Most banks, like many large businesses, are run as corporations, with the leadership of the business delegated among different parties. While the day-to-day operation of most banks is left to its managers, a board of directors is usually appointed by shareholders to monitor and govern the bank's operations, thereby safeguarding the shareholders' investments. The duties and responsibilities of this board are numerous and broad.
While the board of directors does not manage the bank, one of its foremost duties is to pick the people who will. The board must select and appoint the bank's top executive officers. After hiring a chief executive officer, the board must regularly review his performance and replace him if it is unsatisfactory.
Goals and Strategies
In conjunction with the bank's top officers, the board is responsible for formulating broad goals and strategies for the bank. The formulation of clear objectives and policies supplies a framework for the chief executive to work within. The board also helps set priorities for the bank.
The board of directors not only helps lay out the bank's goals, but acts as a watchdog as well. One of its main duties in this capacity is to limit the bank's exposure to excessive risk of all kinds, including legal, reputational and financial. By managing risk judiciously, the board tries to maintain a balance between enterprise and caution.
The primary function of banks is to take money from people who want to save and lend it to people who want to borrow. Deciding, in a general way, to whom it lends is one of the board's most important duties. Banks that chose not to invest in sub-prime mortgages in the late 2000s, for instance, were more likely to stay afloat than banks that invested in them heavily.
A bank's board of directors is the stockholders' proxy, and represents their interests. Many banks require that board members own some company stock to provide them with personal incentives in their decision-making. In overseeing the running of the bank, however, the board must keep the interests of the shareholders paramount.
In its role as company watchdog, the board must also ensure the bank complies with all relevant statutes, both internal and external.The boards of some banks suffer a financial penalty if the bank violates certain legal statutes.
A board of directors should always know how the bank is being run. One of the foremost ways to accomplish this is to conduct periodic audits of the bank. These audits can be both financial and structural in nature, examining both the banks' books and its management practices.
Conflicts of Interest
Boards must always have an eye out for conflicts of interests, both in the bank's top executives and on the board itself. If a person in a position of leadership has mixed motives, this compromises the interests of shareholders; a good board of directors must step in and resolve the conflict.