As the dust (hopefully) begins to settle during this time of bank and market uncertainty and a lull continues for bank M&A activity, it may be just the time to review your institution’s governance structure, documents and mechanisms to bring them up to date (including incorporation of appropriate “best practices” under Sarbanes-Oxley), to provide important alternatives and flexibility for responding to M&A and other corporate opportunities and to generally put the institution in a position to better respond to market opportunities and events as they unfold.

In addition to the fact that it remains the responsibility of the board and management to review governance structures and mechanisms on an ongoing basis and to ascertain that they are appropriate for the operations, plans and intended activities of the organization, a proper governance structure will better enable the institution to control its destiny as a potential acquisition target and to be in a position to quickly respond to acquisition opportunities as a potential buyer.

What is appropriate varies for each organization and the business plans for that organization. There are, however, certain items that make sense on a more general basis for all institutions.

So, what are some of the more important things to look for in this “tuneup?”

Capital Structure

Governance documents should provide appropriate authorization for issuance of common and preferred stock to address planned capital needs and to provide a buffer, if possible, for unanticipated events and opportunities. A broad authorization for preferred stock with terms to be set by the board of the institution can provide flexibility for fairly quick capital issuances, and additional authorized common (or classes of common) stock may make sense as well for growth including potential acquisitions. Expanded stock opportunities may also be appropriate for stock-related incentive compensation programs.

Of course the appropriate structure varies by institution and is impacted by the willingness of existing shareholders to authorize additional shares where such flexibility is not currently provided. Sub-S institutions will need to carefully review the impact of any proposed changes in capital structure on Sub-S status. Perhaps more than any other single item, capital flexibility is important in enabling the institution to take advantage of current and prospective growth opportunities and provides a backup if credit quality issues arise.



This too varies by institution. While some institutions address indemnification coverage in articles of incorporation (or association for national banks), some in the code of regulations or bylaws, some by contract and some through silence in governance documents with a fallback to relevant state and federal law, it is important that boards and management understand and address this issue. D&O insurance is becoming more expensive and difficult to acquire as industry issues continue, and coverage limitations and exceptions are growing, and there is of course the limitation on coverage with regard to agency actions and penalties. Prospective officers and board members may well inquire as to indemnification coverage in the recruiting process, and insurers will need to determine how those issues are handled by the institution. There is no “one size fits all,” and the time to be looking at this issue is preferably long before the lawsuit is served.

Committee Structures and Composition

Standing and special committees have long had an important place in the banking industry, and Sarbanes- Oxley has further focused on “best practices” for non-public companies (including banks) in regard to committee structures and independence. Certain standing committees should be reflected in governance documents, and all committees should adopt and maintain detailed committee charters to provide guidance with respect to committee activities and expectations as well as membership requirements. Audit, compensation and governance committees should be focused on “independent” directors, even for non-SEC companies, and the board should take care to ascertain the “independence” of committee members and document that consideration. Again while not specifically applicable to non-public companies, the committee structure and independence concepts contained in Sarbanes-Oxley and in the listing rules for NYSE and NASDAQ provide a good “best practices” template for all institutions.

Takeover Protections

Even if the institution is uncertain as to its continued independence plans, adopting appropriate anti-takeover protections can provide a method to at least better control the destiny of the institution should unwanted overtures arise and to secure the best transaction (and price) for shareholders. While a true “hostile” takeover can be difficult to prevent, incorporating appropriate protections in governance structures can provide defensive leverage, a stronger negotiating position and critical time to consider an appropriate response. Takeover preparedness is important, and defensive protections including a staggered board, “rights plans,” “supermajority” provisions, “fair price” protections and other structural and procedural protections will enable the institution to better control its destiny and to maintain appropriate leverage in dealing with unwanted acquisition overtures. Each can be structured so that they are not an obstacle to board-approved transactions.

Likewise, potential acquiring institutions should review their governance structure to examine whether there may be inappropriate obstacles for taking advantage of acquisition opportunities as they arise. Takeover preparedness is important for both potential buyers and potential sellers, and institutions should endeavor to adopt a governance structure that will maximize opportunities for protecting the institution in the event of an unwanted acquisition overture while providing flexibility for responding to opportunities as a potential buyer.

Shareholder Activities

The current market has spawned a number of proposals for increased shareholder activism including “say on pay” activities and expanded shareholder access to the proxy process. How these proposals will eventually develop remains to be seen, but in the present environment, organizations (public and non-public) should anticipate that further state and federal pro-shareholder legislation and regulation is likely. For public companies, the SEC is becoming more supportive of shareholder activism proposals generally, which may quickly make their way into state corporate law in the present environment.

State corporate law may in effect be “federalized” by Congressional and SEC shareholder proposals, and banking regulators may be pressured into taking a more active role in bank shareholder issues and activities.

While the impact of this expanded shareholder activism remains to be seen, it is very likely to place additional governance burdens on boards and institutions, increase costs and create further need for careful review and consideration of governance structures and activities for all organizations.

Holding Company and Bank

Many institutions, particularly community banking organizations, have similar (if not identical) boards at the holding company and the bank. This can, and sometimes does, present issues for “piercing the veil” between the holding company and the bank and may be appropriate to avoid. Nonetheless, in all instances care should be taken to avoid inconsistencies between holding company and bank governance structures and documents. Not that they are not and should not be different, but they should be reviewed carefully to avoid inconsistencies that impact board and committee composition and activities. When the holding company is the sole shareholder of the bank subsidiary, making changes is relatively easy but entails regulatory involvement at the bank level. Care must be taken to assure compliance with relevant banking law requirements which differ from the general state corporate law requirements applicable to the holding company.

Making Changes

Depending on the structure, certain changes in governance structure and documents require shareholder approval. Others may be accomplished through amendments to governance documents which may be undertaken by the board without the necessity of seeking and obtaining separate shareholder approvals, and some changes involve the necessity of seeking and securing prior regulatory and/or debt holder approvals. Changes may also impact existing employment, vendor, creditor and other contract relationships, and care must be taken to avoid inadvertently triggering certain provisions in related contracts that may have an unintended result.

Proposed changes should be reviewed with appropriate professionals including financial and M&A advisors, investment bankers, accounting and tax professionals, and legal counsel. Again there is no “one size fits all.” What is appropriate varies by institution and the current and anticipated issues and activities impacting the institution. A well-documented record of consideration of proposed changes by objective outside professionals can assist in addressing an resolving shareholder and regulatory issues that may arise.

In addition, regulatory authorities should be kept in the loop in order to avoid any surprises and to avoid creating any inappropriate and unnecessary concern or suspicion as to the intentions of the institution in undertaking proposed changes.


The time may be right to conduct an overall review and assessment of the governance structure of your institution to better position the institution to address current industry and market issues and to better position the institution be able to respond to a changing environment and unforeseen events. Maximizing flexibility for the organization should be the goal, consistently with the interests of the institution, the constituencies of the institution, and safe and sound banking and corporate practices. Doing so now avoids scrambling to do so in the heat of shareholder, takeover or regulatory concerns and will enable the institution to better manage its own destiny.