In a recent speech at the Large Bank Directors Conference in Chicago, Illinois, Board of Governors of the Federal Reserve System ("FRB") Governor Jerome H. Powell detailed how supervisory expectations for boards of directors were expanded after the financial crisis. He also explained how a new proposal by the FRB would (i) better define and reasonably limit those expectations, and (ii) better differentiate between the obligations of directors and those of senior management.
Mr. Powell stated that during the crisis, firms incurred significant losses from products with risks that were "not even on the radar screen" of firm directors. In response, FRB reforms were implemented in order to ensure that directors could evaluate firm strategic risks and that a firm had the requisite "capital, liquidity, and risk management capabilities" to manage the risk properly. In accordance with these reforms, Mr. Powell said, boards of directors now have expansive responsibilities that include stress testing and other regulatory capital monitoring obligations.
Mr. Powell contends that the reforms have been successful, but noted there are opportunities to lighten the regulatory burden on boards of directors by reducing the amount of "granular information" that directors must sort through as part of their supervisory obligations. He also acknowledged that industry participants have expressed a "widespread feeling" that FRB guidance and regulations are blurring the difference between the roles of boards and management.
Mr. Powell said that an FRB-proposed new framework for board oversight addresses these concerns. The proposal, "spotlight[s] . . . expectations of effective boards" by distinguishing between the responsibilities of boards of directors and those of senior management. He asserted that the proposal sets forth a "principles-based approach" that identifies five expectations for an effective board of directors (see previous coverage). They include (i) establishing clear and consistent business strategies and risk-tolerance criteria, (ii) managing information flow and board of directors discussions, (iii) holding senior management accountable, (iv) supporting independent risk management (including compliance) and internal audit functions, and the stature of both, and (v) maintaining a capable board composition and governance structure.
Mr. Powell also mentioned one aspect of the proposal that has garnered attention: directing matters requiring attention ("MRAs") to senior management rather than to a board of directors. He explained that this measure was introduced in order to allow directors to monitor MRAs through a board committee instead of "getting into the granular details on every MRA," since a large banking organization could have more than one hundred MRAs outstanding at any given time. Mr. Powell noted that the directors would continue to receive copies of all the reports, and added that the FRB fully expects directors to hold management accountable for remediating MRAs.
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