Guidance on Board Effectiveness for Large Financial Institutions
January 9, 2018
In August 2017, the FRB issued proposed supervisory guidance addressing effectiveness for boards of directors. The proposed board effectiveness guidance (BE Guidance) would apply to certain large bank and thrift holding companies supervised by the FRB.
The BE Guidance responds to concerns that boards of directors have been spending disproportionate time and resources on matters outside of their core responsibilities and that distinctions between the roles of the board and senior management have been blurred.
The FRB’s proposal generally has been viewed positively by affected institutions. At the same time, the practical implications of the BE Guidance will depend not only on how it is finalized after the public comment process, but also on how it is implemented by Federal Reserve examiners in the field.
The BE Guidance would define and explain the following five key attributes of effective boards of directors:
1. Setting clear, aligned and consistent direction regarding the firm’s strategy and risk tolerance.
2. Actively managing information flow and board discussions.
3. Holding senior management accountable for implementing the firm’s strategy and risk tolerance and maintaining the firm’s risk management and control framework.
4. Supporting the independence of the independent risk management and internal audit functions.
5. Maintaining a capable board composition and governance structure.
The BE Guidance is part of a package of complementary proposals, which also includes:
- Streamlining and clarifying previous FRB guidance to align with the BE Guidance;
- Revising previous guidance to clarify which examinations findings should be directed to the board of directors (vs. management);
- Creating a new large financial institution rating system for large bank and thrift holding companies (which would incorporate the BE Guidance); and
- Clarifying the guidance that would apply to smaller bank and thrift holding companies (below the $50 billion asset threshold for the BE Guidance).
The BE Guidance and related proposals signal a potential shift toward a more streamlined and risk-based supervisory approach to defining expectations of boards of directors. At the same time, FRB Governor Jerome Powell has noted that the FRB does “not intend that these reforms will lower the bar for boards or lighten the loads of directors.”
Public comments on the BE Guidance are currently due on February 15, 2018.
While the proposal will only affect regulated financial institutions, the focus on the board’s responsibility to guide strategy and oversee compliance and risk management are familiar issues for boards to reflect on periodically. In addition, the spotlight on the independence and stature of the internal audit and risk management function highlights the importance of those areas in all companies in providing critical information to both management and the board.
Finally, at a time when directors may feel that they are suffering from “information overload,” it might be appropriate to consider whether the standard information package strikes the right balance between clear communication of risks and opportunities and sufficient detail to allow for effective oversight.