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Bank Board Accountabilities

The Key to Effective Corporate Governance at Community Banks—The Directorate

By: Debbie L. Meyers, Senior Consultant, Bank Strategies LLC

March 2013

Given the number of bank failures over the past several years and the continuing number of banks in problem status, the regulatory agencies have escalated their attention to the quality of risk management techniques and corporate governance at community banks. In that regard, regulators have specifically focused on the performance of the directorate and have scrutinized their actions in fulfilling their responsibilities. While it is an honor to be selected to serve on the board of a community bank, there is considerable personal liability in serving, and oftentimes the newly appointed director has limited knowledge of the expectations and responsibilities of the position.

How do the regulators view the expectations and responsibilities of the directorate? Simply put, the regulatory agencies have indicated that the board of directors has ultimate responsibility for the bank. Regulators view the directorate as the body that establishes and approves the bank’s strategic direction, outlines the risk appetite within bank policies, and hires qualified management and over-sees performance of their duties in conducting the day-to-day operations of the bank. In addition to these responsibilities, the board also is to ensure the bank’s compensation systems are effective and soundly crafted to incent management in a manner consistent with safe and sound banking. Finally, the directorate is to establish a corporate culture supported by a sound system of internal controls, and a set of corporate values documented within a code of conduct or ethics policy.

To perform their role effectively, board members must approach their position with the highest integrity. They need to demonstrate their ability to make decisions consistent with the best interest of the bank, and within the standards outlined in regulatory expectations. The effective director needs to remain abreast of banking conditions and issues affecting the industry and be aware of regulatory changes. Directors can achieve this knowledge through training, routinely provided by various industry experts and regulatory agencies presentations, or through agency and banking expert websites, which often contain up-to-date information and comprehensive training helpful to the community bank director. Finally, and likely the most important determinant of an effective board member, is his or her ability to remain independent, be unafraid to ask questions of management, and be willing to adjust risk manage-ment systems accordingly when conditions require.

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