Budgeting the board to independence

Northwestern Financial Review, Oct 1-Oct 14, 2003 by Austin, Douglas V

Expense Planning

As a member of the board of directors of your financial institution, what is your annual budget for the board itself? Ah ha, you answer: "I don't know," or "We don't have one."

The Sarbanes-Oxley Act of 2002 requires corporations, including financial institutions, to have the resources necessary for the board to act in a supervisory or corporate governance fashion so as to provide the leadership and oversight that would foster safe and solvent operations of the corporation. In essence, the board of directors must have resources so that it can run its own affairs and hire independent, outside parties to assist it whenever necessary.

Hence the board of directors needs a budget. Do you have a budget at your financial institution?

How much of a budget do you need? The budget must be determined based upon the circumstances at your financial institution.

First, all of the costs associated with normal run-of-the-mill board activities must be placed into a budget. These activities include:

* Annual retainer fees for directors;

* Monthly fees for board members;

* Committee fees for board members;

* Deferred compensation fees for board members - i.e. bank owned life insurance premiums, split dollar insurance policy premiums, etc.;

* Country club membership expenses;

* Vehicle fees - i.e. leases and/or purchase costs of cars;

* Health care fees;

* Other annual expenses for board members based upon agreed expenses;

* Expenses for meetings, such as rental of facilities (if applicable), costs of meals, mileage expenses, airplane fares or other transportation costs to each of the meetings and cost of lodging (if applicable).

That's a start. Those are not all of the expenses to consider as budgetary items. Let us add a few others:

Secretarial expenses, including salary and incidental expenses for the corporate secretary, who may not be a member of the board of directors and whose expenses for providing secretarial services must be allocated to the board function.

Expenses for legal counsel hired as counsel to the board of directors itself, not the general bank counsel who assists in collections, mortgages and routine litigation.

Professional fees of outside certified public accounting firms or individual professionals such as auditors, loan review experts, consumer compliance consultants, etc., who are hired by the board of directors to assist in the functioning of the board of directors as an oversight and monitoring function of the corporation.

Professional fees of special legal counsel who are hired based upon conditions faced by the corporation which may arise from time to time; this individual or individuals could be retained to meet specific needs but should be budgeted as a contingency on an annual basis so as to understand what costs are involved - i.e. a retainer to a law firm for such services if required.

Expenses to cover a strategic planning retreat to be held outside the bank so that there would be a sufficient strategic planning timeframe available to the board.

In addition to these extraordinary costs faced by the board of directors, another cost that could have been mentioned in the first category has been left out deliberately until now to remind you of its importance - the educational functioning of the board.

The board should have an education budget covering both outside education at national, regional and/or local convention seminars or workshops, as well as in-house seminars held for purposes of increasing the directors' knowledge. There should be at least two local in-house seminars per year that all board members are expected to attend. Then your board of directors, including spouses at various times, should attend state association annual conventions, state conventions or even proprietary seminars based upon the specific functions that the board of directors are assigned to become expert in on behalf of the board. This educational budget component could be as high as $5,000 to $10,000 per director.

Then there is the component of the board of directors' educational budget for newsletters, magazines (such as North*Western Financial Review), books and Internet materials available to assist them in increasing their knowledge as directors.

In summary, as you are developing your budget for your financial institution, remember to establish a line item detailed budget for your board of directors' activities. In doing so, you will reinforce the significance of the board's activities in meeting their responsibilities as the supervisors and overseers of the safety and solvency of the financial institution.

You cannot simply give lip service to Sarbanes-Oxley by adopting resolutions at the board of directors' level. You must demonstrate realistic, empirical evidence of conformance with the requirements of Sarbanes-Oxley through the activities of the board of directors, which will take time - and money to accomplish.

Douglas V. Austin is chairman and CEO of Austin Financial Services, Inc., Toledo, Ohio.