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• Reviewing how appropriate financial and operational information is provided tosenior management and board members• Evaluating the overall effectiveness of the board“Typical lawsuits broughtagainst directors of depositoryinstitutions for breaching theirduty of care include:1. Failure to supervise2. Failure to implementappropriate complianceprograms3. Negligent lending andreserving practices4. Failure to respond towarnings or criticismsfrom regulators, auditorsand others”Directors are entitled to rely on information, opinions, reports or statements,including financial statements or other data, prepared by employees, legal counsel,public accountants or other experts or professionals, or committees of the board ofdirectors if the directors reasonably believe that such sources merit confidence. Ofcourse, directors may not rely upon these people if they have knowledge of facts orinformation that would make this reliance unwarranted.Examples of lawsuits typically brought against directors of depository institutions forbreaching their duty of care include the following:1. Failure to superviseDirectors have a duty to supervise other directors, as well as the institution’s officers.While a director may not be directly involved in fraud or embezzlement, the directormay be liable if he or she failed to establish or follow adequate internal controls.State and federal regulators may pursue directors for failing to exercise adequatesupervision. Most notably, regulatory agencies will often sue directors of an insolventdepository institution for negligence and breach of fiduciary duty, as well as breachof various statutory duties, based on the directors’ failure to supervise or adequatelydirect management after unsafe practices have been called to the directors’ attention.The supervisory role of directors is of particular importance as depository institutionsexpand into new lines of business. The decision to enter a new line of business mustbe carefully considered. Acquisitions and entries into new lines of business should beundertaken only after development and analysis of a business plan prepared with theassistance of consultants or advisors with established expertise in the new business.Managing the new business may require special skills or expertise unavailable amongexisting personnel, and the depository institution may be exposed to market factorsand risks of a nature and magnitude different from those affecting the institution’straditional operations.2. Failure to implement appropriate compliance programsA director’s duty of care includes a duty to establish internal compliance programsto identify and curtail misconduct by an institution’s employees and agents, as wellas a duty to monitor those programs to be sure they are effective.Courts used to be reluctant to require directors to take affirmative steps to implementinternal compliance programs – unless, of course, there were obvious problems ofwhich the directors should have been aware. No more. It is now clear that a director’sduty of care includes an affirmative obligation to establish and maintain programs tomonitor whether the institution is complying with applicable law.3. Negligent lending and reserving practicesMany cases brought against depository institution directors have involved improper,unauthorized, excessive or badly documented loans or overdrafts. One recurrentproblem is the lending of excessive amounts to one borrower or an affiliated group5Financial institutions guide
of borrowers. Directors who allow loans to be approved in excess of an institution’slending limits may be liable for the entire amount of the improper loan. 4Other common examples of negligence in lending include:• Failing to obtain financial statements and other adequate information about thecredit standing of borrowers• Lending on inadequate security or without a proper appraisal• Lending to favored borrowers or “cronies”• Lending to businesses run by persons with little or no experience• Permitting a large volume of delinquent or classified loans to build up• Failing to establish adequate reserves or overreserving• Permitting undue concentration of loans in a single industry or field of activity(e.g., commercial construction)4. Failure to respond to warnings or criticisms from regulators, auditorsand othersOften, regulators or private auditors will render an audit or examination reportcontaining specific criticisms of a depository institution’s lending practices oroperations. Directors who ignore these warnings act at their own peril. Manycomplaints against directors allege that they were aware of problems with theinstitutions’ practices, yet failed to establish or adhere to policies designed torespond to those warnings and criticisms.The “Business Judgment” RuleThe actions of directors undertaken in good faith and for a rational business purposewill ordinarily be protected by the “business judgment” rule, which means that thecourts will not overturn corporate decisions and substitute their own judgment forthe business judgment of the directors. As one court has stated:Directors of corporations discharge their fiduciary duties when in good faith theyexercise business judgment in making decisions regarding the corporation. Whenthey act in good faith, they enjoy a presumption of sound business judgment,reposed in them as directors, which courts will not disturb if any rational businesspurpose can be attributed to their decisions. In the absence of fraud, bad faith,gross overreaching or abuse of discretion, courts will not interfere with theexercise of business judgment by corporate directors. 54 See, e.g., Corsicana National Bank v. Johnson,251 U.S. 68 (1919).5 Panter v. Marshall Field & Co., 646 F.2d 271,293 (7th Cir. 1981). Directors are cautioned thatthe business judgment rule has been stated indifferent ways by different courts. Whether aparticular court will apply the business judgmentrule in a particular case may depend on thecourt’s “feel” for whether the directors actedwith reasonable care under the circumstances.6Financial institutions guide
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 and 22: “In recent years, there hasbeen a
Page 23 and 24: • Copies of regulators’ examina
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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