August 27, 2014

Bank Directors: Beware of Expanded Fiduciary Duties

In this American Banker article, Luse Gorman’s John Gorman discusses his concerns about – and opposition to – suggestions made by academics and others that bank directors’ fiduciary duties be broadened in the risk oversight area. His article was triggered by a recent speech by Federal Reserve Gov. Daniel Tarullo where he appeared to support the notion of expanding bank directors’ fiduciary duties – referencing a recent “provocative” academic paper proposing a simple negligence standard for expanded board oversight responsibility for risk-taking by “systemically important” financial institutions.

In the article, Gorman notes that expanding directors’ duties in this manner would expose boards to liability for good faith judgments as to risk management, increase litigation and expense, require boards to function in a management capacity, and discourage board service by capable candidates.

Kevin LaCroix echoes those concerns in this blog. Like Kevin, I too acknowledge stepping into an already-unfolding debate, but just have to note that I am similarly concerned about the implications of such a proposal. Among other things, it seems almost certain that the pool of aspiring and well-qualified bank board directors would shrink measurably as their potential liabilities increase, which would reduce overall board effectiveness – seemingly totally counter to the objectives of the proposal. Kevin’s blog further discusses his seemingly well-founded concerns that the notion of broadened fiduciary duties would quickly expand beyond just systematically important financial institutions to additional – or potentially all – bank directors.

On The Other Hand: Proposed Increased Protection for Australia’s Directors

While here in the US we are dealing with discourse around expanding the fiduciary duties of bank directors, proposals to limit director exposure to liability are being floated in Australia. This paper outlines the Australian Institute of Company Directors’ proposal for a new director defense to supplement the statutory business judgment rule.

The statutory business judgment rule is limited to a director’s duty of care and diligence – leaving directors exposed to liability for actions/omissions related to other Corporations Act provisions and laws that may impose personal liability. The Institute’s surveys (described in the paper) suggest that directors’ exposure to personal liability under the current regulatory scheme adversely impacts their decision-making and discourages their willingness to accept new board appointments. The proposed Honest & Reasonable Director Defense is designed to provide directors with appropriate protection.

The proposed defense is as follows:

Honest and reasonable director defence

Notwithstanding any other provision of this Act or the ASIC Act, if a director acts (or does not act) and does so honestly, for a proper purpose and with the degree of care and diligence that the director rationally believes to be reasonable in all the circumstances, then the director will not be liable under or in connection with any provision (including any strict liability offence) of the Corporations Act or the ASIC Act (or any equivalent grounds of liability in common law or in equity) applying to the director in his or her capacity as a director.

What is “Proxy Insight?”

In this podcast, Seth Duppstadt discusses how the new service – Proxy Insight – works, including:

– What is Proxy Insight?
– How does it differ from a proxy advisor?
– How does it differ from a governance ratings firm?
– Any surprises since you launched?


– by Randi Val Morrison