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The Importance of Outside Board Members
by Regional Examiner K. Paul Qualls, Oklahoma State Banking Department
Why should a bank's board of directors want nonaffiliated, or outside, individuals to serve on its board? What can they contribute? What should their qualifications be? We will first review the responsibilities of a director, and then we will examine what outside directors contribute to the composition of the board. We will also review the qualifications of an outside director and, lastly, we will explore general considerations potential directors should review before accepting the responsibility of directorship.
Every bank has a board of directors which serves as the source of all authority and responsibility. This directorate is charged with the responsibility of formulating sound policies, establishing obtainable goals and objectives, and effectively supervising the affairs of the bank. Along with these responsibilities, the directorate must also be concerned with the safety of depositor's funds and meeting the credit needs of the community it serves. To better serve these ends, the directorate is accountable to the regulatory agency that issued their charter to operate initially. It is this accountability that makes a directorate position so unique and places tremendous emphasis upon a board member's qualifications.
Board composition can vary greatly, but often the directorate is comprised of substantial stockholders and/or executive officers of the bank. These individuals are considered inside directors due to their appointed position or investment in the bank. While their membership to the bank's governing body is significant, this composition can lend itself to group think, narrower economic focus and eliminates the possibility of any semblance of checks and balances. The inclusion of outside directors helps resolve these issues and, additionally, brings to the table varying business and professional experiences, attitudes and ideas from the community, in which they live and conduct business. Outside directors help diversify the composite judgement of the board members due to their independence and should be relied upon to express concerns from their viewpoint.
While the role of a director is considered one of honor, outside directors are cautioned to review and acquaint themselves with the bank before accepting their directorship. Before joining a bank's board, the primary objective of an outside director must be to familiarize themselves with the overall operation of the bank, governing policies and the current business strategy employed by the directorate to develop and cultivate business within the bank's trade area. Familiarization is accomplished through an initial understanding of the bank's credit culture, investment strategies and operational objectives. Analysis can be assisted via existing documents including external audits and loan review reports. The latter two are extremely important due to their independent viewpoint. The secondary and most important objective is for a potential board member to be able to communicate effectively with the other board members. While each director's education, acumen and business experiences differ, information must be unilaterally transmitted to each director on a level commensurate with that individual's experience level. An understanding of all business activity conducted by the board is paramount for each director due to the responsibility they incur by approving or denying said activity. Effective understanding can only be achieved if each director has the presence to question unfamiliar activity and require additional delineation before the matter is put to a vote of the board. Ultimately, the potential director must have the wherewithal to vote against any matter, loan or otherwise, that appears ambiguous or to contain inordinate risk.
What role can outside directors play in a bank's operation? Their contribution to the effectiveness of the bank's governing body can be unlimited, given the proper attitude and the application of diligence.
K. Paul Qualls is a 16 year veteran of the Oklahoma State Banking Department. His career began at the height of the oil field bust and, for the first several years of employ, dealt with the inherent effects said bust effected upon the local banking industry; chiefly, severe underwriting weakness and deficient collateral support. Currently, he holds the position of Regional Examiner and is responsible for the oversight and conduct of fourteen junior examiners, and is a Department representative. He is a graduate of and former instructor at the Graduate School of Banking of Colorado. He is now a course instructor for the Conference of State Bank Supervisors' Credit Risk Analysis and Director's Training Courses taught in various locations throughout the United States of America.
First published on BankersOnline.com 3/4/04
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