CYA: We're Not Referring To The "Christian Youth Association"

Long-time bank lawyer Jeff Gerrish has a nice column in the most recent edition of the ABA Banking Law Journal whose subtitle is "Three key items for your "CYA" do-list." The "to-do" list is that of bank directors, and the three items should be on every director's list. The are: (1) Make sure that you do your job; (2) review the bank and holding company's Articles of Incorporation and Bylaws; and (3) Make sure you understand your directors and officers insurance coverage. Obviously, Jeff puts some meat on those bare bones, and I encourage community bank directors to give it a serious reading. Jeff adapted the article from remarks he gave as a panelist for a recent ABA Baking Law Journal webinar. He includes some advice to directors given by other three panelists, a state bank trade association head, the former board chairman (and current board member) of a community bank, and an insurance company executive who focuses on D&O liability insurance. It's not a long article and well worth a read. More useful advice for directors was given in a recent op-ed piece in the American Banker (paid subscription required) by former FDIC Chairman (and current chairman of Fifth Third Bancorp., Bill Issac. I'll condense some of Bill's discussion to brief bullet points: Beware the dominant CEO who essentially "runs the board." Select your own leadership and membership (with input, but not control, of the CEO). Separate the titles of chairman and CEO. As a director, be independent and act as an independent check on management's assumptions and risk analysis. As questions. Demand answers. I would add, based upon my own experience, that independent directors do themselves and their banks a favor by not being doormats and by insisting that questions they ask and the answers the board is given by management be reflected in the board minutes (or appropriate board committee minutes). While litigators may tell boards of directors that the more generic and less specific board minutes are, the better they are, I think that's dangerous for independent directors. When the FDIC starts second-guessing the board's oversight of management-gone-wild, the directors need to be able to demonstrate that they were sitting at board meetings doing something more beneficial than reading the latest issue Playboy. Give careful thought to "the structure, composition, and mandate of board committees." From what we've been seeing in the midst of the meltdown's aftermath, I'd say that a number of community banks wish they'd given more attention to the loan committee (or loan review committee) and the audit committee. When is comes to board material, try to make them as "high-level and big-picture oriented" as possible. Bill doens't say this, so I will: don't let management bury the board with scores of pages of data that would baffle Albert Einstein. Make management give you reports in plain English that reflect accurately the bank's "condition and risks, the results of its operations, and its challenges." If critical information is buried in a footnote on page 88, then like Cool Hand Luke, you've likely got a failure to communicate. The most critical means to manage risk is to diversify. Now he tells us! Compnsate directors well, or else you may find "that you get what you pay for." At the same time, the board must focus on management compensation becasue, there again, you often "get what you pay for." As Bill observes, if you pay based on loan production, don't be surprised when you grow rapidly through loan production "for good or ill." For many community banks, a number of these suggestions (made with the benefit of much hindsight), while useful, are going to be problematic. For example, a $200 million community bank is going to have a tough time paying the best directors what they are worth (although the bank's business should be less complex and more easily understood and monitored at that size). In addition, as the FDIC lawsuits against former directors of failed community banks continue to be filed, the pool of the most competent eligible directors will likely shrink. As I said recently, in many cases, the risks of serving on a board of a community bank that today looks like it's as well run as the trains in Italy under Moussolini can appear to be much different ten years later, after the sky unexpectedly fell on the bank's head, the composite CAMELS rating went from 1 to 5 in a one-to-two-year span, and you suddenly discover that nasty regulatory exclusion in your D&O policy. Smart people learn from the experiences of others. Jeff's and Bill's advice is excellent for those directors who are sufficiently confident (a cynic might say sufficiently hubristic) to be willing to serve on the board of directors of a community bank. The trick for a number of banks is whether they can contnue to find enough suckers qualified candidates to fill the bill.

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