Regulatory Burden: Don't let the regulators take the fun away

Northwestern Financial Review, May 15-May 31, 2005 by Austin, Douglas V

Rules and regulations are taking the fun out of society. The final straw: Fox hunting is now banned in England!

Although I've never been on a fox hunt, I am English by ancestry, and I say the elimination of fox hunting is the death of yet another area of society that provided many people with joy and bothered few.

Another example of joy-killing is serving on a bank board of directors. Thirty years ago, being a member of a financial institution board was almost like being a member of a college fraternity or the local country club. Board meetings were held convivially among homogeneous individuals, and no one threatened to throw directors into jail or sue them for all they are worth.

Today, the opposite is true. We are now in an environment where the board of directors is under siege, whether the financial institution is publicly traded or privately held. Congress passed the Sarbanes-Oxley Act in 2002, and the most recent anti-director campaign started immediately thereafter.

Note there have been no examples of financial institution directors being involved in the unethical or illegal activities that have been paraded through banner headlines in the Wall Street Journal and other publications. If you go through the list of Enron, Global Crossing, WorldCom, Health South, Adelphi and Martha Stewart, you don't run across any commercial banks.

On the other hand, one of the federal banking regulatory agencies is going to apply all of the Sarbanes-Oxley requirements to community banks which are not publicly traded and, in essence, demand and require Sarbanes-Oxley "best practices" for banks that may not have sufficient resources to hire the outside help in order to meet the best practices standards. Moreover, all directors are now being tainted with the same brush that the major scandals have created.

As directors, you are now entertaining whether to hire special legal counsel, outside loan and compliance review examiners, external certified public accounting firms and other experts in order to protect the board - not from the shareholders, but essentially from the regulatory agencies that are going to demand Sarbanes-Oxley best practices. This is even more absurd when it is applied to a mutual savings bank or savings and loan association, which has no shareholders at all.

There is strong pressure for increased education, continuing legal and banking education, and more participation by the directors in the activities of the financial institutions. The amount of time you will have to spend over the next five years will be approximately double the amount of time you spent annually over the past five years. This is simply to meet all the requirements imposed by recent federal legislation (such as the USA PATRIOT Act, Bank Privacy Act, Bank secrecy Act, the Gramm-Leach Bliley Act, Sarbanes-Oxley Act) and all of the attendant financial rules and regulations. Add to the mix the individual rules and regulations imposed by state legislatures, and the fun really is gone!

There is one potential solution to assist directors in regaining some of the conviviality and enjoyment of serving as a director of a bank or thrift: Surround yourself with other individuals who possess great knowledge, expertise, integrity, veracity, credibility, prudence, vigilance and other elements that boost the reputation and productivity of your board above others within your community. The more expertise and knowledge on the board of directors, and the more the board is able to meet the demands of the crises that affect all financial institutions, the better run your board will be, and the more efficient and productive will be the performance of your financial institution.

Keep in mind that you are not a member of the board of the local country club discussing the latest round of golf, but rather a dedicated, stressed and critically imposed-upon director of a financial institution that is under local, regional and national scrutiny.

Years ago, the Indiana legislature met every two years for 61 days. When things were not going well, pundits would reflect that perhaps the legislature should meet every 61 years for two days! Your board meetings might benefit from meeting three hours once a year rather than three hours a month. The less often you meet, the fewer mistakes you can make and the more fun you can have doing other things.

All kidding aside, serving as a bank director is serious business. Under Sarbanes-Oxley and other federal mandates, a directorship is a job, and you will be expected to perform your responsibilities at the utmost level of efficiency. Mistakes are not tolerated, and the penalties are high. In essence, your fox hunting days are over!

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