Fed Proposes “Board Effectiveness” Standards for Financial Institutions
On August 3, the Board of Governors of the Federal Reserve System proposed metrics for “board effectiveness” as part of a broader document on proposed supervisory guidance for all institutions under Fed supervision. The guidance would apply to bank and savings and loan holding companies with total consolidated assets of $50 billion or more, and to systemically important nonbank financial companies under Fed supervision.
The guidance aims to distinguish the supervisory expectations for boards from those of senior management and identifies five key attributes of effective boards:
- Setting clear strategic direction
- Managing information flow and board discussions
- Holding management accountable
- Supporting risk management and internal audit
- Ensuring appropriate board composition.
The Fed will use these same metrics for its Large Financial Institution Rating System under newly-proposed rulemaking, also released August 3. In both documents, the Fed says that boards may conduct their own self-assessment, without prescribing how to conduct or document such an assessment.
The Fed proposal also tries to cut down on information overload at the board level by channeling the Fed’s own reporting. Under the proposed supervisory guidance, management, not the board, would receive most notices of matters requiring attention, unless management has failed to take action or the board needs to address its corporate governance responsibilities. While critics worry about reducing the information flow between bank examiners and bank boards, the Fed hopes that its proposed supervisory guidance will help alleviate the problem of boards completing non-core tasks at the expense of their core responsibilities.