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Engagement and Independence Make the Difference

By: Jennifer Kelly

Outside directors play a vital role in the success of any community bank. Together with bank management, successful community banks depend on directors who are informed, engaged, proactive and attentive.

One piece of evidence that supports the importance of bank directors and their influence on community banks is that even during the height of the recession, three-quarters of national community banks were able to maintain a 1 or 2 composite rating. The community banks that made it through the recession had stronger capital, better liquidity management, better underwriting and, in most cases, smaller asset concentrations. They are the ones that stuck to their knitting, served their communities and did not try to reach too far for profits. As a result, they maintained their reputations and were able to build on their customers’ trust and confidence.

As important as each of those characteristics was, the strength of the community banks that prospered in difficult times came from more than just the sum of those parts. They also had effective directors working closely with management.

The health of a bank depends on a strong, independent and attentive board. It is for that reason that the OCC provides resources to help community banks develop successful boards of directors. In the last year alone, more than 1,100 directors attended at least one of the OCC’s director workshops. The OCC also distributes a Bank Director’s Tool Kit free of charge and encourages directors to contact their local field offices, located in one of 60 cities across the country, any time they have a question or need independent perspective on an issue.

The evolving regulatory landscape and the slow pace of economic recovery represent significant challenges for community bankers. The OCC understands that in order to successfully deal with those challenges, banks must recruit and retain capable, committed people to serve as directors. Therefore, the OCC wants to support directors who are willing to give their best to oversee successful community banks.

What Are the OCC’s Expectations?

Directors must follow two guideposts: first, duty of care; second, duty of loyalty. On a fundamental level, bank directors have a responsibility to act in the best interest of the bank.

To fulfill those obligations, directors must have the ability and willingness to communicate openly and frankly with management, including challenging their assumptions and asking tough questions. A rubber-stamp board (i.e., one that goes along with whatever management proposes) does not serve the interest of the bank, its customers or the local community.

While not expected to be banking experts, bank directors should have a good understanding of the bank’s business, including risk-management and control systems. Directors with diverse backgrounds provide a valuable check and balance on the management team as they evaluate both current performance and new proposals through the lens of their individual expertise and outside experience.
A current example of how this plays out on a practical level involves cyber security. Bank directors should understand and monitor the steps management is taking to maintain data security.

Furthermore, as the board considers strategic decisions that would affect the bank’s risk profile, directors should be asking what steps would be taken to mitigate the associated risks. Specific areas of inquiry should include how the bank ensures that personally identifiable information remains confidential and secure; what the risk of fraud is and how it will be controlled; and how the bank ensures the continuity of operations to avoid business disruptions that would inconvenience customers.

An individual becomes a bank director because he or she has a genuine interest in the business of banking and a personal commitment to meeting the needs of the local communities that the bank serves.

Jennifer Kelly is senior deputy comptroller for mid-size/community banks at the Office of the Comptroller of the Currency.

Copyright (c) January 2014 by BankNews Media