACD is concerned that the proposed guidelines:

• Are too broad in scope
• Blur the roles of management and the board
• Conflict with state law
• Are prescriptive
• Have implications for director and officer liability
• Have low size threshold
• Would impose time-consuming burdens.

Gleason and Cole write that many of the proposed ‘prescriptive controls over corporate governance matters addressed in the proposal appear to be outside the scope of safety and soundness issues and therefore outside the scope of the FDIC’s authority.’

For example, they write, the adequacy of a bank’s risk-management program falls within the scope of a banking supervisor’s safety and soundness considerations, but requiring a board to implement certain aspects of a risk-management program would dictate a governance structure that should be left to the board and management.

Their recommendation is: ‘Make a clear distinction between recommendations and requirements, focusing requirements on areas within the FDIC’s scope of authority. Make recommendations intended to strengthen bank governance, helping bank boards effectively confront growing market complexity and disruption.’

The NACD is also concerned that the proposed guidelines ‘are extremely detailed and quite prescriptive, which can lull directors and managers into a false sense of security regarding the robustness of risk management.’ Those who take a ‘check the box’ approach to following the guidelines may miss emerging risks, the group says: ‘Boards should be able to use their independent judgment and discretion to determine the appropriate governance and risk-management framework for the institution based on the size, complexity and nature of the institution’s business lines.’

Among other things, Gleason and Cole say the proposal could increase director liability exposure, which in turn could dissuade qualified candidates from serving on the boards of larger banks and raise premiums for director and officer insurance. They urge the FDIC to make clear that its recommendations are not requirements and for any mandates it issues to create a safe harbor against FDIC enforcement for directors and officers acting in good faith.

An FDIC spokesperson declined to comment.