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The Foundation of Officer and Director Duties
March 14, 2011

This is the second in my occasional series discussing board and officer liabilities in light of increasing FDIC scrutiny. Last month in my article “FDIC Goes on the Attack,” I discussed specific allegations made by the FDIC in its recent legal actions against the board members and officers of failed banks. In this article, I am taking more of a “thirty-thousand foot view” and looking at the broader principles that underpin director and officer duties – namely the seminal duties of loyalty and care.

Not surprisingly, the FDIC focuses heavily on the duties of loyalty and care in the “Statement Concerning the Responsibilities of Bank Directors and Officers” (FIL 87-92). Those duties being described, as follows:

  1. Duty of Loyalty – Plainly put, directors and officers should administer the interests of the Bank by giving precedence to the needs of the Bank and not their personal interests. The duty of loyalty prohibits self-dealing, fraud and conflicts of interest.  
  2. Duty of Care – Directors and officers are required to be prudent and diligent business persons in the conduct of bank affairs. In other words, directors and officers are to use a certain (minimum) level of care in the performance of their duties. In practical terms it means, among other things, directors and officers are responsible for 1) the hiring of competent high-level employees; 2) properly monitoring the bank and its employees; 3) ensuring procedures are properly followed; and 4) making business decisions on the basis of fully informed and meaningful deliberation.  

FIL 87-92 showcases the practical importance of duty and care to directors and officers. The letter states, “Lawsuits against former directors and officers of failed banks result from a demonstrated failure to satisfy the duties of loyalty and care.” Predictably, the FDIC spotlighted breaches of both in their recent recovery actions, including in the 1st Centennial Bank complaint. In it the allegations illustrate the problems that arise when the Board and officers do not properly perform its duties – examples are allowing important departments to be critically understaffed, hiring incompetent managers and failing to supervise employees. Whereas the duties of care and loyalty (and what each entails) may appear elementary, these duties should be continually front and center in the directors’ and officers’ thoughts and actions. Duty of loyalty and care underpin the Board’s fiduciary obligations to the Bank, its shareholders and its creditors. One should be cognizant of these duties and how one’s actions may appear or be interpreted because someone is always going to be looking over your shoulder.

Stay tuned because the FDIC’s offensive continues and, as reports suggest, will soon turn on Washington Mutual executives. Supposedly, the FDIC will be seeking more than $1 billion from them. With stakes and the profile so high, this fight should be very interesting and illuminating.

Banking & Finance Law