Board Leadership NAFCU W ebinar Septem ber 24, 2013 Presented By: - PowerPoint PPT Presentation

Board Leadership NAFCU W ebinar Septem ber 24, 2013 Presented By: John J. Gorm an Richard S. Garabedian Luse Gorm an Pom erenk & Schick, PC 5335 W isconsin Avenue, NW W ashington, DC 20015 Phone: ( 202) 274- 2000 www.luselaw.com

Board Leadership Topics Covered:  Board Governance  Risk Oversight  CEO Oversight  Strategic Planning  Board Development  Board Fiduciary Duties 1

Board Governance Board Responsibilities  Ensuring legal and ethical conduct  Selecting, evaluating and compensating the CEO and executive management  Approving corporate strategy and business plans  Reviewing and approving policies for the operation of the institution  Providing general oversight of the business and monitoring performance against plans, policies and goals  Monitoring Board-established risk limits and the overall risk profile  Evaluating board processes and performance 2

Board Governance Role of the Board – Oversight vs. Management  According to NCUA regulations, the Board is “responsible for the general direction and control of the affairs” of the credit union  The Board can “delegate the execution of operational functions to credit union personnel”  But the ultimate responsibility for the credit union’s direction and control is non-delegable  The NCUA recognizes that typically, the primary obligation of a board will be to exercise reasonable oversight and supervision over management  Understand delegation versus abdication; oversight vs. management 3

Board Governance  Boards need to be engaged and informed  To be effective, a Board needs processes in place to enable it to fulfill its responsibilities and satisfy its fiduciary duties of care and loyalty. Best practices:  Effective meetings: Board/ committee agendas and minutes  I ndependence monitoring and testing  Robust committee structure  Executive sessions  Dialogue with Regulators 4

Effective Boards  I mportance of board and committee meeting agendas and pre-meeting distribution  Careful, comprehensive, and consistent preparation of agenda for each meeting provides board members with reasonable assurance that all important matters are brought to their attention  Agendas set with board input  Packets should be received several days prior to the meeting and thoroughly reviewed  Minutes should reflect that materials were distributed in advance of meeting 5

Board Governance  Minutes are best record to show what was done or not done  Minutes of committees are equally as important as full board minutes  Drafting good minutes is an art - there should be some training and they should be reviewed by counsel periodically  Regulators are increasingly expecting minutes to reflect both questioning from board members and occasional push back  E.g., do minutes reflect a discussion of the relative risks involved in proposed matter, were alternatives discussed? 6

Board Governance  Two schools – Long-form Detailed Or Short- form Summary  Arguments for long-form - if done right, will demonstrate most accurate record of what was deliberated on, considered and what was said – but should not be a transcript  Arguments for short form - if done right, will show record of the substance of what was deliberated upon and covered but with ability to “fill in the blanks” - will not have to deal with specific “testimony” that may (will!) be taken out of context 7

Effective Boards  Best practices as to minutes :  Prepare as soon after meeting as possible – review and approval of minutes should be taken seriously  Be careful with drafts – destroy notes and prep materials  Be complete about what was discussed but precise  Capture substance of inquiry – not who said what  Note time devoted to meeting but not particular subject  Note comings and goings of participants  Note reliance on advisors reports, memoranda and analysis  Note advisor question and answer period  Use specific resolutions as much as possible  Note review of committee minutes and recommendations 8

Board Governance Board I ndependence  Board should have policy on board independence and periodic testing of independence  Independence should be more than just “not an employee”  No significant economic ties to credit union  Not an advisor to credit union  No significant familial relationships  Not former member of management  Annual board questionnaire should be prepared and reviewed  Nominating and compensation committees are most sensitive to independence issues – charters should address 9

Board Governance-Committee Structure Typical Committees Board of Directors Governance/ Supervisory Com pensation Nom inating Com m ittee Com m ittee Com m ittee Additional Committees -  Risk  Loan  ALCO  Executive 10

Board Governance - Committees  Certain committee should be composed entirely of independent, outside directors – compensation; nomination and governance  Operate pursuant to a written charter detailing responsibilities and authority, including the authority to engage advisors  Help ensure productive board meetings and bring specialization of skills to bear on particular issues  Board should consider using special board committee in special circumstances (mergers and acquisitions, conflicts involving board members, litigation, regulatory problems) 11

Board Governance  Separating Board Chair and CEO roles?  I f CEO is Chair, consider establishing a Lead Director position with specified responsibilities  Should President/ CEO be a board member?  Makes for a more informed board  Typical structure in bank and corporate environment  Better liaison and communications between board and management  Conflicts can be addressed through recusal on individual matters 12

Board Governance  Executive Sessions: To allow directors to discuss the institution and/ or management in an uninhibited fashion  Of Board without any non-director management members  Of only Independent directors  Regularly Scheduled  Consider for every board meeting  Timing  Before or after meeting  Follow up essential  Feedback to CEO  Minutes? 13

Risk Oversight  Heightened regulatory expectations as to risk management and board oversight of risk management  Enterprise risk management (ERM)  “Process, effected by an entity’s board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within the risk appetite, to provide reasonable assurance regarding the achievement of entity objectives” COSO 14

Risk Oversight  ERM is not a one size fits all program  Tailored to the asset size, business complexity, strategy and appetite for risk  Board needs to understand the material risks inherent in strategy and consider whether the risk management system is appropriate and has sufficient resources  Risks are internal (e.g., management succession; information systems; product offerings; incentive compensation; plans for growth) and external (e.g., economic; interest rates; competition; regulatory; legislative) 15

Risk Oversight - ERM  The banking regulators have identified eight major categories of risk:  Credit  Operational  I nterest rate  Compliance  Liquidity  Strategic  Price  Reputation  And have identified operational risk as having increasing prominence – the risk of loss due to failures of people, processes, systems and external events  Compliance and related reputation risks are also in the forefront 16

Risk Oversight  Dodd-Frank requires larger bank holding companies (> $10B in assets) to have independent risk committee with one member with expertise in risk management  Encourage a dynamic and constructive dialogue between management and the board  Understand that without risk there is no reward 17

Risk Oversight  Every board should be comfortable that:  The risk appetite implicit in the board approved business strategy is appropriate  Expected risks are commensurate with the expected rewards  Management has implemented a system to identify, manage, monitor and mitigate risk  The risk management system informs the board of the material risks facing the institution  There are appropriate reporting systems in place for the board to perform its oversight responsibilities  There is appropriate documentation of ongoing board engagement in ERM 18

CEO Oversight  Selecting, assessing and appropriately compensating CEO are among a Board’s most fundamental and important responsibilities  I n order to properly assess performance, identifiable measures must be agreed upon at beginning of period  Board and CEO should agree upon performance metrics and goals  Goals and metrics should be coordinated with strategic planning  Performance should be measured against goals  Compensation committee can take lead in this area 19