Know the risks - Zurich

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Loss control: protecting directors& officers against liabilityIn the light of the applicable legal principles and case law, what steps shoulddirectors & officers of depository institutions take to protect themselves againstliability? The following are some suggestions for establishing a protection program.These suggestions are not meant to be all-inclusive. It should be emphasized thatthe institution’s general counsel will normally play a leading role in the design andimplementation of any loss control or protection program.Prior protection: promoting awareness• Prepare a code of conduct covering such matters as conflicts of interest, insiderloans, insider trading, safeguarding confidential information, acceptance of giftsand fees, political contributions and other legal and ethical issues. Be sure thecode of conduct is properly communicated and understood.• Establish an orientation program for new directors to make them familiar withbasic institution policies and regulatory requirements.• Send periodic memoranda to directors on recent significant legal and regulatorydevelopments.• Establish ongoing training seminars for directors and key employees to increaseawareness of risks, promote good corporate governance and ensure compliancewith regulations.• Establish training programs for officers focused on “lender’s liability” issues,including obtaining proper loan documentation, lending limits, disclosures toborrowers, perfection of security interests, analysis of borrower and guarantorfinancial information, proper reporting of defaults and loan deficiencies andenvironmental compliance.• Implement credit review procedures designed to reveal problem loans and othercredit problems.Protection against claims of negligence• Attend meetings, participate actively and demand responsive answers frommanagement. Directors should be sure that they understand issues before they vote.• Avoid conflicts of interest whenever possible and fully disclose and recuse yourselffrom any truly unavoidable conflicts.• Conduct board meetings in an environment that encourages candid, opendiscussion and active questioning of management.• Whenever possible, materials should be sent to directors in advance of anymeeting and directors should review and understand materials prior to meetings.21Financial institutions guide
• Copies of regulators’ examination reports should be provided to directors andreviewed carefully. Insist on prompt follow-up action to correct deficiencies.• Investigate warning signs. Important decisions should be thoroughly investigatedand approved by knowledgeable, informed and truly independent persons basedon the advice of qualified outside advisors.• Review periodic reports filed with the institution’s regulators.• Insist on regular reports from officers, including financial summaries, key financialratios and details of problem loans and other weaknesses.• Establish appropriate committees composed of independent directors. Thequalification of committee members will vary depending on the nature of thecommittee. For instance, audit committees should be composed of independent,financially literate members who can fully understand and critique the company’sfinancial statements.• Conduct periodic self-evaluations to analyze the board’s overall performance andthe performance of individual directors.• Establish and monitor key performance criteria reflecting the company’s financialstability and fulfillment of strategic goals.Protection against liability under federal securities laws• Periodic reminders should be given to directors and officers regarding the legalconsiderations involved in buying or selling the company’s stock and reportingrequirements under the 1934 Act or other applicable laws.• Establish proper “due diligence” procedures for review of registration statements,proxy statements, and periodic statements filed with the SEC or other agencies.• Establish corporate procedures for handling disclosures of corporate informationto security analysts and others.• Circulate a policy statement on insider trading so that all directors and officers areaware of the applicable rules.Protection against liability in the sale of the company• In major transaction such as a sale or takeover of the institution or the acquisitionof another entity has been proposed, directors should be well informed about thetransaction and the benefits to the institution and its shareholders.• If appropriate, the board should appoint a special, disinterested committee toreview any proposed transaction.• The board or committee should retain competent independent advisers, includinglegal counsel and investment bankers. The advisers should be given completeaccess to management and relevant documents.• When the transaction is presented to the full board, interested directors shouldabstain from discussing and voting on the transaction.22Financial institutions guide
Page 6 and 7: • Reviewing how appropriate finan
Page 8: While the scope and application of
Page 11 and 12: agents, or servants of the [bank] t
Page 13 and 14: Sarbanes-OxleyThe Sarbanes-Oxley Ac
Page 15 and 16: duty; (2) that such violation, prac
Page 17 and 18: • employ any device, scheme or ar
Page 19 and 20: Claims by or on behalf ofthe instit
Page 21: “In recent years, there hasbeen a
Page 25 and 26: Most indemnification statutes disti
Page 27 and 28: • An institution may be insolvent
Page 29 and 30: ConclusionCorporate indemnification

Know the risks - Zurich

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