Agenda Item of the Month: Corporate Governance

This is the AABD's first Agenda of the Month.

The objective is to expand the discussion of the Board of Directors beyond the ordinary subjects to include issues that arise outside the individual bank, but which may have a material impact on the bank.

For this month, we suggest that the Board consider adding a general discussion of corporate governance. Corporate governance is the relationship among various participants in determining the direction and performance of a corporation. In other words, who does what in a corporation? It also means the empowerment of an independent board of directors and the establishment of structural devices to help assure that the board will be independent of management.

Corporate governance has been in the national limelight at least since the fall of Enron. Questions are being raised as to how future Enrons (and, now, WorldComs) could be avoided through the establishment of strong corporate governance principles.

Earlier this month, a New York Stock Exchange Committee recommended amendments to the exchange rules that would require companies listed on that exchange adhere to certain corporate governance principles. A copy of the recommendations is attached.

For those bank holding and financial holding companies that are listed on the New York Stock Exchange, review of these proposed rules is essential. For others, the proposed rules are a guide to the future. These recommendations will have no direct impact on companies not listed on the New York Stock Exchange, but they will undoubtedly have a ripple effect on other corporations, including banks.

Companies listed on NASDAQ need to review NASDAQ's proposed rules on the same issues, a summary of which is enclosed.

The agenda item for July's board meeting can address the subject of corporate governance generally, putting the subject in the context of current developments. Although there is no current indication that the federal banking agencies will initiate rules on corporate governance similar to those proposed by the New York Stock Exchange or NASDAQ, it makes sense for Boards of Directors to familiarize themselves with the issues, and decide whether it is worth a closer look at their own corporate governance practices to determine whether they can be improved upon.

If the bank Board decides that it needs to study the issue further, it could create a Corporate Governance Committee or assign an existing committee to study the issue more thoroughly. The assigned committee can then prepare and file a report with the Board on what the committee has determined and recommended.