Board Committees

To make governance more manageable for the board, directors are often assigned to committees to handle oversight and policy responsibilities. These committees may include bank management, if appropriate.

Besides making governance more manageable, committees allow a bank to take advantage of an individual board member’s particular strengths. For instance, directors with an expertise in accounting might be well-suited for the audit committee. Board members with expertise in a particular industry, such as agriculture or real estate, would bring unique and valuable insight to the loan committee. Directors who know about changes in technology or who understand data processing might be a good fit on the technology committee. For a sampling of typical board committees, click on "Common Board Committees" in the Learn More section and select a committee to review.

While committee practices in smaller or nonpublic banks are generally less formalized than those at larger or public banks, some recommended practices make all committees more effective. You may find your bank does not follow all of these practices; however, that doesn’t mean its committee practices are weak. The presence of other practices can mitigate or compensate for the absence of others. However, the more of these practices that are present, the more effective committees tend to be. Some of the more commonly recommended committee practices are discussed in this section.

Have appropriate balance between inside and independent directors.

Some committees, like the loan committee or the ALM committee, often include a mix of directors and management. When deciding who to name to a committee, consider the function, the purpose of the committee, and the knowledge and background needed to be an effective committee member. A practice required for the governance-related committees of publicly traded companies, which is being increasingly adopted by smaller nonpublic institutions, is limiting membership on certain committees to independent directors. These committees include the audit committee, the compensation committee, the nominating committee and the governance committee. Limiting membership to independent board members helps reduce conflicts of interest.

Require reports to the board.

For the committee structure to be effective, each committee should make regular reports to the full board of directors on its activities. Although the board delegates various tasks to its committees, the board remains responsible for this work. Because of this, the board should hold its committees accountable for conducting their activities within the authority granted to them and be aware of all actions that committees have taken.

Maintain minutes.

Each board committee, like the board of directors, should maintain minutes of its activities and actions. Minutes provide a record that the committee and individual committee members have met their fiduciary responsibilities to the institution and its stakeholders.