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

Board Leadership

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

NAFCU W ebinar Septem ber 24, 2013

1

Board Leadership

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

2

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

3

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

• f a board will be to exercise reasonable oversight and

supervision over management  Understand delegation versus abdication; oversight vs. management

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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

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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

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Board Governance

 Minutes are best record to show what was done

• r 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

• ccasional push back
• E.g., do minutes reflect a discussion of the relative risks

involved in proposed matter, were alternatives discussed?

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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

• ut of context

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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

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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

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Board Governance-Committee Structure

Typical Committees

Board of Directors Supervisory Com m ittee Com pensation Com m ittee Governance/ Nom inating Com m ittee

Additional Committees -

• Risk
• Loan
• ALCO
• Executive

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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)

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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

13

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?

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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

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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

• fferings; incentive compensation; plans for

growth) and external (e.g., economic; interest rates; competition; regulatory; legislative)

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Risk Oversight - ERM

 The banking regulators have identified eight major categories of risk:  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

• Credit
• Operational
• I nterest rate
• Compliance
• Liquidity
• Strategic
• Price
• Reputation

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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

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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

19

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

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CEO Oversight And Succession

 Performance relative to peers is useful information for Board  Appropriate compensation is critical – incentive compensation has to be risk sensitive

• Should not encourage inappropriate risk taking
• Reward should follow risk tail (e.g., clawback policy)

 Succession planning has short term (what if CEO is hit by bus) and long term components (needs may evolve as institution grows)

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CEO Succession

 Succession planning should be driven by corporate strategy  The goal of CEO succession is finding the right leader at the right time  CEO succession is a board-driven, collaborative process  CEO succession is a continuous process  The board should ensure that the CEO builds a talent-rich organization by attracting and developing the right people  Board should be exposed to management below top tier level

22

Strategic Planning

 Who is responsible?

• CEO responsible for developing strategy

recommendations and alternatives

• Board responsible for reviewing, contributing to,

approving and monitoring progress against strategy

 Strategy is the direction an organization takes with the objective of achieving long-term success  Strategy establishes the purposes and scope of the institution’s business activities, taking into account operating environment, market place, competition, risk and other factors  Strategic planning is a process, not a document

23

Strategic Planning

 Strategic planning and enterprise risk management are integrated processes  Strategic planning and management succession planning are integrated processes  Boards should be involved in strategic creation and development  Board should consider and select options in strategic planning process  Board monitors performance against strategic goals and provides ongoing leadership to fulfill strategic vision  Board should be prepared to pivot/ modify strategic direction as needed

24

Board Development

 Assessing board effectiveness  I dentifying core competencies  Assessing individual contributions  Ending board service (age limits/ term limits)  Ensuring fresh thinking  Questions to ask:

• What kind of board do we have?
• What kind of board do we need?
• What skill sets should be represented on the board?
• How do we attract new directors?

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Board Development

 Board evaluations are conducted for the purpose of enhancing board performance

• An evaluation can assess overall board effectiveness

and/ or include peer to peer performance ratings

• Committee effectiveness evaluations are also

recommended

• Follow up is essential
• Retain conclusions and recommendations and discard

underlying data

 Board training

• NCUA requirement
• Complementary to board evaluations

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Board Development

 Board or governance committee should continually evaluate how board composition fits with the strategic direction of the institution

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Director Fiduciary Duties

 A director must carry out his or her duties in good faith, in a manner such director reasonably believes to be in the best interests

• f the membership (Duty of Loyalty)... and

with the care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances (Duty of Care)  Duty of loyalty requires that board members be free of conflict of interests

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Director Fiduciary Duties

 Duty of loyalty also encompasses the

• bligation to exercise a good faith

judgment that information and reporting systems are in place that are designed to enable management and the Board to reach informed judgments concerning the corporation’s compliance with laws and policies

• “Failure of oversight” - director inaction cases
• In corporate world, requires a “sustained or

systematic failure to exercise reasonable oversight” – high bar

29

Director Fiduciary Duties

 Duty of Care and reasonable inquiry requires that directors inform themselves of all material information reasonably available to them prior to making a decision.  Breaches of Duty of Care usually characterized by:

• Failure to obtain adequate information
• Failure to give thorough consideration to a

decision

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Director Liability



Under the business judgment rule, when board action is challenged, a court will presume that directors acted on an informed basis, in good faith and in the honest belief that the action was taken in the best interests of the entity



The business judgment rule places the burden of proof on plaintiff to demonstrate that there is a reasonable basis for questioning whether the board satisfied either the duty of loyalty or duty of care



Business judgment rule does not apply to regulatory enforcement actions