Stern Bank’s Board of Directors (the “Board”) sets the strategic plan for the Bank through its three-year business plan and tracks the Bank’s progress in relation to that plan through management reports. Compliance with laws and regulations, as well as mitigation of risk, is ensured via control mechanisms. Stern Bank’s control apparatus is envisioned by the policies written and approved by the Board.
The Board of Directors is the ultimate responsible party for Stern Bank and its management. The shareholders or owners of the Bank deliver all power of the Bank to the Board, in Stern’s operating agreement, and instills with them the sole responsibility for developing maintaining and implementing a vision for the Bank. The Board is ultimately responsible for the Bank’s success, or culpable in its failure. The Board governs the company, similar to the way a government official might administer an area over which she has responsibility. To guarantee that highest chance of success in its endeavor, the Board must build an organization that can perform the tasks necessary to perform the day-to-day operations of the bank, and a risk mitigation framework to protect the Bank from the risks that it faces as a result of those activities.
Proper governance of the company is the key.
A key component of an effective board of directors is independence. Independence is achieved in a board through the appointment of independent board members. Independent Board members have no material connection to the Bank, other than the fees paid to them for their role as independent director. An independent director provides an objective analysis of the bank’s operation, they are able to view the issues from a distance, with a fresh set of eyes, ideally sharpened through years of experience in banking.
In a small institution like Stern, where the many of the Board members are also involved in the day-to-day activity of the Bank, external Board members take on greater importance.
The Board currently has 4 members, including an Independent Director. Of the other 3 members, 2 are currently Executive Directors as they are Officers of the Bank. The third, while not an Officer of the Bank, is involved in the day-to-day planning and development of Stern and is therefore not independent. The Board intends to bring on at least one additional independent director before the end of the year, and is considering bringing on a third, if one can be identified.
The Bank subscribes by the FDIC principal that “[s]election to serve as a bank director is an honor… [that] often means an individual has a reputation as being successful in business or professional endeavors, is public spirited, and is deserving of the public trust and confidence.” Moreover, the Bank seeks directors that bring varied skills and experience to enrich and diversify the group’s judgement. When selecting independent directors, the Bank seeks personal characteristics including:
- Knowledge of the duties and responsibilities of the office;
- Genuine interest in performing those duties and responsibilities to the best of their ability;
- Capability to recognize and avoid potential conflicts of interest, or the appearance of same, which might impair their objectivity;
- Sound business judgment and experience to facilitate understanding of banking and banking problems;
- Familiarity with the community and trade area the bank serves and general economic conditions; and
- Independence in their approach to problem solving and decision making.
Risk Management Framework
An effective corporate and risk governance framework is essential to maintaining the safe and sound operation of the bank. Stern’s corporate and risk governance practices is commensurate with the bank’s size, complexity, and risk profile. Stern’s Board has adopted the general principles and practices espoused in The Office of the Comptroller of the Currency’s (OCC) Comptroller’s Handbook booklet, “Corporate and Risk Governance” to address “the primary risks associated with corporate and risk governance [which are] strategic, reputation, compliance, and operational”.
Directors are responsible for providing a clear framework of risk appetite, strategic focus, objectives and general policies within which executive officers operate and administer the bank’s affairs. These objectives and policies at a minimum, include written guidelines for such matters as investments, loans, asset/liability and funds management, profit planning and budgeting, capital planning, internal routine and controls, audit programs, conflicts of interest, code of ethics, and personnel. Policies for specialty areas, such as the Bank Secrecy Act (BSA), Information Technology (IT), also facilitate appropriate oversight.
The Board of Directors holds scheduled meetings on a regular basis, and executive sessions on an as-needed basis. Regular meetings are designed to provide the directors a compressive view of the Bank’s activities and financial condition.
The Chairperson of the Board is to be responsible for setting the agendas for meetings. The agenda and information concerning the business to be conducted at each meeting is sent generally to members a week before the meeting to give them time to review.
The Company Secretary assists the Chairperson in maintaining minutes or other records of meetings and activities.
Regular meetings include a report from the Managing Director, Mr. Alex Silver, about the state of the Bank, local or national news that might impact Stern, the state of the economy and its impact on the Bank, or other subjects of importance that the Managing Director feels it is important to information the Board, and that is not covered in another section of the meeting.
Stern’s financial situation is reported to the Board quarterly with a report from the CFO. That report aims to review and analyze the financials from the previous quarter, provide an updated review and analysis of the projections vs actuals, and provide updated projections for the next 36 quarters.
The Board then handles any other scheduled business that is relevant to the Board and not the committees, and then the meeting moves into committees
The Chairperson of the Committee shall be responsible for setting the agendas for meetings. The agenda and information concerning the business to be conducted at each Committee meeting shall, to the extent practicable, be communicated to members sufficiently in advance of each meeting to permit meaningful review. The Chairperson of the Committee will report regularly to the Board, on the Committee’s activities, findings and recommendations, including the results of the Committee evaluation. The report to the Board may take the form of an oral report by the Chairperson or by any other member of the Committee designated by the Chairperson to make such report. The Company Secretary or representative designated by the Company Secretary shall assist the Committee in maintaining minutes or other records of meetings and activities.
Stern maintains 5 Standing Committees:
- Audit and Risk Management
- Credit and Loan
Standing Committees are comprised of all board members. The Board has defined the roles and objectives of each of the Board Committees through committee charters. Taken in the aggregate, the committee charters create a framework for the board members to oversee the different aspects of the Bank.
Stern’s Board feel that it is important that the proper level of independence be achieved for Board Committees of major risk areas. Independence is achieved when more decision making and approval power is placed in the hands of an independent director, since the executive directors and more deeply involved directors are not able to be objective. For instance, the Managing Director, who is an Officer of the Bank, cannot be considered independent when reviewing an audit of the Bank, since that audit is essentially an audit of the Managing Director’s work. While there are independent directors on every committee, Stern achieves heightened independence in certain committees by nominating an independent director as chair of the committee, by having the non-independent directors recuse themselves from the vote in case of the audit and risk committee and the loan committee, and in the case of the audit committee, in some cases, by recusing themselves from certain meetings.