Bank Director's Training

David is chair of the compensation committee, even though he is self-employed, has no employees and has never held a job with benefits. However, he clearly has the bank’s best interests at heart and he never misses a board meeting or committee meeting. Is he qualified to continue in his position as chair of the compensation committee?

Yes, his lack of personal experience with benefits is not necessarily indicative of his understanding of principles of fair compensation for performance. There is no law or rule that requires particular experience for this position. However, governance experts generally agree that compensation committees should have the benefit of expert, independent advice on difficult or complex decisions.

You are on the board of Reliance Bank, which despite its small size, has a governance committee. However, the governance committee’s sole activity has been to develop and annually approve an ethics policy. Recently, you participated in a director survey distributed by your local Federal Reserve Bank. You noted that there were several questions about management succession on the survey, but you could not answer them affirmatively. For instance, during your term on the board and the governance committee, no one has ever addressed what the bank would do if something happened to the bank president, despite the fact that he is 65 and has a family history of heart problems. What might you do?

The actions you might consider depend largely on the bank’s ownership. You might begin by reviewing the governance committee’s charter to see if the committee has the authority to deal with this issue.

You also could point out the survey questions to the full board and recommend that they authorize the governance committee to explore the bank’s alternatives. The bank’s examination report from its bank supervisor also may contain support for developing a succession plan. Other actions the committee might consider include naming someone who has enough experience to keep the bank operating on a daily basis until a new president can be found, identifying possible candidates to be approached if something happens, or immediately putting the bank on the market in the event something happens.

If the president also is the principal shareholder, he may have identified someone to take over, but may not have discussed this with the board or the governance committee so the committee might want to approach him on the issue. Additionally, if the governance committee performs self-evaluations, this could be a topic that the committee might want to investigate.

The executive committee of Action Bank is authorized to act for the board between board meetings if it gets the telephone approval of seven of the ten board members. The chairman of the executive committee polled five board members by telephone about a proposed action to be taken, but could not reach the remaining five directors. Citing that it was likely that at least two of the directors who couldn’t be reached would approve, the committee moved forward on the action. Was this appropriate?

No. The executive committee comes from the board of directors. It is only authorized to act on the board’s behalf if seven directors give approval in a telephone poll. In this case, the committee wasn’t getting the response it wanted and stopped polling the directors. Here are some follow-up questions to consider: What will the board do? Will it go ahead and ratify the action taken by the executive committee? Or, will it discipline the executive committee in some way? If you were a board member, would you be concerned about the executive committee’s action? Would such a transaction alter the level of trust that exits?

The governance committee of ARB Bank recommended a strict code of ethics, calling for personal honesty by all employees and managers. The board of directors approved the code of ethics in January 2001, and re-approved it each January thereafter. In March 2005, the internal auditor found that the president had taken his family on a two-week vacation with all expenses charged to a bank account for charitable contributions, over which the president had discretionary control. What should the internal auditor do?

The internal auditor should immediately report her findings to the audit committee chair. The audit committee will likely investigate the matter. Once the investigation is complete and the scope of the irregularity is confirmed, the full board will be responsible for confronting the president and deciding the appropriate disciplinary action.