Federal Reserve Bank Governance:

Opportunities Exist to Broaden Director Recruitment Efforts and Increase Transparency

GAO-12-18: Published: Oct 19, 2011. Publicly Released: Oct 19, 2011.

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Events surrounding the 2007 financial crisis raised questions about the governance of the 12 Federal Reserve Banks (Reserve Banks), particularly the boards of directors' roles in activities related to supervision and regulation. The Dodd-Frank Wall Street Reform and Consumer Protection Act required GAO to review the governance of the Reserve Banks. This report (1) analyzes the level of diversity on the boards of directors and assesses the extent to which the process of identifying possible directors and appointing them results in diversity on the boards, (2) evaluates the effectiveness of policies and practices for identifying and managing conflicts of interest for Reserve Bank directors, and (3) compares Reserve Bank governance practices with the practices of selected organizations.

The Federal Reserve Act requires each Reserve Bank to be governed by a nine-member board--three Class A directors elected by member banks to represent their interests, three Class B directors elected by member banks to represent the public, and three Class C directors that are appointed by the Federal Reserve Board to represent the public. The diversity of Reserve Bank boards was limited from 2006 to 2010. For example, in 2006 minorities accounted for 13 of 108 director positions, and in 2010 they accounted for 15 of 108 director positions. Specifically, in 2010 Reserve Bank directors included 78 white men, 15 white women, 12 minority men, and 3 minority women. According to the Federal Reserve Act, Class B and C directors are to be elected with due but not exclusive consideration to the interests of agriculture, commerce, industry, services, labor, and consumer representation. During this period, labor and consumer groups had less representation than other industries. In 2010, 56 of the 91 directors that responded to GAO's survey had financial markets experience. Reserve Banks generally review the current demographics of their boards and use a combination of personal networking and community outreach efforts to identify potential candidates for directors. Reserve Bank officials said that they generally limit their director search efforts to senior executives. GAO's analysis of Equal Employment Opportunity Commission data found that diversity among senior executives is generally limited. While some Reserve Banks recruit more broadly, GAO recommends that the Federal Reserve Board encourage all Reserve Banks to consider ways to help enhance the economic and demographic diversity of perspectives on the boards, including by broadening their potential candidate pool. The Federal Reserve System mitigates and manages the actual and potential conflicts of interest by, among other things, defining the directors' roles and responsibilities, monitoring adherence to conflict-of-interest policies, and establishing internal controls to identify and manage potential conflicts. Reserve Bank directors are often affiliated with a variety of financial firms, nonprofits, and private and public companies. As the financial services industry evolves, more companies are becoming involved in financial services or interconnected with financial institutions. As a result, directors of all three classes can have ties to the financial sector. While these relationships may not give rise to actual conflicts of interest, they can create the appearance of a conflict as illustrated by the participation of director-affiliated institutions in the Federal Reserve System's emergency programs. To increase transparency, GAO recommends that all Reserve Banks clearly document the directors' role in supervision and regulation activities in their bylaws. One option for addressing directors' conflicts of interest is for the Reserve Bank to request a waiver from the Federal Reserve Board, which, according to officials, is rare. Most Reserve Banks do not have a process for formally requesting such waivers. To strengthen governance practices and increase transparency, GAO recommends that the Reserve Banks develop and document a process for requesting conflict waivers for directors. The Federal Reserve System's governance practices are generally similar to those of selected central banks and comparable institutions such as bank holding companies and have similar selection procedures for directors. However, Reserve Bank governance practices tend to be less transparent than those of these institutions. For instance, comparable organizations make information on their board committees and ethics policies available on their websites; most Reserve banks do not.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: While the Federal Reserve System recently has made changes to Reserve Bank governance, it can take additional steps to strengthen controls designed to manage conflicts of interest involving Reserve Bank directors and increase public disclosure of directors' roles and responsibilities. As such, as part of the Federal Reserve System's continued focus on strengthening governance practices, the Chairman of the Federal Reserve Board should develop, document, and require all Reserve Banks to adopt a process for requesting waivers from the Federal Reserve Board director eligibility policy and ethics policy for directors. Further, consider requiring Reserve Banks to publicly disclose waivers that are granted to the extent disclosure would not violate a director's personal privacy.

    Agency Affected: Federal Reserve System

    Status: Closed - Implemented

    Comments: The Federal Reserve Board added a waiver provision to the Guide to Conduct stating that Reserve Banks are strongly discouraged from requesting such waivers except under the most exigent and extraordinary circumstances. Further, a Reserve Bank may submit a written request to the Board describing the need for the waiver upon a vote of the board of directors on whether to recommend a waiver from the Board and the Board must approve the Reserve Bank's waiver request in order for it to become effective. A similar waiver provision is already included in the Director Eligibility Policy. In a December 16, 2011 letter to the Committee on Homeland Security and Governmental Affairs, Chairman Bernanke explained that the Federal Reserve would consider making any waivers public, with due regard for protecting personal privacy. Since the GAO report was issued in 2011, Federal Reserve Board officials stated that the Board has not received any requests for waivers to the Eligibility Policy, and the Board has never received a request for a waiver to the Guide to Conduct.

    Recommendation: While the Federal Reserve System recently has made changes to Reserve Bank governance, it can take additional steps to strengthen controls designed to manage conflicts of interest involving Reserve Bank directors and increase public disclosure of directors' roles and responsibilities. As such, to further promote transparency, the Chairman of the Federal Reserve Board should direct all Reserve Banks to clearly document the roles and responsibilities of the directors, including restrictions on their involvement in supervision and regulation activities, in their bylaws.

    Agency Affected: Federal Reserve System

    Status: Closed - Implemented

    Comments: In December 2011, the Federal Reserve Board revised its Guide to Conduct for Directors of Federal Reserve Banks and Branches ("Guide to Conduct") by adding a provision directing the Reserve Banks to document the roles of directors in their bylaws, including restrictions on director involvement in banking and supervision. Federal Reserve Board officials stated that all Reserve Banks have amended their bylaws to conform to the new guidance.

    Recommendation: While the Federal Reserve System recently has made changes to Reserve Bank governance, it can take additional steps to strengthen controls designed to manage conflicts of interest involving Reserve Bank directors and increase public disclosure of directors' roles and responsibilities. As such, to help enhance economic and demographic diversity and broaden perspectives among Reserve Bank directors who are elected to represent the public, the Chairman of the Federal Reserve Board should encourage all Reserve Banks to consider ways to broaden their pools of potential candidates for directors, such as including officers who are below the senior executive level at their organizations.

    Agency Affected: Federal Reserve System

    Status: Closed - Implemented

    Comments: In December 2011, Vice Chair Yellen sent a memorandum to all Reserve Bank presidents encouraging consideration of potential candidates who hold positions below the senior executive level in their organizations. This memorandum was sent in addition to the Vice Chair's annual letter to Reserve Bank leadership emphasizing the Board's focus on increasing director diversity. The Vice Chair's annual letter also continues to include guidance on the various types of organizations from which labor and consumer/community representatives might be recruited.

    Recommendation: While the Federal Reserve System recently has made changes to Reserve Bank governance, it can take additional steps to strengthen controls designed to manage conflicts of interest involving Reserve Bank directors and increase public disclosure of directors' roles and responsibilities. As such, to enhance the transparency of Reserve Bank board governance, the Chairman of the Federal Reserve Board should direct the Reserve Banks to make key governance documents, such as such as board of director bylaws, committee charters and membership, and Federal Reserve Board director eligibility policy and ethics policy, available on their websites or otherwise easily accessible to the public.

    Agency Affected: Federal Reserve System

    Status: Closed - Implemented

    Comments: As of January 2013, all Reserve Banks had posted their bylaws on their websites and nearly all Reserve Banks had posted their committee charters and membership. In a couple of instances, a Reserve Bank has decided not to post a committee charter and/or membership because the Reserve Bank considers the information (e.g., Audit Committee) to be sensitive. The Federal Reserve Board has posted all director policies, a list of all current directors, and the recently updated publication "Roles and Responsibilities of Federal Reserve Directors."

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