Today's bank directors are being asked to do far more than they should. The long-term result will be wasted effort and difficulty in retaining top-quality directors.
Asking boards of directors to analyze specific loan activity, scrutinize suspicious-activity reports, or decide who has access to a computer's hard drive - all real examples from recent examinations - runs counter to good governance.
The trend is for regulators to require board members to become even more involved in fundamental management responsibilities. Every batch of new guidance seems to further blur the distinction between senior management and the board.
Guidance is designed to help banks, but this regulatory trend diverts the attention of directors away from providing strategic leadership and oversight to an increasing amount of operational and other day-to-day business details.
The routine details of running a bank are best left to senior management. Directors must set policy and a focus on strategic direction. We need to find a better way to let CEOs manage and boards govern.
Unfortunately, new supervisory guidance has caused even more blurring of responsibilities. For example, in the Basel II interagency guidance on operating and credit risk, 40 of the 58 references to a bank's board occur in descriptions of a duty or expectation in conjunction with bank management. We also see this trend reflected in supervisory guidance related to anti-money-laundering programs and information security.
Rising expectations for board involvement in senior management matters have significant implications for corporate governance.
The overspecification of responsibilities converts board service into a compliance exercise. There must be latitude for directors to define their relationship with management; due consideration must be given to economic circumstances, regulatory standards, and complexity of the bank's operations.Agencies can help stop this trend by evaluating whether their examiners are appropriately distinguishing management from board obligations in their exam findings, conclusions, and recommendations.
We formally raised these issues with regulators earlier this year and are discussing them with regulators through the ABA's enterprise risk management group. Those discussions leave us hopeful that changes will be made, particularly in the redrafting of the Basel II guidance.
More can be done, however.
We have urged the regulators to review examination reports to evaluate whether an appropriate distinction is being made between management and board responsibilities. We also believe that any new regulation or guidance should clearly delineate the responsibilities. And we hope that through enhanced training for examiners on the role of the board in today's corporate governance environment, there will be greater sensitivity to this issue.
Regulators are correct in making sure bank directors focus on risk. We all have the same interest in good corporate governance and want the board to be involved in key institutional risk decisions.
But when there is a question about who ought to carry out corporate policy, the answer should not be "Make the board do it." Boards have limited time and can't possibly know every aspect of managing a complex banking organization. Nor should they.
