Corporate Governance Management tool. Executing On Corporate Governance

Transcription

1 Corporate Governance Management tool Executing On Corporate Governance

2 Corporate Governance continues to be rated HIGH on the Regulatory priority for safety and soundness 2

3 Corporate Governance Guidance... OCC Spring 2016 FDIC Spring/Summer 2016 Federal Reserve August

4 The OCC identifies Strategic risk in the following areas... Strategic risk remains an ongoing concern. Banks are several years into the risk accumulation phase of the economic cycle. The banking environment continues to evolve, with growing competition among banks, nonbanks, and financial technology firms. Banks are increasingly offering innovative products and services, enabling them to better meet the needs of their customers. While doing so may heighten strategic risk if banks do not use sound risk management practices that align with their overall business strategies, failure to innovate to meet evolving needs or financial services may place a bank at a competitive disadvantage Strategic risk primarily includes adequacy of business models, board and management succession, breadth and depth of staff expertise, and the search for new market niches. Heightened lending competition pushes some banks to relax credit structure and terms as these banks adopt growth strategies that target new business segments. Banks are increasingly adopting innovative products, services, and processes in response to the evolving demand. Doing so often involves assuming unfamiliar risks, expanded reliance on third-party relationships, and the need to update or acquire new information systems and technology platforms. In this extended low interest rate environment some banks are reaching for yield by extending asset duration. 4

5 The FDIC followed suit and issued a Supervisory Insights dedicated entirely to Corporate Governance... Re asserts the definitive guidance contained in the FDIC Pocket Guide for Directors Duty of loyalty and care Comply with federal and state statutes, rules and regulations Added clarification ü Not involved in day to day operations ü Establish acceptable risk levels ü Ensure that policies, procedures and practices are in place ü Monitor Senior management and business operations Risk culture Ethical culture 5

6 The FDIC Pocket Guide for Directors... Select and retain competent management, talent development and succession planning Supervise management Understand the bank s risk profile Set risk objectives and parameters Establish, with management, long and short term business objectives Strategic planning Maintain independence Adopt operating policies Monitor operations and oversee business performance Provide for independent reviews Heed supervisory reports Keep informed, and Ensure meeting community s credit needs Talent Management ERM Strategic Planning Corporate Governance 6

7 Board Members have specific fiduciary duties... Directors owe their fiduciary duties to the corporation and its shareholders. Common stock, not preferred stock. The rights of the preferred are governed by contract. Duty of Loyalty Requires directors and officers to administer the affairs of the bank: with candor, personal honesty, Integrity The interests and welfare of the institution should take priority over the interest of directors, officers, their family members, and their beneficial interests. Duty of Care Requires directors and officers to act as prudent and diligent business persons in conducting the affairs of the bank Directors must have sufficient knowledge of material facts, Thoroughly examine all available information with a critical eye, Actively participate in the decision making process 7

8 The Board must ensure that there is a Strong Corporate Culture... Risk Management Culture System of goals, objectives, policies, controls, values and behaviors to influence risk decisions Ethical Culture Belief that the interests of customers, investors, the community, and other stakeholders take precedence over short-term profits. 8

9 A strong risk management culture requires a strong Enterprise Risk Program... Phase 1: Combine Modeling Into One Process & Phase 4: Ensure Data Integrity Pre-Phase Phase 2 Phase 3 Phase 5 Phase 6 Phase 7 Phase 8 q Setup Risk Committee q Adopt CAMELS+ Approach Capital Asset Quality Manage-ment q Identify and Quantify Risk q Set Risk Thresholds/ Tolerances q Horizontal Risk Assessment q Prioritization of Risk q Vertical Risk Assessment Model Base Case Scenario Stress Test the Base Case Two Approaches: Identify Trigger Events Mitigation Strategies/ Policies/ Procedures Earnings Liquidity Sensitivity + s 1. Variable Stress Tests 2. Enterprise Wide Stress Tests CAMELS+ Assessment Model Alternative Scenarios Pro Forma CAMELS+ Assessment FinPro Regulatory Review 9

10 To create an effective ethics program, Directors should ensure that the bank has policies that address at least the following areas Safeguarding confidential information 2. Ensuring the integrity of records 3. Providing strong internal controls over assets 4. Providing candor in dealing with auditors, examiners and legal counsel 5. Avoiding self-dealing and acceptance of gifts or favors 6. Observing applicable laws 7. Implementing appropriate background checks 8. Involving internal auditors in monitoring the corporate code of conduct or ethics policy 9. Providing a mechanism to report questionable activity 10. Outlining penalties for a breach of the corporate code of conduct or ethics policy 11. Providing periodic training and acknowledgement of policy requirements 12. Periodically updating policies to reflect new business activities 10

11 The Federal Reserve has also clarified Corporate Governance... Set clear, aligned, and consistent direction regarding the firm s strategy and risk tolerance Actively manage information flow and Board discussions Hold senior management accountable Support the independence and stature of independent risk management and internal audit Maintain a capable board composition and governance structure 11

12 Strong Corporate Governance is the foundation for safe and sound operations... Relationships, policies, and processes that provide strategic direction and controls in the company BODs must provide a clear Corporate Governance framework ü Sound objectives ü Policies ü Risk limits BODs must monitor whether officers and employees are complying with framework Credible Challenge is critical ü Must occur ü Must be documented Documentation Reality ü If it is not in writing, it did not happen! Presumptive Knowledge ü Different levels in an organization have different levels of requisite knowledge 12

13 Regulatory criticism of Board/Management continues at elevated levels... 13

14 Most concerns relate to Policies and Audit. 14

15 Besides regulatory risk, there is also some new legal risks... Spencer Case Challenge to election of Mutual Directors Investors Case Challenge to level and timing of stock compensation from conversions 15

16 Directors must avoid conflicts of interests and maintain independence... Conflict transactions: If a majority of the directors hold a personal interest in a transaction, or if a majority of the directors are not independent, the Board will lose the presumption that they acted in the best interest of the corporation. Directors are not deemed to have breached their fiduciary duties just because they were not disinterested and independent. However: Their decisions will be judged for their fairness. If found liable, their liability cannot be exculpated away 16

17 In making business decisions, directors are generally protected by the business judgment rule... The rule presumes that disinterested and independent directors acted: On an informed basis. In good faith. In the honest belief that the action was taken in the best interest of the corporation. Informed: Directors must inform themselves of all material information reasonably available to them. Directors can rely on information and opinions from consultants and management, if those persons can competently produce those reports. Good faith: The decision-making process must be substantive and cannot just rubber stamp management's actions. Best interest of the corporation: The directors must reasonably believe the action was taken in the best interests of the corporation. The standard for a finding of breach is gross negligence. 17

18 FDIC Lawsuits over Corporate Governance generally fall into the following categories... Dishonest conduct or abusive insider transactions Failure of bank to adhere to law, internal policies or supervisory agreement Failure to establish proper underwriting policies or to adhere to such policies 18

19 Regulators look at Corporate Governance to make sure its is appropriate for the bank s size, complexity, and risk profile... People Policies (controls) Practices (systems) The quality is determined by how well they: ü Set the bank s strategy, objectives, and risk appetite ü Establish the bank s risk governance framework ü Identify, measure, monitor, and control risks ü Supervise and manage the bank s business ü Protect the interests of depositors, protect shareholders or members (in the case of a mutual) obligations, and take into account the interests of other stakeholders ü Align corporate culture, activities, and behaviors with the expectation that the bank will operate in a safe and sound manner, operate with integrity, and comply with applicable laws and regulations 19

20 Regulators are utilizing the concept of Heightened Expectations... Strategic Planning Increased Director Liability Pressures of Corporate Governance Ongoing Board Assessment Internal Risk Assessment Director Training 20

21 To minimize the likelihood of regulatory issues, a Corporate Governance Review should be conducted... Examine the management reporting structure and organizational chart and identify the type and number of officer positions needed to properly managed and supervise the affairs of the company or institution; Review Management position descriptions, and delineate necessary skills required for these positions; Review of indemnification provisions in charter documents and terms of D&O policies Assess the current structure and composition of the Board and its committees, including a determination of the structure and composition needed to adequately supervise the affairs of the organization; Review Board Agenda s to improve efficiency Assess the Board s process management governance system Assess the Board s meetings management governance system Monthly Board and Committee packages and minutes Monthly Board and Committee meeting structure and process Monthly Board and Committee action item calendar Assess the organization s vendor management governance system Assess the organization s talent management governance system Assess the organization s leadership and education management governance system Assess the independence of the Audit Committee (if applicable) and its follow-up procedures Provide recommendations for the overall improvement of corporate governance at the organization 21

22 To manage the risks that Corporate Governance brings, a comprehensive and integrated system is required... 22

23 The system needs to do numerous things to mitigate liability... Centralize corporate governance documents in a secure repository Facilitate meetings and keep appropriate minutes ü Establish internal tracking system to address regulatory criticisms Manage the entities policies and track current best practices relative to policies Allow for formal, ongoing training program(s) for all directors Automate workflows and document control Manage third party relationships and risk Provide steady consistent source of pertinent information Control access with robust and flexible user permissions 23

24 Centralize corporate governance documents in a secure repository Document Control Reduce proliferation of documents Fix version control and conflicting data Manage access Assign employee ownership Know when critical documents are expiring Assign Employee Responsibility and Accountability for Action Items Capture action items generated during a meeting Track ownership and status of action items 24

25 Facilitate meetings and keep appropriate minutes... Meetings Management Build by template or original Full calendar management Click through Agendas Utilize any kind of document Remote voting Capture action items Access from anywhere Access from any device Security, security, security Consistent and Complete Meeting Minutes Minutes should reflect what actually happened Minutes need to be finalized in a timely manner and approved within two weeks of the meeting Permissioned access to agendas and minutes Do not let various copies of meeting minutes float around in multiple chains 25

26 Manage the entities policies and track current best practices relative to policies... Existing policies should be on-line and available Policy updates should be scheduled Best Practices for policies need to be known Changes to Policies should be tracked 26

27 Allow for formal, ongoing training program(s) for all directors... New directors should be subject to intensive training, including at a minimum: Regulatory Related party transactions Technology Board ethics Director liability Insider trading Current directors should receive refresher training and training on new developments Training should use Bank specific data where possible FinPro has partnered with New Jersey Bankers to provide this service (soon numerous other States) 27

28 Automate workflows and document control... Automate manual redundant processes Automate control sequence Provide for phase sign-offs 28

29 Manage third party relationships and risk... Identify key vendor relationships Document vendor reviews Standardize vendor criticality and risk assessments Control and centralize storage of all critical vendor documents Categorize vendors by tier to determine due diligence and annual review requirements 29

30 Based on recent exam report findings, regulators are focusing more on liquidity risk, corporate governance, risk management and information technology (IT) risks Asset Quality Operational Strategic Capital Management Valuation Reputation BSA Corp Governance Earnings Legal & Liquidity Regulatory Risk Management IT Sensitivity CRA Compliance The chart above illustrates the CAMELS+ components and the overall regulatory focus on each component. Over time, each of these components shift based upon the overall projected banking environment. 30

31 The top takeaways on Governance at a Financial Institution... Use Consent Agendas Invest in a Corporate Governance Tool (Board Portals Are Not Enough) Approve Management actions through Policies instead of Board Meetings (e.g. Loan approvals, Investment purchases) Spread Policy Approval dates throughout the year in a Laddered Approach Use Video Conferencing when unable to attend in-person Schedule Committee Meetings on the same day as Board Meetings Invite Industry Experts to present on a regular basis Conduct regular Board Training using your bank specific data. Manage Presumptive knowledge. Ensure an Independent Board that provides Credible Challenge Create and Maintain Management Succession and Talent Management Plans Board members should attend a minimum of 75% of all meetings, in person Board members are expected to know and understand the institution s financials The level of insider income and benefits should be carefully reviewed Internal and external auditors should report directly to the board and there should be some one-on-one time with the Board and auditors Consider a lead independent Director or split the Chairperson/CEO Roles 31

32 Takeaways (continued)... Consideration should be given to Board succession, as appropriate Board expertise can be difficult to find and attract Establish equity ownership expectations to align Board with Shareholders Know your employees, be visible, visit all of the Banks facilities Know the Bank s markets and be visible in the community Avoid conflicts of interest, they can be deadly Qualify experts prior to relying on them. Also understand their motivation Pay attention to compensation issues Do not Micromanage 32

33 Some ideas to enhance Board meetings... Schedule meetings one year in advance Avoids schedule conflicts Include committee schedules Schedule committees directly before or after Board meetings Place known items on agenda early Always have an agenda Should follow consistent format Should be prioritized Should allow for Board input Receive Board package in advance of meetings Directors should read, interpret and analyze issues prior to meeting Insist that proposals that do not make sense be clarified, modified, or rejected Don t take votes on issues that have not been fully analyzed and presented thoroughly Proposals should discuss pro s and con s of an issue and should justify the recommended course of action Follow Roberts Rules State what Board action is necessary, if any If action is required, start with issue presentation, follow with motion, allow for discussion and then take and record the vote Involve management expertise in areas where relevant CFO presents numbers CLO presents loan report Prioritize agenda items from management perspective Discuss issues in priority order Put a deadline on old issues Only selectively discuss new issues The minutes should reflect discussion on topics and differing points of view Use consent agendas Board agendas need to be adjusted to ensure that potential areas of fiduciary risk are discussed periodically. Some of these include: Review of Policies at least annually (should also be readily accessible in Board Room, changes should be blacklined) Regulatory ratios should be reviewed quarterly (upon filing of regulatory report). Responses to regulatory examinations Value creation and factors that influence Bank value Discussion of significant regulatory issues and their potential impact on the Bank 33

34 For more information please contact us Donald Musso ext