22nd July, 2020Jeremy Denton-Clark

Running an Effective Bank Board Meeting

The following is a note on the operation of the Board of Directors of a bank in London. It is based on the writer’s personal experience. This may not be exactly similar in every bank but most banks will follow a broadly similar process. It is intended mainly to stimulate ideas on how the operation of the Board of Directors may be made more effective and streamlined leading to generally shorter meetings.

Structure of the Board of Directors

The authority of the Board of Directors

The authority of the Board of Directors stems from the shareholders and is set out in the Memorandum and Articles of Association of the bank.

The Board of Directors is the supreme decision making body in the bank. Everything has to flow down from the Board of Directors. The Board of Directors is primarily concerned with bank policy and overview, it does not make individual executive decisions which are the responsibility of the Board of Management. Only the staff of the bank, as instructed by the executive management, can make entries into the general ledger of the bank.

The rule is quite simple: the Board of Directors direct the bank, the Board of Management manage the bank.

Accountability and election of the Board of Directors

The Board of Directors is accountable to the shareholders of the bank who generally meet once a year at an Annual General Meeting (AGM).

At the AGM the shareholders elect the members of the Board, usually for a period of three years thus one third of the Board is elected every year. The shareholders can meet at any time and hold an Emergency General Meeting should they wish to make any changes to the composition of the Board of Directors.

Nominations for membership of the Board of Directors are usually submitted to the AGM for approval through the Nominations Committee of the Board of Directors.

Composition of the Board of Directors

The Board of Directors usually numbers between 7 and 9 individuals consisting of a non-executive Chair, the Chief Executive Officer, the Chief Financial Officer and maybe the Chief Operational Officer plus independent and experienced professionals not otherwise connected with the bank. It is now considered good practice to have a majority of independent or so called non-executive directors on the Board of Directors.

There is a tendency towards larger Boards but they can become unwieldy and take too long to reach decisions, the more people you have the more they want to talk or feel they have to make some form of “contribution” which delays decision making.

It is also good practice to make as far as reasonably possible the composition of the Board of Directors diverse by gender, age, ethnicity, experience and qualification.

Chair of the Board of Directors

The Chair, as for all directors, is appointed by the shareholders. His or her nomination as Chair is proposed by the Nomination Committee, recommended by the Board of Directors and then submitted to the shareholders.

Independent non-executive members of the Board of Directors

The concept of non-executive directors is complex and can be dealt with in an additional memorandum if required but essentially they are there to protect all the stakeholders of the bank without fear or prejudice. They say and vote according to what they believe is in the best interests of the bank and stakeholders as a whole and if they lose their directorship it does not matter for them as they are retired or have other sources of income.

Committees of the Board of Directors

In order to spread the workload, the Board of Directors will establish a number of committees to assist it in their decision making process. Typically these will include a Nomination Committee, a Remuneration Committee, an Audit Committee and often a Risk Committee.

They will be chaired by a Non Executive Director and deliver their recommendations to the Board for approval.

It is not good practice for the Board of Directors to have a Credit Committee as such. The provision of individual credit facilities is a matter for the executive of the bank. If the Board have the ultimate credit approval authority, the executive will be tempted to submit the difficult marginal credits to the Board and then say “it must be OK if the Board has approved it” and wash their hands of the responsibility.

A Risk Committee of the Board will look at the broader risk issues and policies in line with their overview responsibilities.

The Company Secretary

The Board of Directors, in particular the Chair, is assisted by a non-voting Company Secretary or legal counsel. Their job is to ensure that at all times the bank operates in accordance with company law, bank regulation and any relevant international regulation such as Basel II and III, FATCA, MiFID etc as well as any covenants on funding agreements signed by the bank.

The Company Secretary will assist the Chairman in the development of the agenda for meetings, taking the minutes of meetings and circulating them.

Before the Meeting of the Board of Directors

Setting dates for the meetings of the Board of Directors

The responsibilities of the Board of Directors of banks continues to grow. They will need to meet once a month. The dates need to be set a year in advance, to enable Board members to work their diary appointments, holidays, trips around the meetings. No dates should be changed once they have been set.

At the meeting in November dates should be proposed dates for all the meetings in the following year except over the Christmas and New Year period and in the August holiday month. This normally means 10 meetings a year.

The meetings tend to be held on the second Thursday of the month to lessen the disruption of any national holidays and enable the balance sheet and profit and loss account for the previous month to be available to the meeting.

Setting the agenda:

The agenda is split into:

Standard Monthly Items that are discussed at every meeting, for example:

  • Ratification of the minutes of the previous meeting
  • Matters arising from the previous meeting
  • Monthly Report submitted by the executive on the financial results, comparison with the Business Plan, Key Performance Indicators, compliance with regulatory ratios and so forth

Quarterly, Semi-Annual and Annual Agenda Items:

The Board will have a long list of matters which will require their attention. The Company Secretary should arrange that these matters are spread over the course of the year to ensure that enough time is available for their consideration. These matters might include for example:

  • Review of the audited accounts in March for presentation to the AGM of shareholders
  • Submission of the Risk Appetite of the Board in September
  • Overview of the Strategy and Business Plan in October
  • Consideration of the KPIs and KSIs in November for the year ahead

New items: as far as reasonably possible these should be minimised. The Board works best when it works to a routine.

The agenda is set by the Chair and the Chief Executive Officer, although any director is entitled to request that an item be placed on the agenda.

The order of the agenda is important. Lengthy discussion at an early stage on a difficult item may mean that the agenda can’t be completed on time and sour the atmosphere for further discussion.

Circulation of Board agenda and papers:

The agenda, with all accompanying papers, should be delivered to directors at least three days in advance of the meeting. Occasionally there may be an item with less than three days notice but it should be unusual.

Every agenda item where a decision is required should be presented on one sheet of paper with a recommendation from the executive, attachments to the front page are permitted to provide an explanation of the proposal in greater depth. Nothing should come forward to the Board without a recommendation, you can’t be neutral or sit on the fence.

It was expected that all papers were read in advance of the meeting and a view formed by each of the individual directors. Directors would be entitled to ask the Chair or the executive for any clarifications or explanations in advance of the meeting.

Prior to the meeting:

One of the secrets of a well-run Board meeting is to ensure as far as is reasonably possible that none of the directors significantly disagree with any of the proposals on the agenda.

The Board of Directors is a team with collective responsibility and they should act as a team. Thus the objective is to reach a common view on any proposal prior to the meeting. There is no point in having lengthy disputes at the Board table, it is counter-productive.

The Chair or the Company Secretary thus might talk to each director prior to the meeting and sought out a consensus view to which all could broadly agree.

The meeting of the Board was thus “stage managed” to an extent, although discussion at the table inevitably produces new ideas and thoughts. Directors will be interested in hearing the professional view of their fellow directors. It should be an objective to have no surprises at the Board meeting and avoid any splits in the voting.

During the Meeting of the Board of Directors

Collective responsibility:

The directors are all equally responsible for the decisions reached. It is therefore necessary to have a consensus view to which all can agree. It should be unusual for a director to vote against any proposal. If they felt strongly about an issue they could abstain. The Board of Directors is a team and it needs to be seen as a team that works together, in particular by the executive and staff of the bank.

It is not possible for a director to claim that he or she was not part of any decision taken by the Board because they voted against it or abstained. All directors are equally responsible. The failure is on the part of the director who voted against or abstained in not being able to persuade colleagues on the Board to also vote against or abstain.

Should a director find themselves in this position on a number of occasions then they might wish to consider whether they should remain a member of the Board.

Reaching decisions

The Board meeting was thus a gathering of informed individuals who have read the papers and formed an initial view on the issues. The Board meeting is intended to discuss the issues and for directors to hear the views and points of other directors and then reach an informed decision. It is a discussion between equals. Directors are appointed as a result of their merit and professional competence, not because of their seniority nor position nor affiliation. To become a director is not a prize, it is an obligation.

No director can take a narrow parochial view. They are there for the good of the entity as a whole and all the stakeholders.

Role of the Chair at the meeting:

To conduct the meeting and ensure that decisions were reached on all agenda items where a decision is required.

This will require allocating time to each item, maybe establishing a maximum of 15 minutes for discussion on any single item. If there was no agreement after 15 minutes the agenda item should be passed over to be:

  • raised again at the end of the meeting
  • discussed at the next meeting
  • the subject of an extraordinary meeting of the Board

The Board cannot afford to become bogged down on a single agenda item. The Chair has to ensure the orderly conduct of the meeting. Thus no speeches nor lengthy presentations are allowed, no shouting, no reading from prepared text just quiet informed discussion on the point being discussed.

In order to save time, not every member was encouraged to speak on every item. If a member had nothing to contribute to a discussion then they should keep quiet.

The Chair should direct the discussion towards the emergence of a consensus view. The Chair should accurately sum up the discussion on each agenda item so that everyone understands and agrees with what has been decided. The Chair has no additional voting rights, except in the very unlikely event of a tied vote the Chair would have the casting vote.

Structure of the meeting:

The meetings should start at 11am. A morning meeting is generally better than an afternoon meeting. The meeting should last for around 90 minutes. Any longer and the concentration of individuals begins to decline and they will want a break.

An in-house lunch for the directors should be scheduled for 1 pm. Informal discussion could continue but without papers nor confidentiality.

After the Meeting

Preparation and circulation of the minutes

During lunch the Company Secretary should draft the minutes of the meeting for review and initialling by the Chair. These minutes would only record the decisions taken, not reflect the discussion nor the arguments as the directors are collectively responsible for the decisions and there should be absolute clarity and unanimity.

The draft minutes would be circulated to all Board members and act as the instruction later that day for executive action to implement the decisions taken. There should be no need for the Chair to issue instructions. The minutes should be sufficient.

Banks may wish to maintain a private minute book which contains decisions that they do not wish to circulate to the executive. This would sensitive matters such as salary levels, potential promotions and staff matters generally that might unsettle or distract the executive.

The draft initialled minutes of the previous meeting would be formally signed by the Chair as the first item of business at the following meeting.

Responsibilities of the directors

The directors are required to undertake their duties with all professional skill and diligence. They owe a fiduciary duty to all the stakeholders in directing the business and must avoid all conflicts of interest and disclose their personal interests.

However, with the ever growing level of detailed regulatory requirements, both domestic and international, increasing environmental and cybersecurity threats the burden on directors is continually increasing. It is probably sensible for the bank to take Directors and Officers liability insurance to provide cover for perceived damage arising from decisions that may be considered misjudged, in error or ultra vires by third parties.

This of course only relates to one item of good corporate governance in a bank. Among other major issues would be:

  • The limited role of shareholders in a bank
  • Committees of the Board of Directors
  • The Board of Management: its role, composition and responsibilities
  • Committees of the Board of Management
  • The role and responsibilities of the Chief Executive Officer

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