Governance: Primer on Board of Director Committees
By: KAREN L. GRANDSTRAND
December 2006
Boards of Directors can establish committees with special expertise to understand and interpret specialized areas. For example, financial institution boards historically have formed loan, audit, and investment committees. More recently, financial institutions are establishing information technology/security committees to address the numerous new legal and technical requirements and risks in this area.
Boards can delegate particular assignments to committees; however, delegating assignments to a committee does not mean that the board members can delegate their responsibilities as directors. In other words, the entire Board of Directors remains responsible for actions and decisions (or the lack thereof) by committees to whom the board has delegated responsibilities. For Minnesota state-chartered banks, however, a director can rely on information, opinions, reports, or statements prepared or presented by a committee, provided the director reasonably believes the committee merits the director’s confidence. See Minnesota Statutes, § 302A.251.
Accordingly, when establishing committees, the board should clearly define, in writing, the committee's functions, responsibilities, and membership qualifications. Committee members should have appropriate independence and expertise based on the duties of the committee and the size and nature of the financial institution. For example, the Sarbanes-Oxley Act requires public companies to have independent audit committees with at least one financial expert. Further, banks and savings associations with assets of $1 billion or more must have an independent audit committee, the members of which are outside directors who are independent of management of the institution. Insured depository institutions with total assets of $500 million or more but less than $1 billion must establish an audit committee, the members of which are outside directors. An outside director is a director who is not, and within the preceding fiscal year has not been, an officer or employee of the institution or any affiliate of the institution. An audit committee of any insured depository institution that has total assets of more than $3 billion must include members with banking or related financial management expertise, have access to its own outside counsel, and not include any large customers of the institution.
Finally, committees should keep minutes to document their proceedings and they should report regularly to the full board.