Regulator, attorneys team up to present seminar focusing on preventative tactics

Northwestern Financial Review, Apr 1, 2001 by Dullum, Justin

The director's seminar hosted by the Minnesota Department of Commerce had a message for directors young and old: Under the prestige of being on a bank's board of directors lies an inherent and potentially devastating financial and social risk.

"Don't confuse your investment in the bank's stock with the extent of your potential liability. If the bank were to fail, your entire net worth could be at stake," said Kevin Murphy, deputy commissioner of commerce. "Discharge your responsibilities as if you own the whole bank." Murphy's comments were followed by a day filled with advice on how to do just that.

According to attorney Scott Coleman, directors of a failed bank cannot only experience great financial loss, but criminal repercussion as well. In order to avoid both, a director should become familiar with all applicable laws, said Coleman of the Minneapolis firm, Lindquist and Vennum. If you're the director of a national bank, familiarize yourself with the National Bank Act, he advised. A director who expects to succeed should attend meetings regularly, participate knowledgeably, require regular audits, insist the bank have an adequate loan and investment policy, and act responsibly and honorably. These duties are, in fact, obligations under common and statutory law, said Coleman.

"A breach of the common law or failure to use ordinary care and prudence may give raise to a violation of state or federal statutory or regulatory requirements and expose the director to civil money penalties or criminal liability," commented Steven Johnson, also of Lindquist and Vennum.

Focusing attention on a board's accountability to its customers and regulators, Patrick Weber and Edward Drenttel, of Winthrop and Weinstine, P.A., advised creating strong policy in the areas of credit, interest rates, liquidity, compliance and reputation as ways to avoid significant problems during a financial downturn. "Policies are important when considering banks that failed in the 1980s. Even though the economic conditions were unfavorable, studies show these failures were more a result of bad decisions made by boards of directors, than they were the result of uncontrollable economic factors," Weber said.

"Remember," said Drenttel, "the consequences of your actions directly affect the constituency you serve. Your most unique responsibilities come from your accountability to your customers." It is easy to forget a director's policy mistakes may not only cost him or her their own money, but potentially hundreds or thousands of dollars in other peoples' savings as well, he added.

"Good policy is not possible without regular and productive board meetings," said Lynn Gardin, who along with Karen Grandstrand and John Kost of the Fredrikson and Byron law firm, emphasized a bank's failure and a director's subsequent personal loss becomes avoidable simply by staging effective and organized meetings. They suggest that the board agenda and supporting materials always be furnished in advance of meetings. They classified such materials as problem loan lists, past due reports, overdrafts, liquidity risk, interest rate risk, investment portfolio and financial derivatives.

Productive meetings also create a strong measure of internal control, said Jerry Felicelli of Larson, Allen, Weishair and Co., who presented an overview of the internal control mechanisms that predicate a bank's success or failure. "An effective board member will draw a clear distinction between the board's internal function and that of management," said Felicelli. "Management should respond specifically to sound decisions made by an involved and organized board."

Within the ranks of directors attending the seminar, which took place in the Minneapolis Convention Center, were representatives from 13 new banks. The February 23 seminar was conducted primarily for directors who are new to the business or otherwise considered "outside" directors.