Remarks by
Ricki Helfer
Chairman
Federal Deposit Insurance Corporation
before the
Assembly for Bank Directors
San Diego, CA
May 2, 1997
It is a great pleasure to be with you today at the Centennial Assembly for Bank Directors
-- when anything lasts for 100 years, it must be good.
There is a widespread belief that Abraham Lincoln encapsulated his belief in democracy
during his historic debates with Stephen A. Douglas with the words: "You can fool all the
people some of the time and some of the people all the time, but you can not fool all the
people all the time." This quotation endures, despite the fact that historians and other
writers have found no evidence that Abraham Lincoln ever said the words.
It is an example of a myth -- a story people believe that has no basis in truth.
I am here today to talk about another myth -- one that is less positive -- a myth that
could cause a great deal of harm to banks by discouraging capable and dedicated
people from serving on a bank's board of directors. That myth is that federal regulators
in general and the Federal Deposit Insurance Corporation in particular hold bank
directors to standards that go well beyond those normally applicable to corporate
directors.
The truth is that the general standards that we, and other bank regulators, expect bank
directors to follow are substantially the same as the standards for directors of all
companies. Today I will describe the standards for corporate directors and discuss how
our standards are applications of those accepted standards. I will also sketch a brief
history of our actions against bank directors when institutions fail and why those actions
have made sense in light of accepted standards for the responsibilities of bank
directors.
Our laws have long held that all corporate directors and officers have duties to the
corporations they serve. These duties are generally known as the duty of care and the
duty of loyalty. They embody the expectation that a director will pay attention to the
operations of the organization and will put the organization's interests above his or her
personal interests in doing the job.
The duty of care dates back at least to the early 1800s when the courts ruled that
directors are required to use the same care and diligence that an ordinary person would
exercise under similar circumstances. The U.S. Supreme Court applied virtually the
same standard to bank directors more than a century ago when it ruled that the director
Ricki Helfer
Chairman
Federal Deposit Insurance Corporation
before the
Assembly for Bank Directors
San Diego, CA
May 2, 1997
It is a great pleasure to be with you today at the Centennial Assembly for Bank Directors
-- when anything lasts for 100 years, it must be good.
There is a widespread belief that Abraham Lincoln encapsulated his belief in democracy
during his historic debates with Stephen A. Douglas with the words: "You can fool all the
people some of the time and some of the people all the time, but you can not fool all the
people all the time." This quotation endures, despite the fact that historians and other
writers have found no evidence that Abraham Lincoln ever said the words.
It is an example of a myth -- a story people believe that has no basis in truth.
I am here today to talk about another myth -- one that is less positive -- a myth that
could cause a great deal of harm to banks by discouraging capable and dedicated
people from serving on a bank's board of directors. That myth is that federal regulators
in general and the Federal Deposit Insurance Corporation in particular hold bank
directors to standards that go well beyond those normally applicable to corporate
directors.
The truth is that the general standards that we, and other bank regulators, expect bank
directors to follow are substantially the same as the standards for directors of all
companies. Today I will describe the standards for corporate directors and discuss how
our standards are applications of those accepted standards. I will also sketch a brief
history of our actions against bank directors when institutions fail and why those actions
have made sense in light of accepted standards for the responsibilities of bank
directors.
Our laws have long held that all corporate directors and officers have duties to the
corporations they serve. These duties are generally known as the duty of care and the
duty of loyalty. They embody the expectation that a director will pay attention to the
operations of the organization and will put the organization's interests above his or her
personal interests in doing the job.
The duty of care dates back at least to the early 1800s when the courts ruled that
directors are required to use the same care and diligence that an ordinary person would
exercise under similar circumstances. The U.S. Supreme Court applied virtually the
same standard to bank directors more than a century ago when it ruled that the director
of a financial institution is expected to act as a reasonably prudent person would. The
Supreme Court also stressed that bank directors, like their corporate counterparts, are
not expected to guarantee the success of every business venture and bank directors
are not liable for mere errors of judgment. No one expects bank directors to be liable
when reasonable business decisions go wrong -- but all corporate directors are
expected to take an active role in overseeing the management of the organization and
to avoid self-interest and self-dealing in performing that function.
Historically, state common law defined the fundamental duties of corporate governance.
It included the concept of "business judgment" -- a recognition that, while directors are
required to oversee management, they must be entitled reasonably to rely on
management, board committees, and the reports they generate in order to make
decisions and authorize business risks without fear of personal liability.
In recent years, most state legislatures have enacted statutory standards of care
applicable to corporations and, at least in a number of instances relating to bank
failures, to insured financial institutions. Forty-four states in recent years have relaxed
common law standards from "ordinary negligence" to gross negligence or, in some of
the more extreme instances, to some form of recklessness or intentional behavior.
Unfortunately, in the case of the extreme instances, states went too far beyond long
accepted standards of conduct in their efforts to insulate directors from liability. In states
that insulated directors from recklessness or intentional misconduct, it began to look as
though directors could rarely be held accountable for any of their actions or inactions no
matter how egregious.
Accordingly in 1989, at the height of the savings and loan crisis, Congress enacted a
law to preserve lawsuits brought by the FDIC as receiver of failed financial institutions
against directors and officers to the extent state law sought to insulate bank directors for
conduct constituting gross negligence or worse. This federal attempt to modify by
statute the liability of directors of failed banks left a lot of confusion and caused
significant litigation over exactly what Congress intended.
The question was finally settled by the Supreme Court earlier this year. The Supreme
Court decided that state law standards of conduct should continue to apply to all insured
financial institutions regardless of charter but only so long as state law provides a
minimum standard no worse than "gross negligence." Thus, if a state were to pass
legislation insulating bank directors from all suits brought by the FDIC as receiver of a
failed institution except for cases involving, for example, intentional misconduct, the
FDIC as receiver would still be allowed to bring suits for gross negligence.
Coming full circle, gross negligence is precisely the standard the FDIC always applies in
determining whether to sue outside directors for breaching their duty of care.
Let's look more closely at the duties of corporate directors in general and compare them
to the expectations for bank directors.
Supreme Court also stressed that bank directors, like their corporate counterparts, are
not expected to guarantee the success of every business venture and bank directors
are not liable for mere errors of judgment. No one expects bank directors to be liable
when reasonable business decisions go wrong -- but all corporate directors are
expected to take an active role in overseeing the management of the organization and
to avoid self-interest and self-dealing in performing that function.
Historically, state common law defined the fundamental duties of corporate governance.
It included the concept of "business judgment" -- a recognition that, while directors are
required to oversee management, they must be entitled reasonably to rely on
management, board committees, and the reports they generate in order to make
decisions and authorize business risks without fear of personal liability.
In recent years, most state legislatures have enacted statutory standards of care
applicable to corporations and, at least in a number of instances relating to bank
failures, to insured financial institutions. Forty-four states in recent years have relaxed
common law standards from "ordinary negligence" to gross negligence or, in some of
the more extreme instances, to some form of recklessness or intentional behavior.
Unfortunately, in the case of the extreme instances, states went too far beyond long
accepted standards of conduct in their efforts to insulate directors from liability. In states
that insulated directors from recklessness or intentional misconduct, it began to look as
though directors could rarely be held accountable for any of their actions or inactions no
matter how egregious.
Accordingly in 1989, at the height of the savings and loan crisis, Congress enacted a
law to preserve lawsuits brought by the FDIC as receiver of failed financial institutions
against directors and officers to the extent state law sought to insulate bank directors for
conduct constituting gross negligence or worse. This federal attempt to modify by
statute the liability of directors of failed banks left a lot of confusion and caused
significant litigation over exactly what Congress intended.
The question was finally settled by the Supreme Court earlier this year. The Supreme
Court decided that state law standards of conduct should continue to apply to all insured
financial institutions regardless of charter but only so long as state law provides a
minimum standard no worse than "gross negligence." Thus, if a state were to pass
legislation insulating bank directors from all suits brought by the FDIC as receiver of a
failed institution except for cases involving, for example, intentional misconduct, the
FDIC as receiver would still be allowed to bring suits for gross negligence.
Coming full circle, gross negligence is precisely the standard the FDIC always applies in
determining whether to sue outside directors for breaching their duty of care.
Let's look more closely at the duties of corporate directors in general and compare them
to the expectations for bank directors.