Tag: Bank boards

Recovery Planning for Large National Banks

This post is based on a Sullivan & Cromwell LLP publication by C. Andrew GerlachRebecca J. Simmons, Mark J. Welshimer and Connie Y. Lam. Mr. Gerlach, Ms. Simmons, and Mr. Welshimer are partners in the Financial Services Group; and Ms. Lam is a firm associate.

On December 16, 2015, the Office of the Comptroller of the Currency (the “OCC”) solicited public comment, through a Notice of Proposed Rulemaking (the “NPR”), [1] on proposed guidelines to establish standards for recovery planning by certain large insured national banks, insured Federal savings associations and insured Federal branches of foreign banks (the “Guidelines”).

International Banking Regulators Reinforce Board Responsibilities for Risk Oversight and Governance Culture

Holly J. Gregory is a partner and co-global coordinator of the Corporate Governance and Executive Compensation group at Sidley Austin LLP. The following post is based on a Sidley update authored by Ms. Gregory, George W. Madison, and Connie M. Friesen; the complete publication, including footnotes, is available here.

In October 2014, the Basel Committee on Banking Supervision of the Bank for International Settlements issued its consultative Guidelines [on] Corporate governance principles for banks (the “2014 Principles”). The 2014 Principles revise the Committee’s 2010 Principles for enhancing corporate governance (the “2010 Principles”), in which the Committee reflected on the lessons learned by many central banks and national bank supervisors from the global financial crisis of 2008-09, in particular with regard to risk governance practices and supervisory oversight at banks. The 2014 Principles also incorporate corporate governance developments in the financial services industry since the 2010 Principles, including the Financial Stability Board’s 2013 series of peer reviews and resulting peer review recommendations. The comment period for the 2014 Principles expires on January 9, 2015.

This post highlights certain themes in the 2014 Principles and identifies recent comments by U.S. banking regulators that indicate that supervised financial institutions can expect new regulations to address some of these themes.


The Fed’s Wake-Up Call to Bank Directors

Edward D. Herlihy and Lawrence S. Makow are partners in the Corporate Department at Wachtell, Lipton, Rosen & Katz. The following post is based on a Wachtell Lipton memorandum by Mr. Herlihy and Mr. Makow; the complete publication, including footnotes, is available here.

The Dodd-Frank Act was undoubtedly a thorough re-working of the regulatory paradigm for banks and other financial institutions. But no less resolute are the intentions of U.S. banking regulators to carry regulatory reform further, based in significant part on perceived “macroprudential” authority after Dodd-Frank. The new regulatory paradigm will increasingly leave behind bank regulation’s traditional moorings in the protection of federally insured deposits and safe and sound operation of banking organizations. Instead, “macroprudential” regulation will rest on the goals of protecting U.S. financial stability and reducing systemic risk—broad, malleable concepts that elude precise definition. It will seek to influence activities not just of banking organizations but also activities conducted by non-bank entities not traditionally subject to prudential regulation. And, according to an important speech given last week by Federal Reserve Governor Daniel K. Tarullo, the new regulatory paradigm embraces consideration of a potentially unprecedented expansion of the fiduciary duties of directors of banking institutions. This would give such directors very potent incentives to prioritize supervisory goals—including macroprudential objectives.


Quack Corporate Governance, Round III?

The following post comes to us from Luca Enriques at LUISS Guido Carli University Department of Law and the European Corporate Governance Institute (ECGI), and Dirk Zetzsche at the University of Liechtenstein and Director of the Center for Business & Corporate Law at Heinrich Heine University.

Like in the US, European policy-makers have taken a number of measures as a reaction to the financial crisis, some of which address corporate governance issues of credit institutions and investment firms (hereafter collectively referred to as “banks”). Other than in the U.S., however, and more consistently with the financial origins of the crisis, very little has made its way into legislation that applies to non-financial corporations.


Key Trends in Financial Institutions M&A and Governance

Edward Herlihy is a partner and co-chairman of the Executive Committee at Wachtell, Lipton, Rosen & Katz. The following post is based on a Wachtell Lipton memorandum by Mr. Herlihy, Richard K. Kim, Lawrence S. Makow, Nicholas G. Demmo, and David E. Shapiro.

2013 was a year of continuing challenges and opportunities for U.S. banks. The low-interest rate environment continued to challenge the ability of banks to lend profitably. Already burdensome regulatory demands grew weightier with expanded Dodd-Frank stress testing and the finalization of the Volcker Rule, among other things. More than ever before, the responsibility of directors of financial institutions for regulatory compliance and bank safety and soundness is broadening, highlighted most recently by the OCC’s steps to formalize its program of supervisory “heightened expectations” for larger banks and their directors. Against this backdrop, the banking industry saw steady and creative deal activity, with a pronounced concentration among community banks.


Bank Board Structure and Performance

The following post comes to us from Renee Adams, Professor of Finance at the University of New South Wales, and Hamid Mehran of the Federal Reserve Bank of New York.

Banks clearly appear to have different governance structures than non-financial firms. The question is whether these governance structures are ineffective and whether implementing independence standards imposed by Dodd-Frank, SOX and the major stock exchanges will improve bank governance. In our paper, Bank Board Structure and Performance: Evidence for Large Bank Holding Companies, which was recently made publicly available on SSRN, we try to provide an answer to this question by examining the relationship between board composition and size and bank performance. We focus on large, publicly traded bank holding companies (BHCs) in the U.S., which are the banks that are mentioned most often in the context of the crisis.

We first examine the relationship between board composition and size and performance in a sample of data on 35 BHCs from 1986-1999. We deliberately focused on a relatively small number of BHCs over a longer period of time to ensure that there would be sufficient variation in governance variables which typically do not change much over time. In addition, we collected detailed data on variables that have received attention in the law, economics, and organization literature and which are recognized to be correlated with sound corporate governance, but that are generally not studied as a group due to high data collection costs.


Corporate Governance Structure and Mergers

The following post comes to us from Elijah Brewer III, Professor of Finance at DePaul University; William E. Jackson III, Professor of Finance and Management at the University of Alabama; and Julapa A. Jagtiani, Special Advisor at the Federal Reserve Bank of Philadelphia.

In the paper Corporate Governance Structure and Mergers, which was recently made publicly available on SSRN, we examine the balance of control between top-tier managers and shareholders using data from bank mergers over the period 1990-2004. Several studies have investigated the role of independent outside directors at nonfinancial firms. Independent boards (with more than 50 percent outside directors) have been reported in the corporate finance literature to be associated with larger shareholder gains and more effective monitoring of management. Unlike the corporate finance literature on nonfinancial firms, the role of independent outside directors in banking firms has not received much attention in the literature. The role of independent outside directors in banking firms could be very different from those of nonfinancial firms due to banking regulations and supervision (at the state and federal level), deposit insurance, and too-big-to-fail implications for very large banks.


Subprime Crisis and Board (In-)Competence

The following post comes to us from Harald Hau of the Finance Department at INSEAD and Marcel Thum, Professor of Business and Economics at TU Dresden.

In the paper, Subprime Crisis and Board (In-)Competence: Private vs. Public Banks in Germany, which was recently made publicly available on SSRN, we examine evidence for a systematic underperformance of Germany’s state-owned banks in the current financial crisis and study if the bank losses can be traced to the quality of bank governance.

For this purpose, we examine the biographical background of 593 supervisory board members in the 29 largest banks and find a pronounced difference in the finance and management experience of board representatives across private and state-owned banks. Measures of “boardroom competence” are then related directly to the magnitude of bank losses in the recent financial crisis. Our data confirms that supervisory board (in-)competence in finance is related to losses in the financial crisis.


Boards of Banks

This post comes to us from Daniel Ferreira, Tom Kirchmaier, and Daniel Metzger all of the London School of Economics.

In our paper, Boards of Banks, which was recently made publicly available on SSRN, we assemble the most complete data set on boards of banks to date. Our data allow us to draw a detailed picture of bank board composition up to and including the crisis period. The data reveal a number of new empirical facts. Right before the beginning of the crisis in 2007, the average board independence in the world’s largest banks was roughly 67%, meaning that two out of three bank directors were formally independent. These high levels of independence are both a recent and mostly North-American phenomenon. In 2000, the average level of board independence in our sample was just 40%. Canada and the US have the highest levels of bank board independence in the world, at about 75%.

Our data also reveal many interesting patterns. Client-directors are usually reported as being independent, although they have clear business relations with the banks that they are supposed to monitor. While the governance literature has focused on the role of bankers on boards of nonfinancial firms, the other side of the coin – nonfinancial corporate clients on boards of banks – has yet to be analyzed.


Review Proposes Fundamental Changes to Strengthen UK Bank Governance

Editor’s Note: This post is by Sir David Walker of Morgan Stanley.

On July 16 the Walker review of corporate governance of UK banks and other financial institutions (BOFIs) released a consultation paper on the future of corporate governance in the UK financial services sector (the Review).

We have recommended substantial changes to the way the boards of BOFIs function in particular through boosting the role of non-executives in the risk and remuneration process.

We recommend strengthening bank boards, making rigorous challenge in the boardroom a key ingredient in decisions on risk and measures to encourage institutional shareholders to play a more active role as engaged owners of BOFIs.

Sir David said “These proposals are designed to improve the professionalism and diligence of bank boards, increasing the importance of challenge in the board environment. If this means that boards operate in a somewhat less collegial way than in the past, that will be a small price to pay for better governance.”

Five key themes of the Review are as follows:

First, the Combined Code of the Financial Reporting Council (FRC) remains fit for purpose. Combined with tougher capital and liquidity requirements and a tougher regulatory stance on the part of the Financial Services Authority (FSA), the “comply or explain” approach to guidance and provisions under the Combined Code provides the surest route to better corporate governance practice in BOFIs. The relevant guidance and provisions require amplification and better observance but there are no proposals for new primary legislation.

Second, principal deficiencies in BOFI boards related much more to patterns of behaviour than to organisation. The right sequence in board discussion on major issues should be presentation by the executive, a disciplined process of challenge, decision on the policy or strategy to be adopted and then full empowerment of the executive to implement. The essential challenge step in the sequence was missed in some board situations and must be unequivocally embedded in future. The most critical need is for an environment in which effective challenge of the executive is expected and achieved in the boardroom before decisions are taken on major risk and strategic issues. For this to be achieved will require close attention to board composition to ensure the right mix of both financial industry capability and critical perspective from high-level experience in other major business. It will also require a materially increased time commitment from non-executive directors (NEDs), from whom a combination of financial industry experience and independence of mind will be much more relevant than a combination of lesser experience and formal independence. In all of this, the role of the chairman is paramount, calling for both exceptional board leadership skills and ability to get confidently and competently to grips with major strategic issues. With so substantial an expectation and obligation, the chairman’s role will involve a priority of commitment that will leave little time for other business activity.