A Case for Reaching Higher; Musings on The Federal Reserve’s Proposed Guidance on Supervisory Expectation for Boards of Directors

This past August, the Federal Reserve published its Proposed Guidance on Supervisory Expectation for Boards of Directors (“Proposed Guidelines”) and invited comment and discussion on the subject of better performance though better governance – a topic near and dear to us at Quantum Governance.

So, as we ourselves have mused on the pros of the Federal Reserve’s proposal, we also want to take a moment to caution of their potential shortcomings as well. These Proposed Guidelines, which apply to the boards of directors of banks and savings and loans, seek to “establish principles regarding effective boards of directors focused on the performance of a board’s core responsibilities.”  While we applaud any effort to improve governance, we are concerned that, as these Proposed Guidelines are designed around supporting “safety and soundness” (inspired largely by the 2007-2009 financial crisis), they are primarily focused on the oversight or a “supervisory” role for the board.  That is, they are concerned largely with mitigating exposure to risk and, as such, promote a narrow view of the board’s role in governance.   Even though the Proposed Guidelines do not directly apply to credit unions, we think it is vital to comment as there are natural parallels to credit union governance.

The Proposed Guidelines seek to better distinguish the role of the board from the role of management by encouraging the board to focus on its core responsibilities: (1) Set clear, aligned and consistent direction; (2) Actively manage information flow and board discussions; (3) Hold senior management accountable; (4) Support the independence and stature of independent risk management and internal audit; and (5) maintain a capable board composition and governance structure.

While all of these are admirable goals, they tend to cast the board’s work in the more traditional role of fiduciary oversight, focused on monitoring performance and mitigating risk. While these things are certainly important and necessary for preserving the safety and soundness of a financial institution, they only address one aspect of what makes a board truly effective in today’s day and age.

This highlights what we perceive as the Federal Reserve’s limited perspective on governance.  It is not, as the Proposed Guidelines imply, simply a matter of carving out areas of responsibility and levels of oversight.  It is important to define roles and responsibilities, to be sure, but we are of the opinion that to foster a highly effective governance culture, a board must see to create a genuine constructive partnership with the CEO – and in credit unions, the Supervisory or Audit Committee as well.

The Proposed Guidelines do acknowledge a situation that bedevils credit union boards as well as bank boards – the overly burdensome amount of information a board is expected to review.  These requirements consume so much time that a director, while attending to them in the course of fulfilling his or her fiduciary duties, is ironically, actually distracted from properly fulfilling what we believe are the higher principles of governance – setting the long-term strategic vision and direction of the credit union, defining “success criteria” which do not necessarily have to be financial in nature, encouraging genuinely diverse ideas and discourse, and constructively partnering with the CEO and staff to further the credit union’s mission.   This constructive partnership, we believe, is the true foundation of good and effective governance.  A well-conceived constructive partnership is one in which the duties and responsibilities of all parties are clearly communicated, understood, respected and mutually supportive of each other.  The board knows not to get involved in day-to-day management (indeed, this is one of the desired outcomes stated in the Federal Reserve’s Proposed Guidelines), but its role goes far beyond this basic standard.

In short, we are concerned that these Proposed Guidelines are grounded in an outdated governance model that may foster boards to move back in time, not forward.  They appear to be premised on a set of legal requirements focused on a minimum standard.  We advocate for all boards to “reach higher” and to put into practice governance principles and skills that are more wholistic and proven to lead to truly exceptional leadership and ultimately mission success for their credit unions.