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Dec 01, 2017

CII seeks more Fed guidance for boards

Central bank issues proposal tackling supervisory expectations for boards of certain financial institutions

The Council of Institutional Investors (CII) has urged the Federal Reserve to expand on its planned guidance for banks’ boards to include more direction in areas such as diversity and independence, amid a move to focus on their key duties.

The Fed in August asked for feedback on a proposal tackling supervisory expectations for the boards of financial institutions including bank holding companies, savings & loan holding companies, US branches of foreign banking organizations and systemically important non-bank financial companies – which are designated by the Financial Stability Oversight Council for supervision by the central bank.

The plan comprises three key elements. Firstly, for the largest domestic bank and savings & loan holding companies and systemically important non-bank financial companies, it would establish principles for effective boards focused on the performance of their core responsibilities.

The Fed’s filing describes effective boards as those that:

  • Set clear, aligned and consistent direction regarding the firm’s strategy and risk tolerance
  • Actively manage information flow and board discussions
  • Hold senior management accountable
  • Support the independence and stature of independent risk management and internal audit
  • Maintain a ‘capable board composition and governance structure.’

Secondly, the proposal is designed to better distinguish between the roles and responsibilities of an institution’s board and those of senior management. Finally, it would eliminate or revise supervisory expectations contained in certain Fed notices for domestic bank and savings & loan holding companies.

In a recent letter, CII general counsel Jeffrey Mahoney welcomes the Fed’s efforts to ‘refocus supervisory expectations for boards on a board’s core responsibilities.’ He agrees that boards’ effectiveness can be damaged if they spend too much time satisfying supervisory expectations not directly related to these core responsibilities, and that financial institution boards at present ‘can be overwhelmed by the quantity and complexity of information they receive.’

But the council is concerned that, ‘while bank boards have been required to be too much in the weeds on some matters, the pendulum could swing too far in the opposite direction,’ Mahoney writes. Outside board members have an information disadvantage vis-à-vis management, which puts a priority on directors having the right knowledge and skill-sets so they can ask the right questions and understand key sources of risk, he says. 

Mahoney suggests that the proposed board effectiveness guidance might be improved by adding a principles-based framework on board independence, which CII defines as follows: ‘An independent director is someone whose only non-trivial professional, familial or financial connection to the corporation, its chairman, CEO or any other executive officer is his or her directorship. Stated most simply, an independent director is a person whose directorship constitutes his or her only connection to the corporation.’

CII also suggests that the Fed add more guidance on director skill-sets and experience, board leadership, outside commitments by board members and board diversity. ‘We believe it is critical that section E [of the proposal] discuss the need for some outside directors with relevant industry experience and subject-matter expertise,’ Mahoney writes. ‘The text of this section is very high level and abstract, and we worry the language will signal to banks acceptance of – or even approval for – return to a model of having only generalists on bank boards.’

The council is worried that the proposed guidance underplays the importance of effective independent board leadership, in that it refers only to a lead independent director – not CII’s preferred alternative of an independent chair – and only describes limited aspects of lead directors’ responsibilities in holding senior management accountable.

Among other things, CII urges the Fed to consider adding the following text or similar language: ‘[A]n effective board would consider board nominees who are diverse with respect to background, experience, age, race, gender, ethnicity and culture.’  

Ben Maiden

Ben Maiden is the editor-at-large of Governance Intelligence, an IR Media publication, having joined the company in December 2016. He is based in New York. Ben was previously managing editor of Compliance Reporter, covering regulatory and compliance...