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FOS Blog

30 Aug

Corporate Governance: Sensitive Topic of the Board of Directors and Diversity

Corporate Governance: Sensitive Topic of the Board of Directors and Diversity

Since the financial crisis in 2008/2009 an increased amount of focus was turned to Corporate Governance and the Board of Directors’ oversight of governance.  Even more recently with the Wells Fargo account opening fraud and Region’s sales tactics from 2016/2017 call into question where the Board of Directors (BOD) responsibility/knowledge comes into play.  From a recent article in the Internal Auditor in February of 2017, states that: “organization governance has always been recognized and valued, but it has become increasing important in the wake of governance failures in financial and public sectors thought the world.1” The BOD is ultimately responsible for the company, and to ensure that the company is run ethically, soundly, and financially profitable. The process of successful direction begins with the structure of the BOD themselves.

The structure/membership of the BOD is usually a sensitive topic.  Often within small banking institutions (and small companies), the BOD members are major stock and large deposit/loan holders.  With that said, however, there are many benefits to at least examine the topic of Board diversity, as the BOD is responsible for the profitability, the “tone at the top” regarding integrity/ethics, and for the corporate governance of the company.  Without diversity, being too homogeneous, a bank/company runs the risk of creating an atmosphere that is more prone for fraud (or where fraud is not to be acted upon), or hidden from the fact that the fraud is taking place within the organization.  In fact, depending on the current structure of the BOD, this can be a topic for external auditor or regulatory agencies recommendations and scrutiny.

Diversity regarding the BOD refers to having:

  • External Directors (not also within the Management of the Bank/Company)
  • Female Directors and more than one (especially in the banking industry where the vast majority of the employees are female)
  • Directors with different ethnic backgrounds
  • Directors with different overall backgrounds (life experiences, social, business, etc.)

Other Recommendations:

  • Separation of the President and Chairman/Chairwoman Positions
    • Including consideration of CEO not holding these positions or at least both positions
  • Having at least a majority of External (non-management) Directors

Some benefits discussed from research:

  • Studies indicate that diversity has the potential to outperform homogeneity (of the BOD).2
  • It is well argued in the literature that diversity among BOD members has the potential to influence performance and reporting.2

Although this maybe a difficult topic to discuss, at least researching the benefits of diversity and composition among the BOD is critical. Additionally ensure that your Internal Audit function has the Board and Management’s support in reviewing the corporate governance within your company.  The independence of the Internal Audit department then should have the ability to review corporate governance either within smaller audits or a comprehensive corporate governance.  The Internal Audit function, then, at a minimum is a partner in ensuring the corporate governance is proper and substantial in nature within the bank or company.

However, do not choose diversity for the sake of diversity, as skills, experience, and overall qualifications must not be left out if the company is looking for a new director or replacing a director.  Do not be afraid to seek outside guidance to ensure your bank makes one of the most important decisions regarding your Board composition.