Congress began grilling the head of the Federal Deposit Insurance Corp. last week about alleged workplace culture issues and harassment at the federal agency, putting the agency in an awkward spot just as it tries to ramp up scrutiny of bank corporate governance.
Bank observers are worried that new corporate governance guidelines from the FDIC could create unintended consequences for boards of directors, blurring the line between board oversight and management.
The proposed guidelines would apply to about 60 institutions above $10 billion in assets that are state chartered but not members of the Federal Reserve, state-licensed insured branches of foreign banks, and state savings associations, according to an estimate from lawyers at Mayer Brown. It would establish standards “that encourage an active and involved” board to “protect” the bank and “oversee and confirm” that it operates in a safe and sound manner. The proposal states that a “board should establish” an effective risk management program and communicate its risk appetite and policies, identify breaches of policies and procedures and establish consequences for these breaches. As an enforceable guideline, the FDIC could take formal action against institutions that fail to submit or implement acceptable plans.
“The proposed guidelines would clarify the FDIC’s expectation that corporate governance and risk management frameworks need to evolve along with growth, complexity and changing business models and risk profiles of larger [insured depository institutions],” said FDIC Chairman Martin Gruenberg in a statement announcing his support for the proposal. “[T]he experience of the three large [bank] failures this spring should focus our attention on the need for meaningful action to improve the corporate governance and risk management processes of large IDIs under the Federal Deposit Insurance Act.”
But the proposal doesn’t have universal support among the FDIC’s board. Director Jonathan McKernan dissented at the Oct. 3 meeting where the policy was revealed and told Bank Director he hopes institutions both above and below $10 billion in assets submit comment letters sharing their perspectives and concerns with the FDIC.
“This guidance would increase the expectations, and impose new expectations, on boards,” he says in an interview. “It would go so far as to conflate the roles of board and management, and those are important distinctions to maintain. We can’t have the board and directors trying to act as managers.”
Meg Tahyar, a partner and head of the financial institutions practice at the law firm Davis Polk, says the proposal “sounds like a good idea” in theory, but has issues in its execution.
“You don’t get good corporate governance by assigning a list of tasks to directors,” she says. “By assigning a list of tasks — and there are so many lists of tasks here, they’re very detailed and then [the FDIC makes] them enforceable — it becomes a compliance exercise,” she says. “You’re turning what should be corporate governance into a low-level compliance job.”
The proposal also widens the constituents that bank directors would need to take into account, says Nathan Ross, vice president of policy at the Conference of State Bank Supervisors, the national organization of state banking and financial regulators. Corporate governance standards, primarily developed at the state level, have established that directors have a fiduciary duty to shareholders. The proposal states that the board “should consider the interests of all its stakeholders, including shareholders, depositors, creditors, customers, regulators, and the public.”
Ross says if the proposal were to sail through exactly as written, “we do think that it would distract boards from their oversight role and inappropriately task them with responsibilities that fall to management.”
These guidelines could be a tall ask for external and independent bank directors, who are often members of the community and lack a banking background. Tahyar and the Conference of State Bank Supervisors are worried that the proposal will ultimately make board service less attractive to potential directors, complicating the board talent search.
Tahyar points out that the FDIC reserves the right to apply the standards to banks below $10 billion if it believes they pose a heightened safety and soundness risk. She also says directors at banks with $5 billion in assets should begin considering the impact of this proposal, given the likelihood they would be subjected to it in future years. She echoes McKernan’s encouragement that directors at FDIC-examined banks read the proposal and submit a comment letter to the agency ahead of the due date Dec. 11.