Accept a bank board seat? A verdict from the litigators: when and why bank directors are most often at risk of civil liability.

• Author: Klein, Dennis

Our experience litigating the civil liability of former directors of failed banks reveals that, absent conflicts of interest, most bank directors accused of negligence, gross negligence, and/or breaches of fiduciary duty have simply failed to act in one way or another, particularly in response to information indicative of potentially fatal risks. Any individual considering service on a bank board should be sure to understand the attendant obligations before accepting a position as a director. Below we discuss two of the basic--along with some not so obvious--obligations every bank director should know.

1. Supervising the bank's management

   As with all corporations, a bank's board of directors is ultimately responsible for overseeing the management of the corporation. A director cannot simply be a rubber stamp. While a director is generally entitled to rely on the representations of management, a director must always exercise his or her own independent business judgment. A director that blindly defers to the judgment of management can be found liable for abdicating his or her supervisory responsibilities over the bank.

   In the banking context, it is particularly important that a bank director actively oversee the loan underwriting and administration procedures of the bank. This area is almost invariably central to a bank's success or failure, and bank directors should accordingly be alert to any signs of weaknesses or excessive risks. Federal regulators, for example, expect the board to review and approve the written loan policy at least annually. The prudent bank director will recognize that he may be held liable even for loans that he does not personally approve, if the director in question permitted obviously deficient loan underwriting or administration practices to persist after he became (or should have become) aware of their existence.

   In our experience, bank directors are most often at risk of civil liability when they allow themselves to be dominated by an aggressive and/or successful CEO or president, particularly when that individual is also a large shareholder of the bank. A bank director must actively challenge management decisions if circumstances warrant. The fact that a certain management team has been historically successful will not excuse a director's failure to act in the face of information indicative of excessive, systemic risk to the bank.

   Relatedly, bank directors should pay careful attention to the compensation of its...