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FHFB Releases Governance Report; Hearing Scheduled

JANUARY 16, 2004


FHFB Releases Governance Report; Hearing Scheduled

The Federal Housing Finance Board has released a report assessing board governance practices of the Federal Home Loan Banks. The FHFB has scheduled a public hearing on FHLB governance for Jan. 23. ICBA will testify.

"With the current high level of attention being paid to the management and operations of government sponsored enterprises, this hearing is certainly timely," said FHFB Chairman John Korsmo. "I hope the discussions will produce useful statutory, regulatory, and operational suggestions for improving governance at the (FHLBs)."

The review of board governance was designed to assist the FHFB in directing and developing its supervisory and regulatory initiatives. The review was not conducted as an examination so as to encourage full, candid comments from FHLB board members and management. The FHFB reviewed board effectiveness considering factors such as: engaged board members, skilled senior management, thorough strategic planning, sound risk management, robust internal controls, effective audit program, strong ethical culture, and timely, accurate and complete communications.

While most of the FHLBs are already promoting engagement of directors, the report states they can do more by offering additional capital markets training for directors, particularly on derivatives and hedging; hold more than six board meetings and four audit committee meetings a year; and promote additional accounting or finance expertise among audit committee members.

During interviews, a number of directors and managers questioned the standards governing the election and appointment of directors. (The size and composition of FHLB boards, as well as the selection of directors, is governed by statute and regulations.) Some directors expressed concern that the voting formula favors the smaller members and disadvantages the larger members. The majority of directors who commented on this issue said the voting formula should be more balanced between large and small members.

The FHFB said that a majority of directors and senior managers interviewed expressed dissatisfaction with the selection of appointed directors, particularly about their lack of banking and financial risk management experience.

Most boards are effective in selecting and retaining skilled senior managers but the report recommends that they consider external as well as internal candidates when filling executive management positions; ensure executive compensation is linked to the FHLB's success in meeting the board's strategic and business objectives; improve recruiting of senior managers in certain specialty functions such as internal audit; and improve succession plans.

All FHLB boards have instituted programs to ensure ethical conduct but the FHFB sees a need for better tracking and reporting of directors' interests to avoid conflicts.

The FHFB plans to develop a booklet on board governance for directors based on findings of the review, and to enhance its examination procedures to include more board governance effectiveness indicators used in the review. The full report is available at www.fhfb.gov/pressroom/reports/Governancereportfinal.pdf.