The Fiduciary Duties of Bank Boards (2022)

Even Bank Directors Are Not “Platonic Masters”: The fiduciary duties of bank boards extend to efforts to exploit banking regulations and manipulate bank regulators

When a board of directors takes action for the primary purpose of thwarting the effectiveness of shareholders’ election of directors, that board violates its duty of loyalty. The rationale for this rule is simple: as between shareholders and directors, shareholders are the principals and directors the agents. In a principal/agent relationship, the principal has the authority to choose the agent and in the context of directors and shareholders, it is fundamentally disloyal for the director/agent to usurp the principal/shareholders’ authority to elect directors. [1] Among non-banking, commercial corporations, this is a matter of settled law and boards are largely loathe (whether to avoid liability or predictable repercussions) to take any corporate action that would thwart the effectiveness of a shareholder vote, such as attempting to prevent a contested election of directors. Yet boards of banking organizations—almost as a matter of course when confronted with an activist investor—will shamelessly take actions with the obvious “purpose of obstructing the legitimate efforts of dissident stockholders in the exercise of their rights to undertake a proxy contest against management.” [2]

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The reason for this disparity is simple: shareholders and others charged with policing bank directors’ compliance with their fiduciary duties have simply failed to grasp that otherwise lawful (or at least, colorably permissible) actions (including those regarding banking laws and regulations) nonetheless violate boards’ fiduciary duties to shareholders when they are taken for the purpose of disrupting the shareholder franchise. An obvious example is amending corporate bylaws—an ostensibly legitimate exercise of power in the abstract, it reflects a direct assault on shareholder rights when taken for the purpose of diminishing shareholder voice. But the same analysis applies when banking organizations exploit bank regulations and manipulate bank regulators for the purpose of thwarting the effectiveness of a shareholder vote. [3] Where the primary purpose of a board’s action is the same—disenfranchising shareholders—the instrumentality of that purpose makes little difference, and the same standards for liability should apply.

Banks are highly regulated entities. For any banking organization, there is a plethora of regulatory schemes, with different regulators, laws and regulatory agendas, that are frequently in tension—or even inconsistent—with one another. There are also myriad rationales offered in support of bank regulation, which include protecting the safety and soundness of the financial system and financial institutions, ensuring access to credit and other banking products, and preventing unfair competition for banking services. Protecting an entrenched board from accountability to shareholders, however, is clearly not a legitimate goal of any bank regulatory scheme. The fact that entrenched boards are able to exploit banking regulations (such as prior approval requirements for certain share purchases or proxy solicitations) and banking regulators (who may have fallen prey to regulatory capture) does not translate to a conclusion that their actions are in furtherance of any legitimate regulatory objective.

The seminal case of Blasius Industries v. Atlas Corporation stands for the proposition that a board cannot interfere with or impede exercise of the shareholder franchise without a compelling justification. Where the board of a banking organization acts to prevent a contested election or prevent an activist shareholder from voting or soliciting proxies in a contested election, fiduciary duty mandates that a board demonstrate a compelling justification for interfering with shareholders’ right to choose directors. Where the mode of action is lobbying a bank regulator (for example, to prompt regulatory proceedings under a statute within the regulator’s jurisdiction), the requirement for a compelling justification is the same as if the board sought to amend the company’s bylaws for the same purpose. When evaluating a board’s actions, purpose matters; and where that purpose is preventing or impeding a contested election, it is difficult to imagine that a compelling justification exists to support that board’s actions, regardless of whether or not those actions are cloaked in an expressed desire to ensure compliance with banking regulations.

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Several states have enacted bank regulations affecting share purchases, voting proxies or the like, requiring prior approval from a banking regulator prior to engaging in the subject activity. The purpose of these regulatory schemes is to give the regulator a chance to decide if further investigation is needed to determine, for instance, whether the purchase or other action might raise safety and soundness or other legitimate regulatory concerns. Prior approval provisions make it easier for bank regulators to further regulatory objectives because they can analyze the potential impact of a transaction before it happens, but it is unclear (at best) that any compelling justification exists when a bank board lobbies a regulator to take action (that the board knows or should know will deprive all shareholders of the right to choose directors) merely because a shareholder had not complied with a prior approval procedure that may or may not even apply to the purchases or other actions at issue.

For example, in anticipation of a 2018 proxy fight with Blue Lion Capital (“Blue Lion”), Homestreet, Inc. (“Homestreet”) lobbied the Washington State Department of Financial Institutions (the “ Washington DFI”) to cause the Washington DFI to issue an interpretation stating that obtaining proxies with respect to more than 25% of the outstanding shares of a Washington bank amounted to a “change of control” for which prior approval was required. This interpretation, which was issued on March 15, 2018, brought an immediate halt to a proxy contest that Blue Lion had started almost two months earlier on January 17, 2018. In that case, the Homestreet board took action (lobbying the Washington DFI) that was clearly intended to interfere with an activist investor’s ability to mount a proxy contest and thereby limited the full exercise of shareholders’ franchise. [4] Whatever interest the Homestreet board might have had in causing the Washington DFI to issue a regulatory interpretation that was clearly designed to disrupt an ongoing contested election for directors, it is difficult to imagine that interest rising to the level of “compelling justification” as set out in Blasius. [5]

The fact that a corporation is engaged in the business of banking doesn’t and shouldn’t mitigate the obligation of its directors to act as faithful fiduciaries to its shareholders. More specifically, there is no wholesale carveout to directors’ duty of loyalty for actions involving banking regulations and regulators. It makes no difference whether a board acts to impede a shareholder vote through more “traditional” corporate actions (such as bylaw amendments, share issuances, etc.) or by exploiting banking regulations and regulators—the effect is the same and the board’s actions should be reviewed using the same standards.

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As Chancellor Chandler noted in Blasius. “[t]he theory of our corporation law confers power upon directors as the agents of shareholders: it does not create Platonic masters.” [6] With respect to directors of banking organizations, neither does the existence of bank regulations and bank regulators that may be exploited and manipulated in order to interfere with shareholders’ fundamental right to elect directors “create Platonic masters.”

Endnotes

1See, Blasius Industries, Inc. v. Atlas Corporation, 564. A. 2nd 651 (Del. Ch. 1988)(noting that a decision by a “board to act for the primary purpose of preventing the effectiveness of a shareholder vote inevitably involves the question who, as between the principal and the agent, has authority with respect to a matter of internal corporate governance” and that such a decision “does not involve the exercise of a corporation’s power over its property , or with respect to its rights or obligations; rather it involves allocation between shareholders as a class and the board, of effective power with respect to governance of the corporation”).(go back)

2See, Schnell v. Chris-Craft Industries, Inc., 285 A.2d 437 (Del. 1971)(holding that management’s use of corporate machinery for the purpose of perpetuating itself in office and preventing a contested election for directors were “inequitable purposes, contrary to established principles of corporate democracy”).(go back)

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3See generally, Schnell at 439 (noting that inequitable action does not become permissible simply because it is legally possible).(go back)

4See, press release issued by Blue Lion on May 21, 2008 available at https://www.sec.gov/Archives/edgar/data/1518715/000089706918000371/cg1119.htm (noting that Homestreet had hired four different law firms to lobby the DFI to issue an interpretation effectively limiting Blue Lion’s ability to solicit proxies representing more than 25% of the outstanding votes in its ongoing proxy fight with Homestreet).(go back)

5This is particularly the case given that, in Delaware and jurisdictions that follow the precepts of Delaware law, “compelling justification” is a extremely high standard. See, Williams v. Geier, 671 A.2d 1638 (Del. 1996)(noting “Blasius’ burden of demonstrating a ‘compelling justification’ is quite onerous, and therefore applied rarely”). As far as other states following Blasius, as one commentator has noted, “[b]ecause of the importance of shareholder voting rights as a counterbalance to managers’ power, it is not surprising that states tend to follow Delaware in requiring managers to show compelling justification in these cases.” Michael Barzuza, The State of State Antitakeover Law, 95 Va. L. Rev. 1973, 2015 (2009)(go back)

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6Blasius at 663.(go back)

FAQs

What are the fiduciary responsibilities of a board? ›

not to make a profit from their position; not to place themselves in a position where their own interest will conflict with their fiduciary duties; not to act to their own advantage or the benefit of a third person without the beneficiary's informed consent; to properly manage organisation assets, funds and property.”

What is the fiduciary responsibility and duty? ›

The primary responsibility of fiduciaries is to run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses. Fiduciaries must act prudently and must diversify the plan's investments in order to minimize the risk of large losses.

What does the board of directors of a bank do? ›

The board of directors is responsible for establishing the policies that govern and guide the day-to-day operations of the bank, so they should review and approve them from time to time. These policies are primarily intended to ensure that the risks under- taken by the banks are prudent and are being properly managed.

What are fiduciary duties UK? ›

Fiduciary duties are owed when someone “has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence”.

What are the three main principles of fiduciary duty? ›

Fiduciaries should act in good faith in the interests of their beneficiaries, should impartially balance the conflicting interests of different beneficiaries, should avoid conflicts of interest and should not act for the benefit of themselves or a third party.

What are the 5 responsibilities of a board member? ›

1) Recruit, supervise, retain, evaluate and compensate the manager. Recruiting, supervising, retaining, evaluating and compensating the CEO or general manager are probably the most important functions of the board of directors.

Does a bank have a fiduciary duty to its customers? ›

As a fiduciary, a bank's primary duty is the management and care of property for others. The Board of Directors and senior management must be able to identify, measure, monitor and control the risks inherent in fiduciary activities, and respond appropriately to changing business conditions.

What is considered a breach of fiduciary duty? ›

A breach of fiduciary duty occurs when the fiduciary acts in his or her own self-interest rather than in the best interests of those to whom they owe the duty.

What are the two main types of fiduciary duties? ›

Fiduciary duties fall into two broad categories: the duty of loyalty and the duty of care.

Is a bank controlled by a board of directors? ›

Every Federal reserve bank shall be conducted under the supervision and control of a board of directors. The board of directors shall perform the duties usually appertaining to the office of directors of banking associations and all such duties as are prescribed by law.

Who holds banks accountable? ›

Federal Reserve Board - The Federal Reserve Board supervises state-chartered banks that are members of the Federal Reserve System. Visit the Consumer Information page for assistance.

What are the legal responsibilities of a board member? ›

There are three such duties. They are the duty of care, duty of loyalty and duty of obedience. Each one is unique and critical to the success of the overall organization. A failure to fulfill any of these duties may expose a director to personal liability.

What are fiduciaries not allowed to do? ›

A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal”.

What are examples of a fiduciary responsibilities? ›

Some examples of fiduciary duties include duties of undivided loyalty, due diligence and reasonable care, full disclosure of any conflicts of interest, and confidentiality. While a fiduciary duty may be violated accidentally, it is still a breach of ethics.

What is an example of fiduciary responsibility? ›

A more generic example of fiduciary duty lies in the principal/agent relationship. Any individual person, corporation, partnership, or government agency can act as a principal or agent as long as the person or business has the legal capacity to do so.

What is the most fundamental fiduciary duty? ›

A duty of loyalty is one of the most fundamental fiduciary duties owed by an agent to his principal. This duty obligates a real estate broker to act at all times solely in the best interests of his principal to the exclusion of all other interests, including the broker's own self-interest.

Is breach of fiduciary duty a crime? ›

If a director of a company breaches his or her fiduciary duties, they could face civil action and, in some cases, criminal sanction. Breach of directors' duties and resulting legal action can have significant consequences for the director, company, shareholders and creditors.

Are fiduciary duties legal? ›

A fiduciary duty is a legal obligation for one party to act in the best interests of another (such as a company). In a fiduciary relationship, the person who is legally and ethically bound by this duty is known as the fiduciary.

What board members should not do? ›

Table of contents
  • Failing to Understand Fiduciary Duties.
  • Failing to Provide Effective Oversight.
  • Deference to the Executive Committee, Board Chair, or the Organization's Founder.
  • Micro-managing Staff.
  • Avoiding The Hard Questions.
  • Insufficient Conflict Management.
  • Lack of Awareness of Laws Governing Tax-Exempts.
20 Feb 2022

Who should not serve on a board of directors? ›

Without further ado, here are five Board No-Nos.
  • Getting paid. ...
  • Going rogue. ...
  • Being on a board with a family member. ...
  • Directing staff or volunteers below the executive director. ...
  • Playing politics. ...
  • Thinking everything is fine and nothing needs to change.
31 Mar 2015

What is fiduciary relationship of banker and customer? ›

A fiduciary relationship is a relation between two parties wherein one party (fiduciary) has the duty to act in the best interest of the other party (beneficiary or principal). The purpose of studying fiduciary relationship is to identify the areas where it exists and gain an insight into the duties of a fiduciary.

Is a bank manager a fiduciary? ›

Fiduciary duty relates to the responsibilities of any person who acts as a trustee for another. In the finance world, this is anyone who makes monetary decisions on behalf of another person. This trust can apply to banks, wealth managers, financial advisors or any other person or body that manages money for others.

What is fiduciary neglect? ›

Fiduciary negligence is a type of professional malpractice in which a person fails to honor their fiduciary obligations and responsibilities. Fiduciary negligence generally comes in the form of passive behavior, in that it is a failure to take action or take any steps to stop or address the actions of others.

How do you prove someone is a fiduciary? ›

To win a breach of fiduciary duty complaint the plaintiff must prove that the fiduciary (defendant) had duties such as acting good faith, being transparent with pertinent information, and being loyal to the plaintiff.

What happens if trustees neglect their duties? ›

If a fiduciary fails to comply with these responsibilities, they may have breached their fiduciary duty. In the case of an executor or trustee, a breach of fiduciary duty may result in their suspension, removal and/or a surcharge – a court order requiring them to pay money damages for the harm caused by the breach.

Are board members financially responsible? ›

Each board member has a responsibility to ensure, to the best of their ability, that all funds are handled and accounted for in a transparent and compliant manner. That includes a number financial fronts, which we'll look at next. Boards of Directors should be the ones who set the organization's budget each year.

Who is responsible for supervision of banks? ›

Introduction. The Fed has supervisory and regulatory authority over many banking institutions. In this role the Fed 1) promotes the safety and soundness of the banking system; 2) fosters stability in financial markets; and 3) ensures compliance with laws and regulations under its jurisdiction.

Who is responsible for supervising banks? ›

Institution Supervision

The Federal Reserve is responsible for supervising--monitoring, inspecting, and examining--certain financial institutions to ensure that they comply with rules and regulations, and that they operate in a safe and sound manner.

What is bank negligence? ›

But this professional negligence is also something that pertains to those in the banking and finance industry. Malpractice in banking occurs when a professional within banking, for instance, is negligent in their work, and, in turn, bring some form of harm to their client's assets.

Where do I report a bank for unfair practices? ›

Your letter of Complaint should be addressed to the Director, Consumer Protection Department. You can submit your letter at the CBN Head Office OR at any of the Central Bank of Nigeria branches of nationwide.

Can I sue my bank for their mistake? ›

If there are many individuals with the same grievances, banks and other financial institutions can be sued through class-action lawsuits. Beyond filing a lawsuit, you have the option of filing a complaint with a government agency about your concern with the bank, which can still result in you getting financial relief.

What is code of conduct for board members? ›

act honestly, in good faith and in the best interests of the Company. All Directors and Senior Management Personnel of the Company shall conduct their activities on behalf of the Company and on their own behalf, with honesty, integrity and fairness.

What are the most important responsibilities of the board of directors? ›

The board is responsible for protecting shareholders' interests, establishing policies for management, oversight of the corporation or organization, and making decisions about important issues a company or organization faces.

Is breach of fiduciary duty a crime UK? ›

Criminal Sanctions can be imposed for breach of fiduciary duties where there is criminal or fraudulent intent.

Who is a fiduciary UK? ›

A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons).

What powers does a fiduciary have? ›

They are bound by their fiduciary duty to responsibly manage the estate and safeguard its assets.
...
A Fiduciary's Duty
  • initiate probate proceedings.
  • notify potential heirs and creditors of the estate's impending settlement.
  • inventory the deceased person's holdings.
  • resolve any outstanding debts.
  • distribute inheritances.

How are fiduciary duties enforced? ›

The compliance of lawyers with their fiduciary duties is enforced by the Legal Services Commissioners of the different states and territories. A breach of fiduciary duty is a tort and a beneficiary may be entitled to damages if fiduciary duty has been breached and they have suffered loss or harm as a result.

What are the key elements of the fiduciary duty of board members? ›

Fiduciary duty requires board members to stay objective, unselfish, responsible, honest, trustworthy, and efficient. Board members, as stewards of public trust, must always act for the good of the organization, rather than for the benefit of themselves.

Does a board of directors have a fiduciary responsibility? ›

Directors on a company board are corporate fiduciaries, with a duty to company shareholders. Many of the board's legal fiduciary duties are articulated in state statutes; courts have also weighed in to help define the scope and limits of these responsibilities.

Do board members have a fiduciary duty? ›

Fiduciary Duties of Board of Directors in a Corporation

Board of directors have a fiduciary duty to exercise due care in how they manage a corporation's affairs and also have the duty of loyalty and obedience to the corporation.

What are two of the most important fiduciary duties of the board of directors? ›

The three fiduciary responsibilities of all board directors are the duty of care, the duty of loyalty and the duty of obedience, as mandated by state and common law. It's vitally important that all board directors understand how their duties fall into each category of fiduciary duties.

Who does board of directors owe fiduciary duties to? ›

Directors have fiduciary duties of loyalty and care to the company and its stockholders. Duty of loyalty. You must put the interests of the company and its stockholders over your own personal interests in making decisions for the Company and evaluating opportunities.

Who does the board of directors owe a fiduciary duty to? ›

Traditionally, corporate directors and officers owe fiduciary duties to the corporation and its stockholders. The boards of directors establish company policies and appoint and delegate certain duties to corporate officers.

What happens if a director breaches their fiduciary duties? ›

If a director breaches their fiduciary duties towards their company, the company can take legal action against the director. This action is usually instigated by the company seeking restitution for financial loss or damage.

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