Would You Like To Serve On Our Board?
What would be expected of you if you were invited to be a director on the board of a financial institution?
A certain amount of knowledge on the day to day workings would be in your favor, but not really a requirement.
A relatively broad understanding of loan proceedings, ratios and standards would be a given.
You would be expected to be reasonably diligent, attend meetings, read and understand reports, have no personal interest other than that of director or stockholder, approve the extension of credit and vote on other issues "in good faith". You would also be expected to follow up on regulatory violations or criticisms. Other than that, the law governing financial institution boards of directors, as other corporate boards, was pretty general in nature.
If you did all these things, then even if you made a mistake, there was a certain amount of protection offered in light of a court decision. And many financial institutions carry directors and officers insurance that would have protected you in case of a misstep.
Not Any More?
Things have changed in the banking industry. Directors are now potential targets if the financial institution fails. Their insurance will not protect them if the FDIC sues them.
Several court cases have challenged the old standard of acting "in good faith." They say that a bank director is held to a higher standard than corporate directors. In one case the court said the board did not require enough information before they voted to extend credit. In another case they are charged with letting the bank take too much risk.
Court cases are considering whether directors can be held liable for "gross negligence," "negligence" or "fiduciary duty" violations.
Even defining these terms puzzles lawyers and directors alike. Does gross negligence mean general negligence, like not reading reports or attending meetings? Or is it intentional wrongdoing? And, in the case of regulators holding directors liable for compliance to regulations, are directors or officers responsible to know all the laws and regulations that apply to financial institutions today? Is it reasonable to assume that anyone could do that?
Now along comes the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) and the FDIC Improvement* Act of 1991 (FDICIA) to add to the liability and responsibility of the director, the financial institution and the employees.
States To The Defense
State legislators are trying to enact laws to return the implied protection to directors who act "in good faith." We applaud the 40 states who have thus far enacted statutes to do so. We fear the federal court appeals that are attempting to overrule the states' actions.
Most of our directors are hard working, upstanding, moral people who are genuinely concerned with the progress and profitability of their financial institutions. They deserve better than the fault finding and blame laying being carried on by the regulators and Congress. We urge you to support your state's actions in returning the consideration of director's liability to the former accepted standard. We need to hold on to our good directors.
* Emphasis is the editor's. Who are they kidding?
Copyright © 1992 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 3, No. 3, 7/92
First published on 07/01/1992