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Start a Bank: Banks in Planning Stage

Board of Directors — Profile and Core Characteristics


A qualified and committed team of directors is essential for success. Typically, boards of directors comprise five to 13 individuals. The board of directors is responsible for setting the strategic direction of the institution and ensuring that senior management, employees, and the board itself comply with established policies, as well as federal and state laws and regulations.


The board should have one or two more members than the required minimum so the bank's formation application will not be delayed in the event that an organizer withdraws for any reason. This also helps to prevent urgency when a board member subsequently seeks to withdraw. The majority of board members should be independent of the bank and bank management, and at least two should have previous banking experience.

Many successful banking institutions have a chairperson who possesses strong leadership skills and effectively engages the board members with a nondominant leadership style. These banking institutions also tend to select a group of directors with banking-related experience in operations, finance, accounting, compliance, and technology. While banking regulators strongly encourage these background profiles, directors with banking-related experience in marketing, sales, operations, and economics are also very helpful. Many banking institutions will also include directors with some experience related to community, social service, and philanthropic activities to complement the other skill sets. Moreover, as a director, you owe the bank the duties of care, obedience, and loyalty.

The Board of Directors is ultimately responsible for the overall safety and soundness for the organization and compliance with all applicable laws and regulations. Directorship involves membership on board committees in addition to attendance at full board meetings. Common committees include executive, loan, asset-liability (ALCO), audit, compensation/nomination, and many more.

The Board will establish an Audit Committee to oversee audit activities. Members will be selected and should include only "outside" directors in order to maintain appropriate independence. Members of bank management should not be formally included for these committees. Members who have the appropriate financial and business backgrounds necessary to evaluate audit activities and supervise the function should be selected. The number of members varies but the committee should have at least three formal members.

The Committee should be formally established through the organization Bylaws or through Board resolution. A formal Audit Committee charter should be established and approved to reflect the duties and responsibilities of the Committee. At a minimum the Audit Committee responsibilities should be commensurate with the size, activities, and risk profile of the organization. Formal minutes, similar to those for the full Board meetings, should be maintained for the Audit Committee meetings.

If the bank has total assets of $500 million or more but less than $1 billion, the audit committee must consist of outside directors, the majority of whom must be independent of bank management. Each bank with total assets of $1 billion or more must have an independent audit committee, with outside directors who are all independent of bank management. For more information, see FDICIA (Part 363 - Annual Independent Audits and Reporting Requirements § 363.5 Audit committees). External Link

The internal audit function should be organized at the highest level of the organization as possible. Where no holding company exists, this should be at the bank level. Where a holding company exists, it is preferable that the audit function be organized at that level. This enables the function to review all areas and activities within the organization. The auditor should report directly to the Audit Committee for all material issues, including schedules, budgets, salaries, reports, and organizational direction. Generally a member of Senior Management is designated to handle administrative issues related to the internal auditor. This person should not be in an operational capacity where audit independence would be compromised. Expectations for outsourced internal audit are similar regarding independence and the internal audit should generally not be outsourced to the external auditor.

The Audit Committee should include approval of the CPA firm in its duties and responsibilities. The firm should present its annual plan to the Audit Committee. If the firm is requested to provide other services, those services must meet regulatory requirements and guidance. For those banks with assets in excess of $1 billion, certain reporting and documentation are required for compliance with the FDIC Improvement Act. The engagement letter should address this, where applicable. Additionally, organizations may be required to comply with the Sarbanes-Oxley Act of 2002, which will also be addressed in the engagement letter.

Core Characteristics

There are many factors to consider when seeking experienced and qualified directors. Key factors include:

It is not necessary for each director to possess all of these characteristics. The diversity of experience, style, and business contacts contributes to the overall success of the board and, ultimately, the bank. It is also important for the board to have a good balance and for all directors to have a fair representation of the key factors.

Because of their experience, background, and business contacts, directors should be able to refer quality business to the bank. Many banking institutions rely on these referrals as a source of business growth. Directors should be able to exercise independence and have the desire to place the bank's interest ahead of any personal interests. They should also have the ability and willingness to avoid conflicts with bank interests.

Formal education for directors is important. College, continuing professional education, and advanced degrees are valuable in the highly regulated banking industry. For more information, review the Bank Director’s Desktop, External Link a Federal Reserve resource. The Federal Reserve's Commercial Bank Examination Manual External Link also describes the duties and responsibilities of directors.

The duties of a director also include strategic planning including capital planning. Capital planning involves setting thresholds for minimum capital ratios and when the bank will need to access additional capital for stability or growth with risk parameters.

All board members should express a commitment to the bank. The board, as a group, should set reasonable, attainable, and measurable bank performance goals. Directors should be strongly encouraged to balance operating performance and financial measures with the overall mission of the bank. Sometimes this may mean that operating performance may need to be intensified in order to achieve the bank's mission or that the mission may need to change in order to achieve an adequate operating performance.

Basics for Bank Directors PDF External Link provides a more complete discussion on the role of bank directors or you can order a copy of this publication by visiting the Federal Reserve System Publications Catalog. External Link