Foreword .............................................................................................. 1

Introduction ......................................................................................... 2

The Board of Directors ...................................................................... 3

Cooperative Principles ............................................................ 3 

Accountability and General Responsibilities ...................... 4 

The Board and the Farm Credit Administration ................. 7 

Examinations ............................................................................ 7 

The Board and the Farm Credit System 

Insurance Corporation ...................................................... 9 

Board Structure and Composition ..................................................11

Committees ............................................................................. 12 

The Board’s Role in Strategic Direction 

and Business Planning .................................................... 15 

The Board’s Policy-Making Role ......................................... 16 

The Board’s Oversight Role ................................................. 19 

The Board’s Relationship with Management .................... 24 

Legal Responsibilities of Directors ............................................... 27

Common Law Liability ......................................................... 27 

Additional Considerations ................................................... 29 

The Business Judgment Rule ................................................ 30 

Farm Credit Administration Enforcement Authorities ............. 31

Agreements ............................................................................. 32 

Cease and Desist Orders ....................................................... 32 

Temporary Cease and Desist Orders .................................. 33 

Removals and Suspensions .................................................. 33 

Civil Money Penalties ........................................................... 34 

Some Guiding Principles ................................................................ 36

Conclusion ......................................................................................... 38

Appendix A—Major Policy Areas ................................................. 39

Appendix B—Information Available ............................................ 42

Appendix C—Financial Condition

and Key Financial Ratios ........................................................... 44

Appendix D—Examination and Supervision

Based on Institution Risk .......................................................... 53

Appendix E—IT Governance ......................................................... 56

Appendix F—Conflicts of Interest ................................................ 58

Appendix G—Nominating Committees ....................................... 60

Contents
Note to Readers

“The Director’s Role“ incorporates several new requirements from FCA’s Governance Final Rule, 

which was published in the Federal Register on February 2, 2006. Most provisions of the new rule 

became effective April 5, 2006. However, the rule delays the implementation date of three requirements for one year from the effective date to April 5, 2007. The following is a list of the three sections 

in this publication for which the implementation date is postponed for one year. 

Page Provision Implementation Date

11 Outside Directors 

Minimum of two outside directors for banks and each 

association with total assets greater than $500 million April 5, 2007 

12 Financial Expertise April 5, 2007 

60 Nominating Committees April 5, 2007 
It is an honor to be elected or appointed to the board of directors of 

a Farm Credit System (FCS or System) bank or association (institution). It is an expression of stockholder or board confidence in the 

director’s ability to oversee the institution’s safe and sound operation for the benefit of member-borrowers. 

That honor, however, carries numerous responsibilities. This booklet provides guidance and information about the duties, responsibilities, relationships, and liabilities of FCS institution directors. 

Although written primarily for bank and association directors, the 

booklet has relevance for directors of service organizations as well. 

The booklet does not cover all of the ramifications of the director’s 

role but describes some of its major components. It is not intended 

to be a substitute for consultation with legal counsel. Directors are 

urged to seek advice from legal counsel or other qualified advisors 

when faced with specific circumstances. 

The Farm Credit Administration (FCA or Agency) wishes to acknowledge the importance of the following publications in producing this booklet: 

The Director’s Book—The Role of a National Bank Director,

published by the Office of the Comptroller of the Currency 

Director Liability in Agricultural Cooperatives,

published by the Agricultural Cooperative Service, 

U.S. Department of Agriculture 

Director’s Responsibilities Guide,

published by the Office of Thrift Supervision 

Questions regarding the content of this booklet

should be directed to the address below: 

Office of Congressional and Public Affairs 

Farm Credit Administration 

1501 Farm Credit Drive 

McLean, Virginia 22102-5090 

Telephone: 703-883-4056 

Facsimile: 703-790-3260 

E-mail: info-line@fca.gov 

Additional information about the FCA and the FCS is available on 

FCA’s Web site at www.fca.gov. 

1 

Foreword
The financial institutions and service organizations that compose 

the FCS are federally chartered entities, organized to carry out the 

mandates of the Farm Credit Act of 1971, as amended (Act). The 

Act provides for a farmer-owned cooperative credit system that 

extends credit and related services to farmers, ranchers, farmrelated businesses, farmer-owned cooperatives, and rural 

homeowners. 

System institutions are regulated and examined by the FCA, an 

independent agency in the executive branch of the U.S. Government. The FCA was created in 1933 by an Executive Order of 

President Franklin D. Roosevelt but now derives its powers from 

the Act. Regulations issued by the FCA have the full force and 

effect of law. Because the authority and responsibilities of System 

institutions and their directors are derived from Federal law and 

regulations, directors of these institutions need to be familiar with 

both. 

The FCA helps inform directors and management about legal and 

regulatory matters, as well as other Agency concerns, by disseminating a variety of materials to all System institutions and, as 

appropriate, to individual directors. It disseminates information in 

several ways: via hard copy, FCA news releases, e-mail, and the 

Federal Register. In addition, the FCA provides pertinent information, such as announcements of public hearings and more detailed 

explanations of regulations and other issues, on its Web site at 

www.fca.gov. The Web site also contains the following resources. 

FCA Handbook. The FCA Handbook, which is updated as changes 

are made, contains statutes, regulations, FCA Bookletters, FCA 

Proposed Regulations, FCA Board Policy Statements, Title V Ethics 

Supplementals, and Farm Credit System Insurance Corporation 

(FCSIC) Regulations. 

FCA Examination Manual and Updates. This manual contains 

concepts, guidelines, and procedures for the examination of FCS 

institutions. 

Uniform Peer Performance Report (UPPR). Produced quarterly, 

the UPPR provides comparable financial and operating ratios for 

like-sized institutions. Every quarter-end, each FCS institution 

submits certain financial and operating information to the FCA. 

The UPPR, which is a product of this quarter-end analysis, can be 

particularly useful to institution directors. Institution directors can 

review this report to learn how their institutions compare with 

others. 

Board Reports. These reports are produced after each FCA Board 

meeting to document actions taken since the previous meeting. 

Introduction

2 
Congress set up the Farm Credit System in 1916 as a cooperative 

because it wanted to ensure that the System could fulfill its public 

mission of providing long-term and affordable credit services to 

agricultural and rural America. A cooperative structure allows 

farmer-borrowers to own and control the System and keeps the 

System committed to serving rural credit needs. This is an important feature that sets the System apart from most other commercial 

lenders. 

The Farm Credit System is guided by seven cooperative principles 

shared by other co-ops around the world. Cooperatives trace the 

roots of these principles to the first modern cooperative founded in 

Rochdale, England, in 1844. 

1. Voluntary and Open Membership 

Cooperatives are voluntary organizations, open to all people able 

to use their services and willing to accept the responsibilities of 

membership, without gender, social, racial, political, or religious 

discrimination. 

2. Democratic Member Control 

Cooperatives are democratic organizations controlled by their 

members—those who buy the goods or use the services of the 

cooperative. The members participate in setting policies and making decisions. 

3. Members’ Economic Participation 

Members contribute equally to, and democratically control, the 

capital of the cooperative. “This benefits members according to the 

amount of business they conduct with the cooperative rather than 

the amount of money they invest in it.” 

4. Autonomy and Independence 

Cooperatives are autonomous, self-help organizations controlled 

by their members. If a co-op enters into agreements with other 

organizations or raises capital from external sources, it does so 

based on terms that ensure democratic control by its members and 

the autonomy of the cooperative. 

5. Education, Training, and Information 

Cooperatives provide education and training for members, elected 

representatives, managers, and employees so they can contribute 

effectively to the development of their cooperatives. Members also 

inform the general public about the nature and benefits of cooperatives. 3 

Cooperative

Principles

Board of

Directors
The Act provides that each System bank and association shall elect 

from among its voting members a board of directors of such number, for such terms, with such qualifications, and in such a manner 

as may be required by its bylaws. The regulations also require at 

least one member (two in certain larger institutions) to be elected 

by the other directors. The member(s) selected by the other directors shall not be a director, officer, employee, or stockholder of any 

System institution. These outside directors provide a valuable 

resource to the board. They allow the addition of directors with 

specialized skills and independent backgrounds. 

The board of a System institution, like that of any corporate organization, is elected to oversee the management of the institution. 

Engaged and reliable directors play a key leadership role in financial institutions. FCS directors, like other corporate directors, owe 

fiduciary duties to the institution and must exercise reasonable 

care in governing the institution’s activities. However, directors of 

financial institutions, including System institutions, face special 

challenges because federally insured financial institutions differ 

from private companies in an important aspect—they put the 

funds of others at risk through their lending activities. Depository 

institutions lend the funds of depositors. System institutions lend 

Accountability and

General Responsibilities

6. Cooperation Among Cooperatives 

Cooperatives serve their members most effectively and strengthen 

the cooperative movement by working together through local, 

regional, national, and international structures. 

7. Concern for Community 

While focusing on member needs, cooperatives work for the sustainable development of communities through policies and programs accepted by the members. 

The board should understand the distinctive cooperative principles and philosophies its institution follows and should be aware 

of the implications of these principles and philosophies. The FCA 

conducted a study in 2005 to identify and better understand the 

range of cooperative practices employed by System institutions. 

The study found that, like most other cooperative organizations, 

the FCS institutions generally adhere to three core cooperative 

principles: user-ownership, user-control, and user-benefits. These 

principles are the underlying foundation for the System’s cooperative practices and have been formally recognized by the U.S. 

Department of Agriculture. 

4 
5 

the funds of investors. As a government-sponsored enterprise 

(GSE), directors must protect the investing public, as well as the 

institution’s stockholders. Additionally, directors, other than 

outside directors of System institutions, are faced with challenges 

unique to the cooperative structure, as both they and their fellow 

stockholders are also borrowers. Scrupulous objectivity is important when taking actions that may affect directors’ interests as 

borrowers. 

Directors are responsible for the safe and sound operation of the 

institution regardless of economic and financial conditions in local, 

domestic, and international markets. The directors are thus accountable to shareholders and investors for the following: 

• Understanding the institution’s operations. 

• Providing for competent institution management. 

• Establishing sufficient systems and processes that provide 

for safe and sound operations. 

• Ensuring that information and disclosures to investors and 

shareholders are accurate and reliable. 

• Diligently and impartially performing their duties as directors. 

• Exercising independent judgment. 

• Remaining loyal to the institution’s interests. 

The ultimate responsibility for the conduct of the institution’s 

affairs lies with its management and the board of directors. The 

board establishes policies and strategies that govern how the 

institution carries out its business and ensures that those strategies 

and policies are implemented. Directors select and evaluate competent senior management, and they monitor and assess their 

performance. The board delegates day-to-day operations to management but remains responsible for ensuring that the institution 

operates within prescribed policies, in compliance with laws and 

regulations and in a safe and sound manner. 

The board’s effectiveness will depend, in part, on how well its 

members know the business it is directing. It will also depend on 

how well its directors work together to identify and address issues 

that are important to the success of the institution. Board members 

must diligently seek to understand the operations of the institution 

to faithfully execute their duties. They should also understand the 

industry and the community in which their institution does business. 
Board composition is also important. Elected directors have an 

excellent opportunity to bring specialized financial institution 

management expertise, as well as other kinds of knowledge and 

skills, to the board through their selection of outside directors. 

Important new perspectives and objectivity can be provided by 

these individuals. 

A well-organized board will examine the demands that will be 

placed upon it and identify areas that could be handled by committees. Matters that require detailed review or analysis might be 

better addressed in this manner. Serving on committees enables 

directors to develop more specialized knowledge of the 

institution’s business. Typical committees are the executive committee, audit committee, compensation committee, risk management committee, and asset and liability management committee. It 

is the responsibility of the board to ensure that committee members have both the technical knowledge and experience for the 

committee to function effectively. When selecting committee members, the board should evaluate and assess the skills and experience of prospective committee members. Also, the board should 

ensure that committee members receive necessary training and 

access to third-party experts for committees requiring a higher 

degree of specialized skills or knowledge. 

All committees should have clear written statements of their 

missions, authorities, responsibilities, and duration. Standing 

committees address continuing areas of responsibility, while ad 

hoc committees may be set up to handle special projects—for 

example, mergers or joint management agreements. It is also wise 

to rotate committee responsibilities to allow directors to broaden 

their knowledge and understanding of the institution’s operations. 

Committees should report regularly to the full board. If decisions 

are based on the recommendation of a committee, the board 

should ensure that the committee has done its work responsibly 

and that its recommendations are reasonable. 

The board can delegate management authority to the institution’s 

officers, but a delegation that is too broad, without appropriate 

standards, may be considered an abdication of the board’s management functions. Delegation of such authority does not relieve 

the board of its legal responsibilities for the outcome. 

6 
7 

Directors must understand the Act whose mandates the FCA is 

organized to implement. In addition, they must understand the 

role, operations, and regulations of the FCA because directors are 

ultimately responsible for ensuring that their institutions comply 

with statutes and regulations. The FCA regulates and examines 

System banks, associations, and related entities for compliance 

with applicable statutes, regulations, and safe and sound banking 

practices. 

FCA policy is vested in a three-member board appointed by the 

President of the United States with the advice and consent of the 

Senate. FCA Board members serve six-year staggered terms and 

may not be reappointed after serving a full term or more than 

three years of a previous member’s term. The President designates 

one member as chairperson of the Board. The FCA Board is responsible for Agency policy, promulgation of regulations to implement the Act, and enforcement activities. FCA provides for the 

examination and supervision of the System, including the Federal 

Agricultural Mortgage Corporation; it approves corporate restructuring of System institutions; and it oversees the FCS Building 

Association, which is responsible for the management and maintenance of the FCA facility (owned by the FCS) in McLean, Virginia, 

and four leased office spaces in Denver, Colorado; Dallas, Texas; 

Bloomington, Minnesota; and Sacramento, California. FCA’s threemember Board also makes up the Board of Directors for the FCSIC, 

which was created to insure FCS securities. 

The FCA Board and staff develop and interpret regulations and 

policies to accomplish FCS’s mission. Congress requires that the 

FCA examine all FCS institutions at least once every 18 months, 

with the exception of Federal Land Bank Associations, which must 

be examined at least once every three years. Approximately onehalf of the Agency staff is engaged in the examination function. 

Oversight and examination of institutions is conducted along 

functional lines by examiners in various locations throughout the 

United States. 

In the past, every examiner followed prescribed procedures in 

conducting examinations. Today, examiners exercise flexibility in 

choosing examination procedures and the best method to communicate results and expectations for corrective actions, if any. Examiners make their decisions based on their assessments of the nature 

of the individual institutions, their degree of risk, and the adequacy of their governance and internal control systems. This riskbased examination approach has resulted in a more effective and 

The Board and the Farm

Credit Administration

Examinations
efficient examination process. As much as possible, examiners 

complete examination work from their work locations, thereby 

avoiding travel costs and some of the disruption caused to institutions by the presence of examiners on site. Also, examiners are able 

to tailor the interval between examinations to the individual 

institution’s risk profile. Smaller, well-managed, and sound institutions do not require the same amount of examination and oversight as do larger, more complex institutions or those that are 

troubled. 

Because examinations may find flaws or weaknesses in institutions’ operations and control processes or compliance with laws 

and regulations, management may at times be defensive about 

examiner findings. However, the institution directors should 

consider the examination as an objective and external assessment 

as to whether the institution is operating in a safe and sound 

manner and in compliance with laws and regulations. Reports that 

communicate the results of examinations are intended to be helpful to management by providing information about the conditions 

observed by the examiners and the corrective actions needed. 

Directors may not necessarily agree with all of the examiners’ 

conclusions, but they should ensure that they understand and fully 

consider the basis for the conclusions reached by the examiners 

and how failure to address and resolve the underlying causes 

could affect the safety and soundness of the institutions. 

Every 18 months (or more frequently, depending on an 

institution’s condition) an examiner sends the board of each institution a written evaluation of the institution’s condition, operations, and compliance with laws and regulations. In this report, the 

examiner includes an overall numerical rating of the institution. 

The Financial Institutions Rating System (FIRS) is similar to one 

used by other financial institution regulators; however, it has been 

modified to reflect the nondepository nature of FCS institutions. 

The examiner evaluates the institution’s capital, asset quality, 

management, earnings, liquidity, and sensitivity to changes in 

interest rates (CAMELS). In addition to providing a rating from 

one to five (with one being the best) for each of these components, 

the examiner also provides a composite rating for the institution. 

These ratings are explained in the Examination Manual. FCA 

provides institution board members with the rating results to give 

them additional perspective on the condition of the institutions 

they lead, but the FCA urges directors to focus on the basis for the 

ratings assigned and not on the ratings themselves. 

8 
9 

The examiners will make themselves available to meet with boards 

of directors, present their findings, and respond to questions from 

the board members. Most of the time, an institution’s management 

is invited to take part in the meetings, but each meeting also 

should provide an opportunity for the board members to meet in 

executive session with the examiners without management 

present. Experience has shown that these private sessions are 

greatly appreciated by directors because they provide a free forum 

for discussions with examiners. In preparing for a meeting with 

the examiners, directors are advised to read examination reports 

thoroughly, along with any accompanying correspondence, and to 

come to the meetings prepared to ask questions. 

Examination reports are not intended to diminish the directors’ 

role in overseeing an institution’s operations. Rather, they are 

intended to be useful tools to assist the board as it monitors the 

institution’s safety and soundness and its compliance with laws 

and regulations. The institution’s board has a duty to address 

report findings and take appropriate corrective actions in a timely 

manner and to ensure that underlying causes of problems found 

during examinations are addressed and resolved. During subsequent examinations, the FCA will evaluate the extent and effectiveness of the directors’ efforts to resolve any problems noted in 

previous examinations. 

Directors should also be familiar with the FCSIC and its importance to investors. The FCSIC is a Government-controlled corporation established by the Agricultural Credit Act of 1987. Congress 

created the FCSIC to renew investor faith in the financial integrity 

of the System. The FCSIC insures the timely payment of principal 

and interest on FCS notes, bonds, and other obligations issued to 

investors. The FCSIC is administered by a board of directors who 

serve concurrently on the FCA Board. The chairperson of the 

FCSIC Board is elected by the other members and may not serve 

concurrently as the FCA chairperson. 

The FCSIC administers the Farm Credit System Insurance Fund 

(the Fund) and collects annual insurance premiums from FCS 

banks. Premium rates are calculated using a statutorily defined 

formula based on FCS loan volume, with different rates for accrual 

loans, nonaccrual loans, and loans guaranteed by Federal or state 

governments. 

The Board and the

Farm Credit System

Insurance Corporation

(FCSIC)
10 

Congress directed the FCSIC to build the Fund to a “secure base 

amount.” The secure base amount is defined as 2 percent of the 

aggregate of outstanding insured obligations of all insured banks, 

adjusted downward by a certain percentage of the FCS’s government-guaranteed loans. The Farm Credit System Reform Act of 

1996 gave the FCSIC Board the authority, in its sole discretion, to 

reduce insurance premiums from the statutory rates before the 

Fund reaches the secure base amount. Current information about 

the Fund’s secure base and insurance premium rates can be found 

on the FCSIC Web site at www.fcsic.gov. 

In addition to building and maintaining the Fund, the FCSIC has 

other mandatory and discretionary responsibilities. The FCSIC, in 

its discretion, is empowered to provide assistance to FCS banks 

and direct lender associations suffering financial difficulties by 

providing loans or contributions, purchasing assets and debt 

securities, assuming liabilities, and facilitating consolidations and 

mergers. The statute imposes a cost-test limitation for financial 

assistance whereby the total cost of assistance may not exceed the 

alternative cost of liquidating the institution. The FCSIC shall also 

serve as conservator or receiver of any FCS bank or association 

placed into conservatorship or receivership by the FCA Board and 

may serve as conservator or receiver, when appropriate, for other 

organizations regulated by the FCA. Another responsibility of the 

FCSIC is to insure the retirement of eligible borrower stock at par 

value. At yearend 2005, eligible borrower stock outstanding at FCS 

institutions totaled $16 million. 
11 

General. Each System institution has a board of directors, which is 

the governing body of that institution. The board of directors is 

responsible for establishing policies, providing strategic direction, 

hiring the CEO and providing for a plan of succession, overseeing 

management, and overseeing all major institution functions. In 

short, it has a fiduciary responsibility to represent the institution’s 

stockholders. Because the System has a federal charter and is 

subject to regulatory oversight, it is incumbent on the board to 

ensure that the institution operates in a safe and sound manner 

and in compliance with appropriate laws and regulations. To 

accomplish this, the board must structure itself so that it has the 

requisite knowledge and skills to carry out its duties in a manner 

that is efficient and cost-effective. 

Size. The board size should be large enough to provide adequate 

stockholder representation and to ensure that it has the collective 

skill set needed to address the challenges the institution faces, both 

current and projected. It must also be small enough to get meaningful input from each director and avoid developing the “rubber 

stamp” mentality frequently associated with larger boards. While 

the board and management form a partnership in directing the 

operations of the institution, the board still has an oversight responsibility. It, as well as its committees, should plan regular 

executive sessions, without institution officers or staff present, in 

connection with regularly scheduled meetings. This will facilitate 

open and candid discussion. 

Outside Directors. Outside directors are valuable because they 

provide an independent and objective perspective to the board’s 

deliberations. They also provide the board with valuable technical 

expertise. Regulations governing System banks and associations 

generally require that they have at least two outside directors. 

Associations with $500 million or less in total assets are only required to have one outside director. If a larger association’s board 

size is so small that the addition of a second outside director 

would result in less than 75 percent stockholder-elected representation on the board, it is exempted from the requirement to have a 

second outside director. While the board is not prohibited from 

adding more outside directors, under no circumstances should 

stockholder-elected board representation drop to less than 60 

percent. 

Skills and Training. Both agricultural production and the financial 

services sector within which the System operates have seen considerable change over the last several years, and more changes are 

anticipated. Generally, these changes introduce additional eleBoard

Structure and

Composition
ments of risk to institution operations and to institution borrowers. 

System institution boards have an obligation to continually reevaluate their collective skill set in light of these changes. Individual directors need to undertake training on an ongoing basis to 

stay abreast of these changes. System institution boards are required to develop policies for, and implement director training 

programs appropriate to, their institutions’ needs. New directors 

must receive training in, and orientation on, all aspects of the 

institution’s operations within 1 year of their election to the board. 

Financial Expertise. Each Farm Credit institution board must have 

at least one director who is a financial expert. Boards of directors 

for associations with $500 million or less in total assets may satisfy 

this requirement by retaining an advisor who is a financial expert. 

The financial advisor must report to the board of directors and be 

free of any affiliation with the external auditor or institution management. A financial expert is one recognized as having education 

or experience in accounting, internal accounting controls, or in 

preparing or reviewing financial statements for financial institutions or large corporations consistent with the breadth and complexity of accounting and financial reporting issues that can reasonably be expected to be raised by the institution’s financial 

statements. A financial expert on the System audit committee 

(SAC) must meet a higher standard. The SAC financial expert is 

one who either has experience with internal controls and procedures for financial accounting or experience in preparing or auditing financial statements. 

Board committees should be viewed as extensions of the board to 

assist it in carrying out its fiduciary responsibilities. Others, such 

as the executive, governance, credit, and risk management committees, may be established by the board based on an assessment 

of the institution’s needs and the board’s best judgment. Once the 

determination to establish a board committee has been made, the 

board needs to draft a charter defining the committee’s responsibilities and giving it the requisite authorities to carry out its responsibilities. The board must ensure that committees receive 

adequate support and resources necessary to carry out assigned 

duties. The board also needs to select fellow board members to sit 

on the committees. Careful consideration should be given to director qualifications in making these selections, and director training 

can play an important role in ensuring that committee members 

have and maintain needed knowledge and skills. Although the 

board may create a committee and charge it with specific responsibilities, this does not minimize or abrogate the fiduciary responsi- 12 

Committees
13 

bility the board has to its stockholders. The board should require 

regular committee reports to ensure that all directors are kept 

appropriately and timely informed and able to exercise due diligence. 

Audit Committee. Each institution must have an audit committee. 

An audit committee is the guardian of an institution’s financial 

integrity. It recommends actions needed to provide full and accurate disclosure of the institution’s operations in the most transparent manner possible. It oversees and reviews the preparation of the 

institution’s financial reports and retention of the external auditor. 

It is important for audit committee members to be well-qualified 

board members because the committee acts on behalf of the board 

in carrying out its fiduciary responsibilities to stockholders. By 

effectively carrying out its responsibilities, a strong audit committee independent from management helps to ensure that management properly develops and adheres to a sound system of internal 

controls, that procedures are in place to objectively assess 

management’s practices, and that the external auditors objectively 

assess the institution’s financial reporting practices. The audit 

committee reports only to the institution’s board. It is responsible 

for preparing financial reports to shareholders and the public, 

appointing and overseeing the work of the external auditor, and 

overseeing each institution’s system of internal controls. 

Each System institution is required under FCA regulations to have 

an audit committee composed of at least three directors with some 

level of knowledge of public and corporate finance, financial 

reporting and disclosure, or accounting procedures. Within these 

parameters, each board has considerable discretion in defining the 

qualifications it wants each audit committee member to have. For 

those institution directors who, upon election or appointment to 

the board, might not have sufficient financial knowledge to serve 

on an audit committee, the institution should provide a training 

program in appropriate financial areas. FCA rules also require 

audit committees to hire the institution’s external auditor, thereby 

minimizing potential or perceived undue management influence 

in the review of financial reports and accounting procedures. The 

audit committee’s oversight is intended to provide auditors with a 

knowledgeable authority other than management with which to 

discuss controversial matters. Each audit committee must have at 

least one member who is a financial expert. Institutions with less 

than $500 million in total assets who retained an independent 

financial expert must require the independent financial expert to 

advise the audit committee in lieu of a board member. 
The audit committee at the System-wide level need not be composed solely of board members, but, according to FCA regulations, 

at least one-third of the committee’s members should be from the 

System. Because the SAC assists in setting the reporting and disclosure standards for the entire System, it should have broader 

representation from System institutions and deeper and broader 

financial knowledge and experience than other System institution 

audit committees. 

Compensation Committee. A compensation committee is mandatory for each System institution. It must have at least three members who are members of the institution’s board of directors. Each 

member of the compensation committee must be able to exercise 

independent judgment and be free of any relationship that would 

interfere with that independent judgment. 

A well-defined compensation program, administered by a qualified, objective board committee, ensures that institutions have the 

needed structure for this important function, regardless of their 

size. The compensation committee must take an active role in 

monitoring compensation, and FCA regulations require the compensation committee to approve the overall compensation program for senior officers. A board committee performing the duties 

of the compensation committee, with a charter that satisfies committee requirements, may fill the role of a compensation committee, even though it has a different name. 

Other Committees. Institution boards may determine that other 

board committees are needed to carry out the board’s oversight 

duties in an efficient manner. These committees are not mandatory. 

Other committees common to good corporate governance, and 

particularly firms in the financial services sector, are risk management, governance, credit, and executive committees. It is important to note that, by law, a System institution’s nominating committee is not a committee of the board; the System differs in this 

regard from many public companies and other corporate entities. 

For a complete discussion of the nominating committee and its 

role, see Appendix G. 

14 
15 

Unprecedented changes in the System and the financial services 

industry have heightened the importance of effective planning. 

Planning can be used as a tool to chart progress and maintain 

sound operations during periods of uncertainty and change. It is 

vital to the long-term success of the institution because it translates 

the board’s vision into measurable goals with strategies to achieve 

them. By analyzing where the institution is and what the board 

wants it to be, directors are able to identify strategies to accomplish what they envision. As part of the planning process, directors 

should consider financial and human resources, as well as technological and organizational capabilities, necessary to achieve the 

board’s long-term vision and goals. Because effective planning is 

essential to institutional health, the board must be fully involved 

in the planning process. 

The planning process should be dynamic and ongoing. In its 

simplest terms, planning is the process of determining (1) where 

the institution is; (2) where it would like to be; and (3) how it plans 

to get there. Planning can be divided into two components, strategic and operational. Strategic planning is an ongoing process that 

focuses on the long-term deployment of resources to achieve 

institutional goals. Operational planning concentrates on shortterm actions, which should flow logically with the development of 

a long-term plan that states the board’s overall philosophy and its 

vision of the institution’s future. Planning should detail strategies 

for attaining the short-term, sometimes routine, goals of business 

operations, as well as long-term goals. Short-term business plans 

should translate into long-term goals with specific, measurable 

targets. Also, plans should address modifications in resources and 

goals resulting from significant changes in the regulatory and 

economic environment. 

The plan should identify those areas selected for strategic development, allocate resources, and provide the basis on which business 

decisions can be made and performance measured. Several strategies may be involved in achieving a particular goal. If, for example, the goal is to attain a certain net worth position, the business plan should incorporate strategies to retain capital, increase 

earnings, and grow assets. The board should ensure that its strategies and the use of institution resources will reasonably accomplish the intended purposes. 

The Board’s Role in

Strategic Direction and

Business Planning
To properly direct an institution, the board of directors should first 

determine the operating environment of the institution. This is 

typically done by identifying the institution’s internal strengths 

and weaknesses and by identifying external opportunities and 

threats. A thorough understanding of the operating environment 

allows the board to design goals and strategies to best meet the 

mission of the institution. 

The board should also identify, analyze, and address risk as part of 

the planning process. By understanding and defining existing 

risks, the board learns their causes and how they could affect 

future performance. By defining risk, projections can be made and 

financial needs determined. Once risks are defined, the board can 

require management to explore alternative methods for managing 

the institution’s exposure to these risks. 

The board should establish reporting requirements for each component of the plan and review the institution’s performance at 

least quarterly to evaluate the appropriateness of both the strategic 

and operational components. During the review, directors should 

consider new opportunities, changes in the operating environment, and external developments to decide whether adjustments 

to the strategic direction are needed. The board should establish 

contingency plans in case actual results vary from planned goals 

and objectives. 

16 

The board is ultimately responsible for the success of the institution; thus, it is essential that policies approved by the board provide sound direction to management. In addition to policies required by statute or regulation, the board should develop policies 

addressing all significant aspects of the institution’s operations. 

Such policies would include those specific to each area of operations that relates to the institution’s pursuit of its mission and the 

discharge of its chartered authorities. Also, policies may be needed 

to address specific institutional programs or activities. The 

institution’s charter or bylaws may also dictate areas requiring 

policy direction. Other sources to be considered when establishing 

needed policy direction are industry standards, emerging issues, 

and authoritative sources providing guidance on governance 

issues and best business practices. 

Effective policy development can be accomplished using various 

approaches. For example, the entire board could establish broad 

guidelines and set a general direction for a given policy. ResponsiThe Board’s

Policy-Making Role
17 

bility for more detailed aspects of a policy might then be delegated 

to a board committee or to management. Using this approach, the 

full board would adopt a general policy statement on standards of 

quality that must be met before credit is extended. The appropriate 

committee of the board would outline the specific elements to be 

addressed in the policy. Management would then prepare the 

details necessary to address those elements and the manner in 

which they are to be implemented. In another case, after providing 

general guidance and direction, the board might delegate the 

entire drafting of the policy and procedures to management. No 

matter how policies are developed, they are ultimately approved 

by the board, and the board remains responsible for them. Before 

approving policies, the board must ensure that they are appropriate for the institution and supportive of strategic objectives. 

The board should ensure that policies are thoroughly understood 

at all levels of the institution. This is best done through written 

documents that can be maintained in a policy manual providing a 

single and authoritative reference. A better understanding of more 

complicated policies and procedures can be gained through training programs. 

Regardless of the process used in policy development, an effective 

policy should include or address the following components: 

Purpose. A statement of purpose should clearly articulate the 

intention behind the policy or the policy’s goals. The purpose of 

some policies is straightforward and relates to specific areas, such 

as loan programs, human resources management, or capitalization 

and dividends. 

Objectives. Policy objectives may be simple statements that require 

the institution to comply with a specific law, regulation, or business practice. Objectives may be linked to specific business plan 

goals related to capitalization, earnings, asset growth, or interest 

rates; or the objectives may address expectations related to the 

management of investments or other assets, interest rate risk, 

liquidity, asset quality, or liabilities. 

Delegations. Each policy that requires specific action by committees, officers, or employees of the organization should clearly 

define which authorities are delegated by the full board and which 

are retained by the board or by a board committee. For example, 

the full board might adopt a policy that establishes limits on concentrations of risk in various portfolio segments or limits on loan 
size in relation to the institution’s capital base or risk funds. In 

such instances, the chief executive officer (CEO) may be authorized 

to approve loans up to a certain amount within the established 

limits, whereas loans in excess of the limits might require approval 

or review by the board. The board must ensure that delegated and 

retained authorities are appropriate and that the board is neither 

abdicating its authority nor unnecessarily restricting the 

institution’s operations. 

Exceptions to Board Policy. Unexpected and urgent matters may 

arise that require immediate attention and greater authority than 

has been delegated to management. The board’s policy should 

clearly define a process to handle such contingencies. 

Reporting Requirements. Each policy should have well-defined 

reporting requirements for management. The policy should specify 

what is to be reported; how frequently reports should be issued 

(monthly, quarterly, semiannually, etc.); and who is responsible for 

generating the report. These reports to the board should enable 

directors to evaluate the policy’s effectiveness and impact. They 

should include actions taken under delegated authorities and 

actions taken as exceptions to policy. The overall body of reporting 

requirements set by board policy should provide sufficient information to keep the board fully apprised of the institution’s business affairs. 

The board should periodically evaluate whether policies are accomplishing their intended objectives and goals. Typically, the 

internal auditor evaluates the institution’s compliance with board 

policies, and management evaluates the policies’ effectiveness. In 

some instances, the internal auditor may evaluate both compliance 

and effectiveness. 

The board might schedule the review of certain policies at board 

meetings or provide a committee to review policies on a regular 

basis. However, there may be times when an immediate review of 

a policy is required because of changes in law, regulations, the 

business environment, or the institution’s business performance or 

risk profile. 

The board must ensure that policies adequately direct and control 

the business affairs of the institution at all times. Hence, policies 

should be reevaluated and revised as necessary to ensure the 

successful operations of the institution. 

18 
19 

In today’s world of corporate governance, System boards of directors must recognize and accept the need to maintain a strong 

oversight role over their institutions’ performance. Institution 

operations, as communicated to stockholders, investors, and the 

public in reports and disclosures, must reflect a transparency and 

truthfulness that will ensure that safety and soundness are maintained. The board’s oversight role must be sufficient to meet that 

standard. Each member of the board shares this fiduciary obligation. 

In addition to the traditional responsibility to furnish sound, 

adequate, and constructive credit and related services to eligible 

applicants and borrowers, System institutions bear the responsibility to meet the growing financial needs of agriculture and rural 

America in the 21st century. In this light, FCA believes that sound 

business, ethical, and mission-related performance must be key 

board objectives. Measuring performance in each respective area is 

a good way to measure the board’s success in directing and overseeing the institution. 

Business and Financial Performance. For any financial institution 

to remain in business, it must be profitable and maintain adequate 

capital over the long term. Thus, business and financial performance is more than how much was earned—it is also the quality of 

the earnings and the institution’s ability to sustain those earnings. 

To assess the quality of earnings, directors must understand the 

institution’s entire operations and the relationships among interest 

earning-assets, interest-bearing liabilities, capital, and off-balancesheet items such as derivatives. Further, quality earnings result 

from fundamental institutional strengths: ability to identify and 

manage risks, quality assets that can weather adversity, wellcontrolled expenses, effective asset/liability management, proper 

loan pricing, knowledge of the institution’s operating environment, and the effect of competition. 

The directors must understand the institution’s entire financial and 

credit operations, as well as the relationships among operating 

statistics, to evaluate the quality of earnings. To facilitate this 

effort, each new director should be given training and orientation 

into all aspects of the institution’s business. The board should 

evaluate the institution’s business carefully, looking behind the 

numbers to verify that earnings are not artificially inflated with 

delays in chargeoffs or insufficient provisions for loan losses. 

Regular reports by the institution’s audit committee, as well as 

FCA examination reports and reports by independent public 

The Board’s

Oversight Role
20 

accountants and internal reviewers, may assist directors in ensuring reliability of reports to the board, shareholders, investors, and 

the public. CEO and chief financial officer (CFO) attestations on 

financial reports should also help to ensure accuracy in financial 

reporting. 

Not all directors are financially literate and capable of evaluating 

the institution’s financial performance. FCA regulations do require 

that at least one director be a financial expert or, for smaller institutions, that the board retain an independent financial expert. Directors also have authority to enlist the help of an independent financial expert to assist them in this responsibility. Moreover, FCA 

governance regulations require each institution to have a chartered 

audit committee, and for institutions with greater than $500 million in assets, at least one member of the committee must be a 

financial expert. All board members should be able to discern poor 

operating performance, and they may also seek training under the 

institution’s director training program to enhance or reinforce their 

financial skills and aptitude. Directors should realize that there are 

no model numbers or ratios that guarantee success but that certain 

accepted business ratios are guides to the success or failure of the 

institution. Board members need solid financial data and should 

ensure that analyses are completed that support the institution’s 

financial and operating results. Board members can achieve this by 

asking the following questions: 

• Is management meeting the targets established in the business plan? If not, why? 

• Is the level of earnings consistent or erratic? 

• Do earnings result from successful implementation of strategies or from questionable accounting practices? 

• Are earnings an accurate portrayal of the institution’s financial picture, or are they distorted by an incomplete evaluation of asset quality or potential losses? 

• Is too much emphasis placed on short-term financial performance indicators rather than long-term indicators? 

• Are significant findings from internal and external audits 

and reviews routinely delivered to the board and/or the 

audit committee? 
21 

• Does the board’s audit committee charter vest the committee with adequate authority and clearly describe its responsibilities? Is there adequate financial expertise on the committee? 

Directors are not expected to have all the answers, but they must 

ask the right questions and ensure that responsible answers are 

provided. Directors should periodically ask individual key management employees questions regarding the institution’s condition 

and performance, not just when problems arise. Accordingly, 

directors should attend every board meeting and arrive prepared, 

having reviewed all available information in advance. Directors 

should ask questions to become familiar with the documents and 

transactions they are asked to approve and the risks associated 

with the transactions. Finally, boards should make informed decisions—if something is confusing, they must get a satisfactory 

explanation from management or an outside expert and insist that 

all decisions are well documented. 

The board, and especially its audit committee, should be provided 

with sufficient financial information so that the institution’s performance can be evaluated. The board should be satisfied that it has 

adequate financial expertise on its audit committee to assist the 

board in the conduct of its fiduciary responsibilities to stockholders. The audit committee should be expected to provide regular 

reports to the full board. Some of this financial information is 

represented by key financial ratios and data relating to critical 

aspects of operational performance. The board should understand 

the significance of and trends in these ratios. Appendix B of this 

booklet discusses several key financial ratios to help directors 

familiarize themselves with, and track, the institution’s financial 

performance. 

Operational Performance and Asset Quality. The principal assets 

of FCS institutions are their loans to America’s farmers, ranchers, 

rural communities, individual residents of rural communities, and 

farm-related businesses. Therefore, the quality and performance of 

those assets are of paramount importance to the institution. FCA 

believes that there are some key indicators that measure changes in 

asset quality. The number of performing, criticized, adversely 

classified, restructured, high-risk, past-due, and nonaccruing loans 

reflects the quality of assets and directly affect the institution’s 

overall operational performance and condition. Management 

should fully explain any variation in the quality or volume of 

loans. The board, and especially its audit committee, should 
22 

closely monitor the findings of the internal credit review and any 

weaknesses discovered in lending processes and practices. Sufficient controls need to be in place so that assets are managed in 

accordance with sound business practices. 

Asset quality statistics should clearly and concisely show both the 

institution’s current position and its historical trends. The volume 

and percentage of each loan risk category should be discussed so 

that the board understands the reasons for any changes and thus 

can evaluate its underwriting standards and lending policies. 

Unusually poor asset quality may reflect weaknesses in lending 

policies or inadequate underwriting standards, both of which 

require prompt corrective action. Similarly, problems with 

nonearning assets, which include nonaccrual loans and acquired 

properties, also require prompt corrective action. The board 

should recognize that although deviations from acceptable asset 

quality may occur periodically, the board is ultimately accountable 

for ensuring that lending programs preserve and enhance the 

institution’s capital, regardless of the operating environment. 

Any institution can encounter problem credits. Sometimes they 

result from a breakdown within the institution, which requires 

quick board correction of the “process” problem that led to the 

troubles. Sometimes they result from unforeseen circumstances 

beyond the institution’s control. In any event, it is important that 

problem credits receive close attention. A plan of correction or 

collection should be put in place on each troubled credit. In many 

instances, the board may wish to approve the individual correction 

plan and be provided with periodic progress reports. But in all 

instances, the board members should ensure that plans are being 

put into place and are being followed. A neglected problem credit 

is more likely to result in loss than one that is well administered. 

Mission-Related Performance. One of the board’s most important 

responsibilities is ensuring that the institution accomplishes its 

mission, goals, and objectives. The mission of the Farm Credit 

System is clearly delineated in its enabling legislation: to improve 

the “income and well-being of American farmers and ranchers by 

furnishing sound, adequate, and constructive credit and closely 

related services to them, their cooperatives, and to selected farmrelated businesses necessary for efficient farm operations.” To meet 

these critical goals, the board must ensure that the institution has 

sufficient capital. Establishing capital goals should not be limited 

to FCA regulatory requirements because these requirements only 

prescribe the minimum required of each institution. An 

institution’s capital needs depend on its operating environment, 
23 

risks that exist within the institution, and the goals set by the 

board. The board must carefully monitor all components of capital, 

both stable and transitory, to keep the institution’s financial foundation sound. Most institutions will likely require more capital 

than the regulatory minimum. A determination of the amount of 

capital appropriate for an institution should result from analysis 

by the board and management. Most importantly, capital levels 

should be reflective of the risks within the institution—existing 

and anticipated. 

The Farm Credit Act further states: “It is the objective of this Act to 

continue to encourage farmer- and rancher-borrowers participation in the management, control, and ownership of a permanent 

system of credit for agriculture which will be responsive to the 

credit needs of all types of agricultural producers having a basis 

for credit, and to modernize and improve the authorizations and 

means for furnishing such credit and credit for housing in rural 

areas made available through the institutions constituting the 

Farm Credit System.” Explicit in this objective is that the System is 

a cooperative and should function under cooperative principles. 

Core cooperative principles include user-benefits, user-ownership, 

and user-control. 

The board should actively seek and encourage stockholder participation in setting the direction for the institution. The board should 

understand the distinctive cooperative principles and philosophies 

the institution holds and be aware of their implications, especially 

as they relate to stock and patronage. The board has the discretion 

to determine capitalization, either through direct borrower investments or earnings retention. With respect to patronage, the board 

needs to determine if the institution’s current-year earnings are 

sufficient to return patronage. The board should carefully evaluate 

the institution’s earnings performance, capital adequacy, and 

future business strategies before it determines the amount of 

patronage distribution. 

The board must also be mindful that the System was intended for 

all types of producers, not just existing stockholder-borrowers. 

Programs for young, beginning, and small farmers are required. 

Implicit in the above objective is the need for diversity; benefits, 

ownership, and control should be available for all types of producers, including women and minorities within the institution’s territory. It is the board’s responsibility to develop plans and policies 

that will extend the full range of allowable System benefits to all 

types of eligible borrowers within its territory. 
24 

Board Evaluation and Ethical Principles. Directors are responsible 

for a thorough evaluation of the board’s effectiveness in achieving 

safe and sound operations and in operating within applicable laws 

and regulations. Accordingly, the board needs a systematic approach for evaluating its own performance and that of each of its 

committees. The board evaluation should assess the full range of 

the board’s governance capabilities, particularly in light of existing 

and projected circumstances. FCA regulations require board evaluations—as well as strategy development for correcting identified 

weaknesses, if any—on an annual basis. This is most appropriately 

done in connection with annual planning and review of the institution and its management. Finally, sound ethics, adherence to standards of conduct, and sufficient director training and expertise will 

assist directors in fulfilling the oversight role of today’s boards. It 

is to the board’s benefit to ensure that an appropriate code of 

ethics is developed, reviewed on a periodic basis, distributed to all 

appropriate parties and prominently displayed, and adhered to by 

all parties. 

Boards of directors have the ultimate responsibility for the affairs 

of the institutions, and sound corporate governance dictates that a 

proper and independent relationship between the board and 

management be established and maintained. The board can fulfill 

its responsibility and help protect the institution’s future by making sure that day-to-day operations are properly managed. Every 

soundly run and successful operation is led by a quality management team. Therefore, the board’s duty in hiring and retaining 

quality management becomes one of those critical elements, if not 

the most critical element, necessary for the institution’s success. 

Consistent with these sound governance principles and FCA’s 

governance regulations, especially § 620.31, each institution must 

charter and maintain a formal compensation committee. 

The board is responsible for hiring the CEO of the institution. A 

CEO must have the expertise necessary to assist and support the 

board in carrying out its fiduciary responsibilities. The board 

should consider integrity, education, technical competence, and 

sound lending and management experience as key considerations 

in any CEO selection process. Management should also understand the cooperative philosophy and principles upon which the 

institution is based. At all times, directors must pay attention to 

their fiduciary responsibilities and be diligent in their efforts to 

ensure that management is carrying out the institution’s mission 

and goals. 

The Board’s Relationship

with Management
25 

Notwithstanding its cooperative philosophy, the board should 

ensure that the institution is operating as a profit-oriented business 

and maintains financial stability to serve future generations of 

borrowers. Short-term problems must not be allowed to affect 

long-term objectives. Board committees, such as the audit committee, and management should identify problems and provide solutions that ensure financial stability. Further, the quality and 

strength of the institution’s management may be the difference 

between success and failure during difficult economic times or 

swings in the rural economy. 

The board may want to use its compensation committee to institute a formal process to evaluate management performance and 

ensure that periodic evaluations are a part of the ordinary course 

of business. These actions demonstrate that the board is discharging its responsibility for supervising management. Clear standards 

of performance and measurable key results should be defined to 

ensure that management fully understands the board’s performance expectations and that it is accountable for fulfilling those 

expectations. The board cannot be “asleep at the switch” and leave 

management alone to set its own performance standards and then 

measure its own performance. 

The business success of the institution, its record of complying 

with applicable laws and regulations, and management’s responsiveness to board directives are among the key factors that should 

be evaluated. The timeliness, quality, and accuracy of 

management’s recommendations and reports to the board and 

adherence to the institution’s business plan should also be considered. The degree to which the institution’s objectives have been 

achieved, actual versus projected performance, and comparisons 

with similar institutions are other performance measurements that 

can be used to evaluate management. Finally, FCA Reports of 

Examination, external audit reports, and internal business performance and credit quality indicators provide additional information to help in the board’s evaluation process. 

If performance expectations are not being met, it is the responsibility of the board to deal with the situation immediately. Although 

timely and effective communication may prevent serious problems 

from developing, occasionally the board will find it necessary to 

dismiss management for poor performance, dishonesty, conflicts of 

interest, or other reasons. All such actions should be properly 

documented in the institution’s official records. When such circumstances dictate, a board’s failure to act expeditiously may 

represent a serious breach of its fiduciary responsibilities. 
26 

Another board responsibility in its relationship with management 

is identifying and developing a successor CEO. Sound governance 

dictates that the board should have a succession policy for its CEO. 

If no individual in the institution is suitable to succeed the CEO, a 

competent and experienced temporary replacement should be 

identified. Contingency plans should be reviewed annually because one measure of a good CEO is the strength and expertise of 

the entire senior management team. Succession planning for the 

other critical management levels, including, but not limited to, the 

chief financial officer, the chief credit officer, and the chief information officer, is a good measure of a well-run institution and an 

effective CEO. 

With the enactment of the Sarbanes-Oxley Act in 2002 and the 

implementation of amended FCA governance regulations in 2006, 

the board’s relationship with management has fundamentally 

changed. Whereas the board at one time simply followed 

management’s lead, today the board leads proactively in collaboration with management. We expect boards to be more involved in 

overseeing management and in setting their institutions’ strategic 

direction and mission to represent all their stockholders and 

America’s rural communities. 
27 

System institutions are governed by the Act and are subject to 

other Federal laws and regulations. A director who fails to comply 

with statutory or regulatory mandates, engages in unsafe or unsound practices, or breaches a fiduciary duty (or permits another 

person to do so) may be held personally liable and subject to 

monetary penalties or other sanctions. The director may be held 

responsible either alone or jointly with other board members in 

lawsuits brought by shareholders/investors and in FCA enforcement actions. 

In addition to the standards established by Federal law and regulations, there is also a body of common law against which the performance of directors is measured. Common law is the body of 

law that is made up of cases decided by the courts and that constitutes generally accepted legal principles. Common law and statutory provisions, including Federal statutes and state corporate and 

fiduciary statutes, often address the same conduct. Hence, a lawsuit against a director could allege a violation of common law or 

statutory law. 

In the exercise of their institutions’ corporate powers, directors 

owe common law duties to their institutions and their stockholders similar to the fiduciary duties of trustees. By accepting the 

position, the director assumes a fiduciary duty to the institution 

and its stockholders (and in some instances, to its creditors) and is 

therefore liable for damages resulting from a breach of that duty. A 

fiduciary status signifies a special relationship between a director 

and the institution, which is characterized by trust and confidence 

in the director and his or her integrity. It also imposes certain 

obligations the director owes to the institution. The fiduciary 

duties of a director are typically described as the duties of due 

care, obedience, and loyalty. 

Due Care. The duty of due care holds directors to a standard of 

care in performing their jobs equal to that which a reasonable and 

prudent person would exercise in similar circumstances. This 

means that directors must make a reasonable effort to gather and 

consider relevant information. What “reasonable” is varies by 

courts, but when a court examines whether a director has fulfilled 

the duty of due care, it measures the director’s conduct against 

that of a hypothetical director of ordinary diligence, possessed of 

the same information and acting under similar circumstances, not 

against the conduct of an expert. Courts often will consider special 

factors that might affect how the hypothetical director would act. 

The courts have found a lack of due care when directors have 

Legal

Responsibilities

of Directors

Common Law

Liability
28 

made a habit of missing meetings or not reviewing such essential 

documents as the quarterly and annual reports. Another responsibility considered part of due care is the hiring and supervision of 

management. Though not responsible for the day-to-day operations of their institutions, directors are expected to hire competent 

managers and establish policies and procedures to guide management. They are also expected to evaluate how well management is 

fulfilling its duties. 

The duty of due care carries with it the obligation to investigate 

and to exercise the care of a prudent person in making decisions 

on behalf of the institution. When circumstances alert directors to 

an actual or potential problem, the duty to investigate requires that 

they learn the facts and resolve the situation. Not only must directors act in a careful manner, but they must also not neglect to act. 

For instance, a director who learns about an auditor’s or 

examiner’s criticism, whether by informal communication or 

written report, must make sure that the board and management 

review the matter and take any needed corrective action. Similarly, 

a director may be responsible for monitoring resolution of a problem to prevent recurrences. Directors have been held liable for 

failing to attend board meetings, failing to maintain adequate 

audit procedures, permitting false statements to be made in reports, failing to supervise excessive loans to delinquent borrowers, 

and failing to examine reports (including Reports of Examination) 

that pointed out problems warranting attention. 

Obedience. The duty of obedience requires the director to act 

within the limits of power granted by the institution’s charter, 

articles of incorporation, bylaws, statutes, and regulations. To 

discharge this duty faithfully, directors must familiarize themselves with the legal constraints under which their institutions 

operate and seek legal counsel when they are uncertain about 

whether a particular action is authorized. Directors must also keep 

themselves sufficiently informed about their institutions’ activities 

to provide adequate supervision of management. 

Loyalty. The duty of loyalty generally prohibits directors from 

placing their personal or business interests or those of others 

above the interests of their institutions. Directors must deal fairly 

with their institutions, refrain from letting personal interests affect 

their decisions, and always act honestly and in good faith. The 

duty of loyalty does not mean that directors absolutely may not do 

business with their institutions or participate in transactions in 

which these institutions may have an interest. It does mean that 
29 

directors must disclose fully to the board any personal interest 

they may have in matters affecting their institutions and ensure 

that any transactions involving these interests are evaluated and 

that decisions are made by disinterested directors. The duty of 

loyalty requires directors to adhere to standards of fairness, avoid 

the usurpation of corporate opportunity, avoid misusing their 

positions, and disclose conflicts of interest. 

Adhering to Standards of Fairness. Directors must observe strict 

standards of fairness in handling their own transactions and those 

of other member-borrowers. Directors must never favor some 

member-borrowers over others who are similarly situated. 

Avoiding the Usurpation of Corporate Opportunity. Directors 

must not take personal advantage of business opportunities that 

might benefit their institutions without first offering those opportunities to their institutions. 

Avoiding the Misuse of Position. Directors must not use influence 

or knowledge acquired through their official position for personal 

gain or the gain of others. Directors must deal with their institutions’ assets solely for the benefit of their institutions and their 

member-borrowers. Institution assets must not be appropriated, 

given away, or wasted. 

Disclosing Conflicts of Interest. When a director stands to gain 

personally from a proposed action or inaction by his or her institution, a conflict of interest may exist; the legal and regulatory problems that directors encounter often result from such conflicts. 

When directors question a possible conflict of interest, they should 

ask the institutions’ standards of conduct officer whether an actual 

or apparent conflict exists and whether they can participate in 

considering the matter at issue. Appendix F contains further information dealing with conflicts of interest. In all jurisdictions, directors are required to disclose conflicts of interest with their institutions and to refrain from considering or voting on any matter in 

which a conflict exists and from attempting to influence the vote of 

others on such matters. A prudent director will avoid even the 

appearance of a conflict of interest by disclosing the apparent 

conflict to the institution and by refraining from considering or 

voting on the matter. 

Additional

Considerations
30 

Directors are not expected to be insurers or guarantors of their 

institutions’ success or of the conduct of the officers. Nor are they 

expected to be all-knowing in their business decisions regarding 

the institutions. Directors are expected, however, to carry out their 

duties in good faith, in the best interest of their institutions, with 

diligence, and with the exercise of unbiased, independent judgment. 

A director who has done so may be protected from liability by the 

business judgment rule. This doctrine recognizes that without 

allowance for honest error, no director could afford to be associated with the position. It means that courts will not second-guess 

the director’s decision even though it may turn out to be wrong 

and bring hardship to the institution. However, in order to invoke 

the business judgment rule, the director must first have fully met 

the duties of care and diligence implicit therein. The director’s 

decision-making process involves careful consideration of the 

reasonably available and relevant facts necessary to making a wellinformed decision, and the director must honestly and reasonably 

believe that the decision was in the best interest of the institution. 

It is also important to document the board’s decision-making 

process because the courts are less likely to examine the substance 

of a decision or the deliberative process the directors followed in 

reaching their judgment if there is an adequate record of informed 

decision making, as opposed to no record or an insufficient one. 

In most jurisdictions, directors may rely on officers, experts, and 

business records for facts as long as there is a reasonable basis for 

such reliance. When directors reasonably rely on others, they are 

protected from liability if they are misled or given incorrect information. However, a director is not protected if he or she relies on 

information provided by an officer or expert whom the director 

has reason to doubt. In addition, directors should not rely on 

officers or experts for decisions on matters that directors are 

charged with deciding. When the line between facts and judgments is blurred, which is often the case, directors should not 

unduly rely on the views of others. 

In addition to liability for breach of fiduciary duty and negligence, 

directors can be liable for intentional torts, such as fraud or misrepresentation, when third persons are injured, even though the 

actions were on behalf of their institutions. Federal securities laws 

impose civil liability for fraud or misrepresentation in connection 

with the sale of securities. Thus, directors must exercise care in the 

certification of financial statements and collateral because Farm 

Credit Bank securities are issued on the basis of such certification. 

The Business

Judgment Rule
31 

All System institutions need to be able to attract and to retain 

qualified and conscientious directors. Directors have obligations 

to discharge duties owed to the institution, its shareholders, and 

its creditors. Directors further have obligations to comply with 

Federal and state statutes, rules, and regulations. When an institution becomes troubled, it is especially important that it have the 

benefit of the advice and direction of people whose experience 

and talents enable them to exercise sound and prudent judgment. 

However, when directors breach a fiduciary duty, violate the laws 

and/or regulations governing their conduct, cause or permit 

persons associated with the institution to violate laws and/or 

regulations, or act in a way that would adversely affect the 

institution’s condition, the FCA can and will take action to correct 

the problem and hold the wrongdoer responsible. An institution 

director, employee, agent, or other person participating in the 

conduct of the affairs of an institution can be required to refrain 

from specific acts or to take positive steps to correct the problem. 

A director (or other party) might also have to pay a penalty for 

violating the law or failing to take action required in an enforcement document. 

The Farm Credit Act Amendments of 1985 granted the FCA enforcement authorities similar to those of other Federal financial 

regulatory agencies such as the Comptroller of the Currency, the 

Federal Deposit Insurance Corporation, the Federal Reserve 

Board, the Office of Thrift Supervision, and the National Credit 

Union Administration. These authorities provide FCA with appropriate power to ensure that System institutions and their related 

parties comply with laws and regulations and operate in a safe 

and sound manner. 

Enforcement actions served upon an institution or an individual 

are determined on a case-by-case basis, with consideration given 

to correcting current deficiencies and preventing future problems. 

If FCA brings an action, the institution’s directors will usually be 

asked to meet with Agency personnel who will present the enforcement action deemed appropriate for the institution. 

Enforcement actions are taken to correct specific problems, and 

directors are ultimately responsible for ensuring that the institution complies with the action(s). Typically, they specify the steps 

and time frames the institution must take to correct problems 

described in Reports of Examination. An action is terminated in 

one of two ways: (1) by the Agency when it determines that the 

Farm Credit

Administration

Enforcement

Authorities
institution has subsequently complied with the terms of the enforcement action and its overall condition has significantly improved or (2) by a reviewing court. 

Enforcement actions can take one of several forms, depending on 

the seriousness of the situation and the institution’s willingness 

and ability to address the problem(s). The Agency can enter into 

agreements, issue orders to cease and desist, temporary orders to 

cease and desist, and orders of removal and suspension. The 

Agency can also impose civil money penalties. 

An agreement is a contract between the institution or an 

individual(s) and the FCA, which commits the institution or individual to taking the specified actions needed to correct a problem. 

Agreements are used when problems are not severe enough to 

warrant a more stringent action and the board and management 

are able and willing to address the agreement’s requirements. An 

institution’s board of directors or the specified individual(s) executes the agreement along with an authorized representative of 

the FCA. If an institution or the individual fails to comply with an 

agreement, FCA may institute cease and desist proceedings. 

An order to cease and desist is issued to institutions and individuals when problems are severe. It also may be used when agreements or conditions have been violated that were imposed upon 

an institution in connection with the granting of an application. An 

order to cease and desist either specifies affirmative actions that 

are necessary to correct illegal or unsafe practices or conditions, or 

requires that such activities be stopped, or both. 

All cease and desist proceedings begin with a notice of charges 

served on the affected institution or party. The notice sets forth 

allegations regarding the unsafe or unsound practices and/or any 

violations of law, regulations, written agreements, or conditions 

that have been identified by FCA. Generally, when a notice of 

charges is issued to an institution, FCA asks the institution’s board 

to consent to the cease and desist order. A majority of board members, as stipulated in the institution’s bylaws, must agree to the 

order. If the party charged consents to a cease and desist order, the 

matter does not proceed to an administrative hearing and the 

order is effective upon execution by the board. 

The notice of charges must be answered within 20 days of service. 

If consent to the order is not obtained, the matter proceeds to a 

formal hearing before a Federal administrative law judge (ALJ). 32 

Cease and

Desist Orders

Agreements
33 

After a hearing at which all parties present evidence to the ALJ, the 

ALJ submits a recommended decision to the FCA Board. It is the 

Board that ultimately decides whether to issue an order to cease 

and desist. The party to whom an order to cease and desist has 

been issued may obtain review of the order by the appropriate 

United States Court of Appeals. If an order to cease and desist is 

not complied with, it can be enforced in Federal district court or a 

civil money penalty action can be initiated. An order to cease and 

desist remains in effect until terminated by the FCA Board or a 

reviewing court. 

The FCA may issue a temporary order to cease and desist before a 

cease and desist proceeding is completed when a violation, threatened violation, or unsafe or unsound practice is likely to (1) cause 

insolvency, (2) cause substantial dissipation of assets or earnings, 

(3) seriously weaken the condition of the institution, or (4) seriously prejudice the interests of investors or shareholders prior to 

completion of a cease and desist proceeding. The temporary order 

can require the institution or a specific party to stop the violation 

or practice described and/or take corrective action. Unless the 

temporary order is set aside by court order, it is effective immediately upon being served on the party and remains in force until the 

effective date of a permanent order to cease and desist, if issued, or 

dismissal of the charges. 

To remove a director or officer, FCA must determine that the 

director violated a law or regulation or engaged in an unsound 

practice or breach of fiduciary duty. The FCA can remove a director or officer if (1) the institution has suffered or probably will 

suffer substantial financial loss or other damage; (2) the director or 

officer has received financial gain through a violation or unsound 

practice; (3) the interests of the institution’s shareholders or investors in System obligations could be seriously prejudiced, or (4) the 

violation, unsound practice, or breach of fiduciary duty involves 

personal dishonesty or demonstrates willful or continuing disregard for the safety and soundness of the institution. 

Directors, officers, or other persons participating in the conduct of 

the affairs of an institution can also be removed from a System 

institution if their conduct or practice with respect to another 

business or System institution (1) has caused a substantial financial 

loss or other damage; (2) shows personal dishonesty or willful or 

continuing disregard for the entity’s safety or soundness; or (3) 

shows that the individual is unfit to participate in the conduct of 

the institution’s affairs. 

Temporary Cease and

Desist Orders

Removals and

Suspensions
The FCA begins proceedings to remove individuals by serving 

written notice to them of the Agency’s intent. The notice states the 

grounds for the action and the time and place of a formal administrative hearing. If the person does not consent to removal, the 

matter proceeds to a hearing. Based on a review of the hearing 

record and recommendations of the ALJ, the FCA Board decides 

whether to remove the individual. A removal order may be reviewed by the appropriate United States Court of Appeals. If 

deemed necessary, the FCA may suspend a director or officer 

pending completion of a removal proceeding. A suspension may 

be appealed to the appropriate United States District Court. Once 

in place, a removal or suspension order prohibits the person from 

participating in any manner in the affairs of the institution. 

The FCA can also suspend or remove an individual charged with 

or convicted of a crime involving dishonesty or breach of trust 

punishable by imprisonment for more than 1 year. The FCA must 

show that the person’s continued service is a threat to the interests 

of the institution’s shareholders or investors or threatens public 

confidence in the institution or the System. Within 30 days of 

service, the person may request an informal hearing before FCA to 

modify or terminate the suspension or removal order. A suspension remains in effect until terminated by FCA or until the criminal 

charge is finally settled. At such time as the conviction is not subject to further appeal, FCA can order the individual’s removal from 

office or prohibit the individual from further participation in the 

institution’s affairs. 

A civil money penalty (CMP) action requires an institution or 

individual to pay a monetary penalty and can be used alone or in 

conjunction with other administrative actions. A CMP can be 

assessed against an institution or individual for violation of the 

Act, regulations issued under the Act, or an order to cease and 

desist. The FCA may assess up to $1,100 per day for each day the 

institution or individual is in violation of a cease and desist order 

and up to $650 per day for each day a violation of law or regulation continues. Pursuant to the Federal Civil Penalties Inflation 

Adjustment Act of 1990, as amended, every Federal agency, including the FCA, must adjust each CMP under its jurisdiction by the 

rate of inflation at least every 4 years. The CMPs were last adjusted 

in March 2005. 

Civil Money

Penalties

34 
35 

Before the FCA determines whether to assess a CMP, the offending 

individual or institution is given an opportunity to submit relevant 

information that addresses the violation. Once FCA reviews this 

information, the individual or institution will either receive a 

notice of assessment or be informed that no assessment will be 

imposed. 

If a notice to assess a CMP is issued, the individual or institution is 

afforded the same hearing procedures that apply to cease and 

desist orders. If the evidence supports the allegations, FCA can 

order the offending party to pay the penalty. The party can seek 

review of the assessment by the appropriate U.S. Court of Appeals, 

but if the individual or institution fails to pay the assessment after 

it becomes final, FCA may refer the matter to the Department of 

Justice for collection. 

This section is included in this handbook so that all directors are 

fully aware of the potential for a formal regulatory enforcement 

proceeding and the ensuing personal liability associated with that 

proceeding. An independent and fully informed board of directors 

is essential for a well-run institution, and we encourage all directors to know the facts and act responsibly in the discharge of their 

duties. The following section provides many of the safeguards 

available for boards. 
The information in this booklet may cause a would-be director to 

think twice before taking on the responsibility of being a director. 

To be sure, there are myriad pitfalls to successfully serving as a 

director on the board of a bank or association. However, the following guiding principles will help. Underlying these principles is 

the assumption that you are making an honest effort to deal fairly 

with the institution, to comply with all laws and regulations, and 

to follow sound practices. 

Know the law and regulations. Read and understand the Act and 

the FCA regulations. (Ask management to provide a hard copy of 

the information or download it from FCA’s Web site at 

www.fca.gov.) 

Act as a fiduciary. As a fiduciary, you must think and act independently and in the best interest of the institution. Always remember 

that you are the stockholders’ representative and are serving their 

best interests. When acting in an official capacity, your personal 

interest and those of your family and your associates must be 

subordinate to the best interest of the institution. You should 

evaluate issues in terms of the institution’s resources and capabilities, the reasonableness of risk and returns, and any potential 

adverse effects on the institution. 

Become well informed. Read financial statements and reports to 

the board, reports from management, and Reports of Examination 

with a critical eye. If something is not clear or needs further explanation, ask questions. Always ask yourself whether you have 

enough information to make an informed decision, and if you do 

not, find out where you can get the information you need. It is 

your responsibility to be well informed about the institution, its 

business environment, and current market practices. 

Delegate wisely. Business demands and legal standards that govern an institution’s board require you to serve with dedication and 

vigilance. It cannot be overemphasized that although you may 

delegate assignments, you may never delegate your responsibilities as a director. While you are encouraged, and in some cases 

required, to use board committees, the committees do not relieve 

you of your individual responsibility for the decisions you make 

and for ensuring that institution operations are properly delegated 

to people who merit confidence. 

36 

Some Guiding

Principles
37 

Avoid conflicts of interest. Be familiar with the FCA regulations in 

part 612 addressing conflicts of interest and standards of conduct. 

Before you act on an institution business matter, ask yourself if you 

(or members of your family or other close associates) stand to 

personally gain from a matter. If so, consult with the institution’s 

legal counsel and the institution’s standards of conduct officer to 

determine the appropriate method of dealing with the conflict, 

including the possibility of recusing yourself from the board deliberations and vote on the matter. When in doubt, the prudent 

course is likely to be to disclose and abstain from voting on or 

discussing the matter. 

Make use of counsel. Do not hesitate to seek legal counsel when 

considering internal investigations, application of the business 

judgment rule, or other matters affecting your role as director. 

Select and retain competent management. The most important 

factor in the success of an institution is the quality of its management. It is rare that the cause of a serious problem or the failure of 

an institution is other than mismanagement. You must stay keenly 

aware of management’s activities. Your early detection of managerial problems can mean the difference between success and failure 

of the institution. 

Be attentive to risk. The FCA recognizes that FCS institutions 

must assess and assume carefully calculated risks to be profitable. 

Your institution must establish an adequate system to manage 

those risks for its size and complexity of operations. You must be 

aware of the various risks confronting your institution, the magnitude of those risks, and management’s ability to limit risk-taking 

to an acceptable level consistent with the board’s strategy. The 

board and management must work together to ensure that they 

adequately identify, measure, monitor, and control risk. 

Risk management is a continual process involving the whole 

organization. Larger institutions may want to establish a separate, 

independent risk management function. Smaller or less complex 

institutions can accomplish this objective through the audit committee and active management and board oversight. 
Although there are laws and regulations to guide the System in 

providing the highest quality financial support and related services to a critically important segment of the economy, it ultimately falls to each institution’s board of directors to conduct the 

institution’s affairs in a responsible manner. Directors must understand the legal and regulatory mandates that govern the System 

and make sure that policies are put in place to uphold those mandates while allowing the institution to thrive and serve its members. Their integrity must be unimpeachable, and their dedication 

to the job unfailing. As the regulator of the System, FCA stands 

ready to help directors understand and execute their duties. The 

FCA welcomes your comments and queries. 

38 

Conclusion
39 

The board of directors should define its philosophy, objectives, and 

practices governing compensation and ensure that such compensation practices comply with federal, state, and local laws governing 

employer and employee relationships. Sound business practices 

dictate that a compensation program be designed to attract and 

retain highly qualified employees and to recognize and reward 

those employees based on their individual performance and based 

on institution goals and objectives. The board of directors should 

determine if the institution has sufficient earnings capacity to 

cover both its compensation programs and other costs of operations. In those instances where the institution provides deferred 

compensation to officers or employees, the future financial impact 

of those programs should also be determined and addressed in the 

institution’s financial planning. 

FCA regulations §§ 620.31 and 630.6(b) require each board of 

directors to establish and maintain a compensation committee to 

review the compensation policies and plans for senior officers and 

employees and to approve the institution’s overall senior officer 

compensation program. Characteristics of an appropriate compensation program include the following: 

• A board-approved compensation policy that incorporates a 

purpose, objective, delegations, exceptions to policy, and 

reporting requirements. 

• Salary ranges based on the competitive market. 

• Salaries that reflect the relative value of each position to the 

institution. 

• Salaries and incentive programs that motivate employees to 

attain higher levels of performance and achieve business 

plan goals and objectives. 

The board of directors may adopt an incentive compensation 

program to encourage improved or continued performance and 

the accomplishment of the institution’s strategic goals and objectives. An effective incentive program requires careful deliberation 

by the board about its cost-benefit, and the board should also 

closely monitor the impact of the incentive program on the 

achievement of business and capital plan goals and objectives. 

An effective compensation administration is complemented by 

written job descriptions and a system for assessing jobs and assigning them to salary ranges. Some institutions might use consulting firms, a personnel department, or a panel of experts to 

evaluate positions. Any of these approaches is appropriate as long 

Employee

Compensation

Appendix A:

Major Policy

Areas
as it results in internal equity and as long as the differences between grades or compensation levels are linked to differences in 

position requirements. 

To establish the appropriate salary range for employees, including 

the CEO, institutions may want to use salary surveys to compare 

their compensation rates with similar positions (benchmark positions) in comparable organizations. Benchmark comparisons allow 

institutions to ensure that the salary scale for each position is 

competitively priced compared with jobs of similar responsibility 

and complexity in other institutions of similar size, function, and 

operations. 

A board of directors should ensure that the basis for salary adjustments is substantiated by independent studies using objective data 

from the marketplace. Farm Credit banks should be mindful that 

Section 5.19 of the Act requires FCA to include in the examinations 

of Farm Credit banks an analysis of the compensation paid to the 

CEOs and the salary scales of the employees. 

FCA regulation § 611.400(d) also requires banks to have policies 

addressing bank director compensation. A Farm Credit bank board 

of directors must establish a policy governing fair and reasonable 

compensation to directors for their services to the institution. The 

critical elements of the policy include methodology for determining each director’s rate of compensation and the exceptional circumstances under which the board would pay additional compensation for any of its directors as authorized by FCA regulation 

§ 611.400(c). 

Annually, the FCA notifies each Farm Credit bank’s board chairperson and the CEO of the maximum bank director compensation 

for the ensuing calendar year. Section 4.21 of the Farm Credit Act 

establishes a maximum annual compensation for bank directors, 

which is annually adjusted to reflect the change in the Consumer 

Price Index (CPI). Section 4.21 allows FCA to adjust the compensation level if it will adversely affect the safety and soundness of the 

bank or to waive the compensation limit under exceptional circumstances. 

Bank Director

Compensation

40 
41 

On December 15, 2005, the FCA Board made a one-time adjustment to the current limitation on bank director compensation. 

Farm Credit bank directors now have a maximum compensation 

level of $45,740, adjusted for the CPI. When making this one-time 

adjustment, the FCA Board advised bank boards to modify their 

written policies on director compensation, including an explanation of the factors that would justify higher levels of compensation. 

The FCA Board also advised bank boards to be judicious when 

exercising the existing 30 percent waiver authority in FCA regulations §§ 611.400(c) and (d). Approved exceptional circumstances 

that might justify exceeding the statutory limit could include 

mergers, consolidations, other corporate restructurings, and joint 

management proposals and joint strategic planning projects between System banks. The FCA Board advised banks using the 

waiver to fully identify in the annual report both the specific 

extraordinary event(s) and time or effort warranting additional 

compensation. An individual justification must be made for each 

director receiving additional compensation under the waiver 

authority. 
The FCA makes a variety of information about FCS institutions 

available to the public on the FCA Web site, including the periodic 

data that FCS institutions are required to submit to FCA about 

their operations. The required reporting includes financial data 

that FCS institutions submit quarterly in the form of Uniform Call 

Reports (UCR) and the annual data that FCS institutions submit 

pertaining to lending activities to young, beginning, and small 

farmers and ranchers (YBS) for the past year. 

The UCR data are located on the FCA Web site under “View Call 

Reports,” which is listed as an option under the “FCA Institutions” 

category. Nearly all UCR data are available to the public; however, 

some of the data are considered proprietary and, as such, are not 

available to the public. However, an FCS institution’s management 

can access the proprietary data for its institution by logging in to 

the private area of the FCA Web site. 

The UCR data are provided in a variety of reports. Most of the 

reports available are the quarterly UCR reports submitted by the 

individual FCS institutions. In addition, FCA has developed several analytical trend or comparison reports using the UCR data: 

the Uniform Performance Report (UPR), the Uniform Peer Performance Report (UPPR), the Six-Quarter Trend Report, the Six-Year 

Trend Report, and the Institution Comparison Report. Most reports are available for active and inactive institutions back to 

March 1989. 

The UPR. This report presents an institution’s financial statement 

information in various relational formats, including key financial 

ratios, percentages, and dollar amounts. The report shows a condensed balance sheet and income statement, as well as information 

on capital, assets, earnings and profitability, and liquidity. Four 

reporting periods are represented—the current quarter, the same 

quarter 12 months earlier, and the last 2 yearends. 

The UPPR. This tool facilitates analytical review of an institution’s 

performance by providing peer averages and percentile rankings. 

The purpose of the UPPR is to provide a comparison of an 

institution’s condition and performance with that of other institutions of similar asset size. UPPRs are available from 1993 to the 

present. 

42 

Reports

Appendix B:

Information

Available
43 

Six-Quarter and Six-Year Trend Reports. These reports are identical to the UPR in format and content; however, the information is 

presented in six consecutive reporting periods to facilitate trend 

analysis. 

Institution Comparison Report. This report is also identical to the 

UPR in format and content, but it presents the information for the 

specified reporting period for up to six institutions chosen by the 

user. 

YBS Report. The annual YBS data are also made available to the 

public on the FCA Web site in the same location as the UCR data. 

The YBS report presents the institution’s outstanding lending 

activity in each category, as well as the lending activity for the 

specified year. It also includes a comparison of the lending activity 

for each category with the entire portfolio. The YBS reports present 

data for only one reporting period and go back only to 1999. 
A director must have an in-depth understanding of the 

institution’s financial condition and risk position. Regular reports 

showing the institution’s financial performance help directors 

assess the institution’s financial condition, determine whether the 

risk taken by the institution is consistent with the board’s philosophy, and identify potential warning signs in current operations. 

For financial information to be useful, it must be timely, concise, 

and presented in an easily understood format. Financial reports 

should present information regarding current operations and 

financial trends in the areas of credit risk, earnings, liquidity risk, 

and interest rate risk (IRR). Further, they should periodically 

include comparisons to the budget and the board’s business plan 

goals and objectives, as well as benchmarking between the institution and its peers. In all such comparisons, significant deviations 

should be explained by management. 

To assist directors and management of FCS institutions, the FCA 

has developed two reports that directors may access on the FCA 

Web site: the Uniform Performance Report (UPR) and the Uniform 

Peer Performance Report (UPPR). These reports are based on the 

Call Report data that each institution submits to FCA each quarter. 

The UPR and the UPPR include various data and financial ratios in 

the areas of capital, asset quality, earnings, liquidity, and sensitivity. In reviewing these reports, directors should first review the 

“Guide for the Use of the Uniform Performance Report and the 

Uniform Peer Performance Report,” which will soon be available 

on the FCA Web site. This guide contains basic guidelines for using 

the UPR and the UPPR, including definitions of the various data 

elements and calculated ratios. 

There are two levels of access to the UPR and the UPPR—a private 

one and a public one. The public version includes only data that 

are not exempt under the Freedom of Information Act. FCS institutions have passwords that allow access to the private versions of 

the UPR and the UPPR for their institutions. FCA encourages 

directors to request that management periodically provide reports 

on the information in the private versions of the UPR and the 

UPPR. We also note that individual financial ratios can be calculated using various methodologies. Therefore, ratios presented in 

the UPR and the UPPR could differ from the ratios that an 

institution’s management provides to its board. Directors should 

ask management to explain significant differences. 

Appendix C:

Financial

Condition and Key

Financial Ratios

44 
45 

In addition to the UPR and the UPPR, FCA’s Web site also includes 

the Six-Quarter Trend Report and the Six-Year Trend Report. These 

reports are similar to the UPR and the UPPR, but they provide 

different time perspectives (six quarters, or six years, of data and 

ratios). They are useful in evaluating trends in the various ratios 

over an extended period. 

FCA’s Examination Manual (also available on FCA’s Web site) 

contains two documents that discuss how FCA assigns ratings to 

individual institutions: 

EM-135—”Financial Institution Rating System (FIRS).” 

EM-199—”Supplement 5—FIRS Guide.” 

EM-135 discusses the system that FCA examiners use to assign a 

composite rating to an institution, as well as component ratings for 

capital, assets, management, earnings, liquidity, and sensitivity. 

The FIRS guide is more specific in that it defines the characteristics 

of each rating and the financial ratio benchmarks that FCA examiners use to assign the composite and component ratings. 

Financial ratios (whether internal to the institution or those in the 

UPR, the UPPR, and the FIRS guide) are useful indicators of risk 

and performance in multiple areas of operations. The sections 

below discuss the primary examination areas with reference to 

some of the more important financial ratios boards use to monitor 

their institutions. Most of the ratios noted in the sections below are 

included in the UPR and the UPPR, and many are used in the FIRS 

guide. Definitions of the ratios are also found in the “Guide for the 

Use of the Uniform Performance Report and the Uniform Peer 

Performance Report.” 

The responsibilities of a director include ensuring that the institution has sufficient capital to accomplish its mission, goals, and 

objectives. Capital provides a cushion to absorb fluctuations in net 

income, provides a measure of assurance to investors and stockholders regarding the institution’s stability, supports asset growth, 

and contributes to the institution’s earnings base. FCA regulation 

§ 615.5200 requires boards of directors to establish, adopt, and 

maintain formal written capital adequacy plans as part of the 

institutions’ financial plans. The regulation also requires directors 

of FCS institutions to determine the amount of total capital, core 

surplus, total surplus, and unallocated surplus needed to ensure 

the institutions’ continued financial viability and to provide for 

growth necessary to meet the needs of their borrowers. The minimum capital standards specified by the regulations are not meant 

to be adopted as the optimal capital level in an institution’s capital 

adequacy plan. 

Capital

Adequacy
The board of directors is charged with establishing an appropriate 

optimum capital goal based on the institution’s particular circumstances and risk profile. An institution’s capital needs depend on 

its operating environment, portfolio risk, growth prospects, and 

other risks that exist within the institution. The board must carefully monitor all components of capital to ensure an appropriate 

balance between shareholder ownership and unallocated surplus. 

Determination of the appropriate optimum capital goal should 

result from analysis conducted as part of the business planning 

process and should be reflective of the risks faced by the institution—both existing and planned. 

Key Capital Adequacy Measures 

Regulatory Capital Ratios: FCA regulations define and set minimum regulatory levels for the following ratios: 

• Permanent capital ratio 

• Total surplus ratio 

• Core surplus ratio 

• Net collateral ratio (banks only) 

The first three of these regulatory ratios generally express various 

components of capital as a percentage of risk-adjusted assets, and 

the three are organized by the quality of capital included. The core 

surplus ratio contains the highest quality of capital, the capital 

with greater “staying power” when the institution encounters 

trouble. These ratios provide insight into the composition of capital, the financial strength of the institution, and the ability to fund 

future growth. The net collateral ratio (banks only) is essentially a 

capital leverage ratio that also eliminates any double-leveraged 

capital between a district bank and its affiliated associations. 

Adverse Assets to Risk Funds: This measure compares the risk in 

the loan portfolio and other property owned to the institution’s 

permanent capital base, plus its allowance for losses on loans. The 

ratio measures the risk-bearing capacity and threat to the 

institution’s capital base presented by the quality of assets. Criticized or nonaccrual assets can be substituted in the numerator of 

this ratio for alternative perspectives. 

46 
47 

Potential Warning Signs 

• A declining capital position, below the board’s optimum 

capital goal or capital levels approved in the business plan. 

• Asset growth exceeding the institution’s capital growth. 

• Significant increases in portfolio risk as evidenced by the 

level and trends of criticized, adverse, and nonaccrual 

assets. 

• Capital ratios significantly below peer averages. 

• Capital levels approaching the institution’s minimum 

regulatory capital requirements. 

An adequate and reliable earnings stream is fundamental to the 

maintenance of a safe and sound institution. Earnings represent 

the institution’s first line of defense against capital depletion due 

to credit losses, IRR, and other operational risks. The viability of an 

institution often depends on its ability to earn an appropriate 

return on its assets and capital. The board’s philosophy on earnings should be clearly documented in the institution’s business 

and capital plans. The earnings philosophy should address the 

composition of income, be reflective of the competitive environment, and address the need to generate an acceptable return on 

assets. The directors’ review of earnings should focus on the quantity, quality, and trend of earnings. Institutions with good earnings 

performance can grow, remain competitive, augment capital, and 

provide a return to shareholders through patronage distributions. 

When an institution’s quantity or quality of earnings diminishes, 

the cause is usually related to excessive or inadequately managed 

credit risk or IRR, or high operating costs. The quality of earnings 

may also be affected by reliance on extraordinary or nonrecurring 

events. 

Key Earnings Ratios 

Return on Average Assets: Net income divided by average assets. 

Measures how efficiently the institution uses its assets to generate 

earnings. 

Net Interest Margin: Interest income less interest expense divided 

by average earning assets. Reflects funding costs, loan pricing, and 

investment practices. 

Operating Expenses to Average Total Loans: Total operating expenses divided by average total loans. Measures operating efficiency in terms of the relationship between the operating costs and 

the loan assets. 

Earnings
Return on Average Equity: Net income divided by average equity 

capital. Measures the return on the stockholder’s investment. 

Loanable Funds to Earning Assets: The percentage of earning 

assets that are not funded with interest-bearing debt. Loanable 

funds (earnings assets less interest-bearing liabilities) are a measure of the earnings capacity of the institution. 

Potential Warning Signs 

• Large variances from budgeted amounts on income and 

expense items. 

• Significant differences in return on assets, return on equity, 

or net interest margin from prior periods. 

• Inconsistent or unstable earnings performance. 

• Declining levels of net interest income. 

• Unfavorable comparisons of key earnings ratios with those 

of peer group. 

Liquidity represents the ability to fund assets and meet obligations 

as they come due. Liquidity is critical to the ongoing viability of 

any institution and is among the most important management 

activities at a financial institution. The principles of liquidity 

management used by banks differ substantially from those used by 

associations. A bank should seek to maintain sufficient cash flow to 

fund operations, service debts, meet commitments to borrowers, 

and provide for funding contingencies; an association must maintain access to funding from the creditor bank. Sufficient liquidity is 

essential to accommodate expected and/or unexpected balance 

sheet fluctuations and to provide for contingencies. 

The board of directors should maintain policies and strategies 

related to the management of liquidity. In addition, banks should 

have contingency plans in place that address the strategy for 

handling liquidity crises or unanticipated funding events. The 

FCS’s primary source of liquidity is its access to debt capital markets using its government-sponsored enterprise status. The banks 

obtain their principal sources of funding and liquidity through 

debt issued in the capital markets through the Federal Farm Credit 

Banks Funding Corporation. Secondary sources of liquidity are 

available through investment management in accordance with 

FCA regulations. Other sources of liquidity include lines of credit 

from commercial lenders. These lines of credit can provide an 

alternative source of liquidity in normal periods but can become 

expensive or quickly dissipate in an adverse operating environment. 48 

Liquidity
49 

The principal source of liquidity for associations is funding from 

the bank. The board must ensure that the association complies 

with the general financing agreement for funding. Failure to comply with the terms of the general financing agreement could result 

in increased interest costs, additional fees, penalties, increased 

oversight, or suspension of funding. Each of these consequences 

could increase the cost of borrowing and impact profitability and 

ultimately the cost to borrowers. 

Liquidity Ratios/Measurements 

Days of Liquidity: The number of days-of-maturing obligations 

that could be funded by the liquid investments at any given point. 

FCA regulation § 615.5134 requires FCS banks to maintain a liquidity reserve sufficient to fund 90 days of the principal portion of 

maturing obligations and other borrowings of the bank at all 

times. 

CIPA (Contractual Interbank Performance Agreement) Score: An 

agreement between all FCS banks and the Federal Farm Credit 

Banks Funding Corporation (as scorekeeper) that measures and 

monitors each bank’s/district’s quarterly financial condition and 

performance. The CIPA score incorporates measurements of capital, asset quality, earnings, liquidity, and sensitivity (IRR). The 

agreement provides for economic penalties against individual 

banks if specified minimum thresholds of performance are not 

met. 

Association Performance Scores: Performance scores that have 

been developed by several district banks for their associations; 

they are similar to the CIPA scores used by the district banks. 

Association directors should fully understand any performance 

scores that may be incorporated into covenants of the association’s 

general financing agreement with the district bank. 

Quality of Assets Supporting the Direct Loan: A measure applicable to associations only; it provides a measurement of the quality 

of assets that support the direct loan from the funding bank. Acceptable assets as a percentage of the direct loan measures the 

coverage provided by high-quality assets available to secure the 

direct loan with the institution’s funding bank. Loans graded 

“acceptable” and “special mention” and accrual assets as a percentage of the direct loan are additional measures of the quality of 

assets supporting an association’s direct loan. 
Potential Warning Signs 

• Real or perceived negative developments in either internal 

or external operating environments. 

• A decline in asset quality (resulting in a decline in the ratios 

that measure quality of assets supporting debt). 

• A decline in earnings performance or projections. 

• Downgrades or announcements of potential downgrades of 

the System’s or an institution’s credit rating by rating agencies. 

• Days-of-liquidity approaching the regulatory minimum. 

• Wider spreads on the debt issuance compared with other 

government-sponsored enterprises. 

Sensitivity to market risk refers to the risk to an institution’s earnings or capital resulting from changes in market interest rates. 

Changes in interest rates can adversely affect a financial 

institution’s earnings and capital. IRR is an inherent risk for financial institutions and can become excessive unless properly managed. The institution’s IRR management program comprises the 

policies, procedures, and systems used to manage this risk. The 

effectiveness of an institution’s IRR management program will 

determine whether additional capital may be required to compensate for excessive risk or whether the level of exposure poses 

supervisory concerns. 

The following FCA regulations set forth the responsibilities boards 

of directors have regarding IRR management: 

• FCA regulation § 615.5135 requires the board of directors of 

each FCS bank to develop and implement an IRR management program and requires the board to adopt an IRR 

management section of an asset/liability management 

policy that establishes IRR exposure limits, as well as the 

criteria to determine compliance with these limits. 

• FCA regulation § 615.5180 requires the board of directors of 

each FCS bank to develop and implement an IRR management program tailored to the needs of the institution and 

consistent with the requirements set forth in regulation 

§ 615.5135. 

• Regulation § 615.5181 states that FCS bank boards are 

responsible for providing effective oversight of the IRR 

management program and must be knowledgeable of the 

nature and level of IRR taken by the institution. 

50 

Sensitivity to

Market Risk
51 

• FCA regulation § 615.5182 requires any association with IRR 

that could lead to significant declines in net income or in the 

market value of capital to comply with the requirements of 

§ 615.5180 and § 615.5181. 

The board of directors must ensure that management effectively 

identifies, measures, monitors, and controls IRR. The complexity 

and level of risk should determine the sophistication of the 

institution’s IRR management program. At most associations, the 

bank, through the transfer pricing program, limits the IRR that an 

association can assume. As a result, the sophistication and analysis 

required to assess risk will be less at most associations. Nevertheless, the risks assumed should be clearly documented, and the 

board should monitor the risks to ensure conditions do not change. 

More complex institutions, such as banks or associations assuming 

more IRR, will need more formal, detailed IRR management programs. Management should establish sound controls and analyze 

all major risk exposures. The board of directors should understand 

the major risks that are being taken and ensure that controls surrounding the IRR management program are sound. At these institutions where the IRR is more complex, a thorough independent 

review of the IRR management program should be performed 

periodically. FCA recommends that directors unfamiliar with IRR 

concepts obtain training in this area. 

Sensitivity Ratios/Measurements 

Gap Analysis: The difference between assets and liabilities that 

mature or reprice within a given time is known as the periodic 

gap. An institution’s gap position indicates how interest rate 

changes may affect its net interest income. If more assets than 

liabilities mature or reprice in the defined period, then the institution would have a positive gap for that period. Generally speaking, an institution with a positive gap position would be exposed 

to falling interest rates because as interest rates declined, more 

assets than liabilities would reprice at lower rates. Conversely, at a 

negatively gapped institution, net interest income would be adversely affected by increases in market interest rates since more 

liabilities would reprice more quickly. Although gap reports can be 

useful in understanding IRR exposures, institutions with significant risk exposure or complex financial instruments should not 

rely solely on gap analysis for establishing IRR exposure limits or 

measuring exposure to those limits. 
Duration Analysis: The term duration refers to a measurement of 

the sensitivity of an asset’s or liability’s value to movements in 

interest rates. By measuring the duration of assets, liabilities, and 

off-balance-sheet positions, duration measures such as the “duration of equity” or “duration gap” can be used to analyze the effects 

of interest rate changes on the value of an institution’s assets, 

liabilities, and capital position. 

Net Interest Income (NII) and Market Value of Equity (MVE)

Simulations: These simulations show the percentage change in NII 

and MVE for a given change in market interest rates. Income 

simulation is used to forecast how net interest income changes in 

response to changes in interest rates. MVE simulation focuses on 

possible changes in the market value of a bank’s assets, liabilities, 

and off-balance-sheet items due to interest rate movements and the 

impact these changes have on an institution’s capital position. 

MVE simulation is especially important in large and complex 

institutions managing significant sources of IRR. The reliability of 

the measurement system depends heavily upon the quality of the 

data and various assumptions used in the model; therefore, close 

attention to these areas is warranted. 

Potential Warning Signs 

• Significant volatility in the institution’s net interest income. 

• Noncompliance with the board’s established limits. 

• Increasing amount of, and trend in, aggregate IRR exposure. 

• High or increasing volume of assets with embedded options, such as fully prepayable fixed-rate loans or investments. 

• Lack of timeliness and clarity in management reports regarding the identification and quantification of the major 

sources of IRR. 

• Lack of an independent review or audit of the IRR management process. 

52 
53 

Historically, institution risks have been concentrated in traditional 

lending activities. However, the complexity of institutions’ consolidated risk exposure has increased over the years as the variety of 

lending products has increased, as the diversity of geographic 

areas served by FCS institutions has increased, and as delivery 

systems have evolved. Because of this complexity, institution 

management must evaluate, control, and manage risk according to 

its significance. Consolidated risk assessments should be a fundamental part of managing the institution. 

Because of the variation and complexity of risks in the institutions, 

FCA employs a risk-based examination and supervisory approach. 

Its examiners do not attempt to restrict risk-taking but rather to 

determine whether institution management identifies, understands, and controls the risks they assume. As an organization 

grows more diverse and complex, its risk management processes 

must keep pace. When risk is not properly managed, FCA will 

direct an institution’s board and management to take corrective 

action. In all cases, FCA’s primary concern is for the institution to 

operate in a safe and sound manner and to maintain capital commensurate with its risk. 

For purposes of the discussion of risk, FCA evaluates institution 

risk largely relative to its impact on capital and earnings. From an 

examination and supervisory perspective, risk is the potential that 

events, expected or unexpected, may have an adverse impact on 

the institution’s capital or earnings. 

The existence of risk is not necessarily reason for concern. Even the 

existence of high risk is not necessarily a concern as long as management exhibits the ability to effectively manage that level of risk. 

To put risks in perspective, examiners will evaluate whether the 

risks an institution undertakes are, either individually or collectively, warranted. Generally, a risk is warranted when it is identified, understood, measured, monitored, and controlled. It should 

be within the institution’s capacity to readily withstand the financial distress that such risk could cause. Unwarranted risks (that is, 

those not understood, measured, controlled, or backed by adequate capital to support the activity) will need examination and 

supervisory attention. Examiners will communicate to management and the directorate the need to mitigate or eliminate excessive risks. Appropriate institution actions may include reducing 

exposure, increasing capital, or strengthening risk management 

processes. 

Appendix D:

Examination and

Supervision

Based on

Institution Risk

Risk

Definition
As discussed in the following paragraphs, FCA has defined seven 

categories of risk for institution examination and supervision 

purposes. These risks are credit, interest rate, liquidity, operational, 

compliance, strategic, and reputation. These categories are not 

mutually exclusive; any product or service may expose the institution to multiple risks. In addition, they can be interdependent. 

Increased risk in one category can increase risk in other categories. 

Credit Risk: The current and prospective risk to earnings or capital 

arising from an obligor’s (i.e., a borrower’s) failure to meet the 

terms of any contract with the institution or an obligor’s failure to 

perform as agreed. This risk is found in all activities where success 

depends on counterparty, issuer, or borrower performance. It 

arises whenever institution funds are extended, committed, invested, or otherwise exposed through actual or implied contractual agreements, whether reflected on or off the balance sheet. 

Interest Rate Risk (IRR): The current and prospective risk to 

earnings or capital arising from movements in interest rates. This 

risk primarily arises from differences between the timing of rate 

changes and the timing of cash flows (repricing or maturity mismatch risk); from changing rate relationships among different 

yield curves affecting various products (basis risk); from changing 

rate relationships across the spectrum of maturities (yield curve 

risk); and from interest-related options embedded in assets and 

liabilities (options risk). Other secondary factors can also impact 

an institution’s IRR profile. 

Liquidity Risk: The current and prospective risk to earnings or 

capital arising from an institution’s inability to meet its obligations 

when due without incurring unacceptable losses. This risk includes the inability to manage unplanned decreases or changes in 

funding sources. It also arises from the failure to recognize or 

address changes in market conditions that affect the ability to 

liquidate assets quickly and with minimal loss in value. Sufficient 

liquidity is essential to accommodate expected and unexpected 

balance sheet fluctuations and to provide funds for growth. 

Operational Risk: The current and prospective risk to earnings 

and capital arising from problems with service or product delivery. 

This risk transcends all divisions and products in a financial institution, including senior management, treasury, corporate 

accounting, credit risk, loan underwriting, and internal audit. It is 

a function of internal controls, information technology, employee 

integrity, and operating processes. Operational risk exists in all 

products and services; it arises on a daily basis in all financial 

institutions as transactions are processed and services are provided. 

54 
55 

Compliance Risk: The current and prospective risk to earnings or 

capital arising from violations of, or noncompliance with, laws, 

rules, regulations, prescribed practices, or ethical standards. Compliance risk also arises in situations where the laws or rules governing certain products, such as consumer loans, or activities, such 

as borrower rights, are inappropriately applied. This risk exposes 

the institution to fines, civil money penalties, payment of damages, 

and the voiding of contracts. Compliance risk can lead to diminished reputation, customer flight, limited business opportunities, 

lessened expansion potential, and lack of contract enforceability. 

Compliance risk is often overlooked because it blends into operational risk and transaction processing. A portion of compliance risk 

is sometimes referred to as legal risk. This is not limited solely to 

risk from the failure to comply with consumer protection laws; it 

encompasses all laws, as well as prudent ethical standards and 

contractual obligations. It also includes the exposure to litigation 

from all aspects of the financial services industry. 

Strategic Risk: The risk to earnings or capital arising from inadequate direction and control, adverse business decisions, lack of 

achievement in goals and objectives, lack of adherence to policy 

direction, or lack of responsiveness to industry or regulatory 

changes. This risk is a function of the compatibility of the board’s 

strategic goals, strategies to achieve those goals, and accountability 

for achieving the goals. The resources needed to carry out business 

strategies are both tangible and intangible; they include communication channels, operating systems, delivery networks, and managerial capabilities. An institution’s internal characteristics must be 

evaluated against the impact of economic, technological, competitive, regulatory, and other environmental changes. 

Reputation Risk: The risk to earnings and capital arising from 

negative public opinion. Negative public opinion can impact an 

institution’s ability to maintain creditability as a viable institution, 

as well as its ability to establish new relationships with existing 

FCS institutions or other financial institutions. It can also affect an 

institution’s ability to continue servicing existing customers. Although sometimes difficult to quantify, reputation risk can expose 

an institution to litigation, financial loss, or a decline in the customer base. The potential for reputation risk exposure is always 

present; therefore, the board and management must exercise an 

abundance of caution in dealing with customers and the community. 
56 

The pervasive use of technology in FCS institutions has created a 

critical dependence on information technology (IT), which calls for 

a specific focus on IT governance. Boards of directors of FCS institutions are responsible for an effective enterprise governance 

framework that includes IT. Like other governance subjects, IT 

governance is the responsibility of the board of directors and 

executives of System institutions. 

The board of directors should approve IT-related plans, policies, 

and major expenditures. Board members should be aware of key 

IT topics, such as the IT and information security policies, data 

center concepts and activities, and IT-related risks. The institution’s board should have an understanding of the IT strategy’s 

infrastructure and components. In addition, the board should be 

aware of key system development and acquisition projects and 

how they support and affect overall corporate strategies, objectives, and short- and long-term budgets. To carry out their responsibilities, board members should do the following: 

• Ensure management has an effective strategic planning 

process that aligns IT strategy with enterprise strategy. 

• Adopt IT policies sufficient to ensure the institution’s safety 

and soundness, and compliance with law, regulations, and 

IT essential practices. 

• Insist that an IT control framework be adopted and implemented. 

• Require regular reporting on IT system functionality and 

security. 

• Identify the role and resources of the internal auditor with 

respect to IT use and security. 

Many boards use committees that oversee critical areas of the 

institution to assist them with carrying out their governance duties. An FCS institution’s board of directors may choose to delegate 

the responsibility for monitoring IT activities to a senior management committee or IT steering committee. The board should define 

the responsibilities of the committee within a charter. The 

committee’s mission should be to assist the board in overseeing 

the institution’s IT-related activities. The committee should consist 

of representatives from senior management, the IT department, 

and major end-user departments. Members do not have to be 

department heads but should know IT department policies, practices, and procedures. Each member should have the authority to 

make decisions within the group for his/her respective areas. 

Appendix E:

IT Governance
57 

In addition, the committee should ensure that the board has the 

information it needs to make informed decisions that are essential 

to achieve the objectives of IT governance. Those objectives are the 

following: 

• The alignment of IT and the business. 

• The delivery of value by IT to the business. 

• The sourcing and use of IT resources. 

• The management of IT-related risks. 

• The measurement of IT performance. 

The overview by the committee enables the board to make decisions without becoming involved in routine operations. The committee should provide general reviews to the board regarding 

major IT projects. The committee helps to ensure business alignment, effective strategic IT planning, and oversight of IT performance. The committee may also perform the following: 

• Oversee the development and maintenance of the IT strategic plan. 

• Approve vendors used by the organization and monitor 

their financial condition. 

• Coordinate priorities between the IT department and user 

departments. 

• Review the adequacy and allocation of IT resources in terms 

of funding, personnel, equipment, and service levels. 
58 

Having a reputation for honest dealings is important. Having the 

good opinion of the internal community—the employees and 

officers—is critical for effective corporate governance. Even more 

important is to have the good opinion of those outside the corporation. 

To establish and maintain an institution’s reputation for customer 

trust and honest dealings with business partners, certain disclosures are expected. In general, it is a duty of the board, as fiduciary 

agent for the institution’s stockholders, to keep stockholders fully 

informed of any activities or business affiliations by the board, 

individually or collectively, and/or its officers that might affect the 

decisions they make or actions they take on behalf of the institution. 

In addition, to carry out legislative requirements contained in the 

Act, FCA regulations require the disclosure of certain information 

to stockholders and other interested parties. 

Each director must disclose in the institution’s annual report any 

outside business affiliations in which he or she serves as a director 

or senior officer. Moreover, directors must disclose all cash and 

noncash compensation received from third parties when acting in 

their official capacity. Noncash compensation includes gifts, such 

as coffee, T-shirts, and meals, unreimbursed payments for trips, 

and use of property. To facilitate reporting of cash and noncash 

compensation, FCA regulations provide a $5,000 threshold. The 

threshold is applied to the combined value of 

1. cash and noncash compensation from a third party; 

2. noncash compensation from the employing institution; and 

3. institution perks. 

Senior officers must disclose in the annual report any business 

affiliations with outside entities in which they serve as directors or 

senior officers. Senior officers must also report any cash or noncash 

compensation received from third parties when acting in their 

official capacity. The compensations of all senior officers, plus any 

other officers whose compensations are among the five highest 

paid by the institution, must be reported in the aggregate in the 

annual report. However, the CEO’s compensation must be reported on an individual basis. Associations are given an option of 

Appendix F:

Conflicts of

Interest

Directors

Senior Officers
reporting this information in the annual meeting information 

statement (AMIS) if an appropriate notation is made in the annual 

report. In addition, the annual report (or the AMIS) must contain a 

statement that the individual compensation of any senior officer 

may be requested by a stockholder of the institution and received 

without delay or adverse consequences. By regulation, the AMIS is 

a public document and must be available for public inspection at 

each institution’s offices. 

59 
The nominating committee has the ability to help stockholders 

shape the composition of the board. The composition of the board 

should represent as nearly as possible all areas of the institution’s 

territory and as nearly as possible all types of agriculture practiced 

within the territory. It should also represent a combined skill set 

that facilitates the board’s ability to address the issues that it faces 

and expects to face. 

The nominating committee’s responsibility is to identify, evaluate 

the qualifications of, and nominate at least two willing and qualified candidates for each open director position to stand for election 

by the institution’s board of directors. The evaluation should also 

consider any known obstacles preventing a candidate from performing the duties of the position. If the nominating committee is 

unable to identify more than one willing and qualified candidate 

for an open director position, the nominating committee must 

provide a written explanation to the board of its efforts to locate at 

least two willing candidates for each open director position, including its reasons for disqualifying any other candidate(s), if the 

disqualification resulted in fewer than two nominees. A summary 

of the nominating committee’s efforts must be disclosed to voting 

stockholders in the annual meeting information statement (AMIS). 

The nominating committee’s independence is critical to the success 

of the cooperative because it ensures that representatives of the 

voting stockholders, not the current board members or institution 

management, choose the slate of candidates. While it is the nominating committee’s responsibility to find candidates who meet or, 

with director training, could meet the qualifications the board 

desires, other eligible stockholders may seek nomination without 

regard to desirable director qualifications. Hence, floor nominations may result in director candidates who do not possess those 

qualifications. Only associations are required to allow floor nominations, but banks must inform stockholders if they will accept 

floor nominations. 

Each bank and association board of directors must establish and 

maintain a policy identifying desirable qualifications for directors. 

The policy must explain the type and level of knowledge and 

experience desired for board members and explain how those 

qualifications were identified. The policy must be periodically 

updated and provided to the institution’s nominating committee. 

The desirable qualifications must be adequate to meet the board’s 

needs but broad enough to allow the nominating committee to 

identify at least two willing and qualified candidates for each open 

position without undue burden or difficulty. 60 

Appendix G:

Nominating

Committees
61 

Composition. The voting stockholders of each Farm Credit bank 

and association must elect a nominating committee composed of at 

least three stockholders who are independent of the institution’s 

board, management, and staff. This requirement precludes an 

institution’s directors, director candidates, employees (including 

officers), and agents from serving on the committee. It does not 

preclude former directors from serving in this capacity as long as 

they remain voting stockholders of the institution. The institution 

should strongly discourage stockholders who are family members 

of candidates from serving on the nominating committee. 

Election of Nominating Committee Members and Term of Office.

Section 4.15 of the Act requires each association to elect a nominating committee at the annual meeting to serve for the following 

year. Banks do not have to elect a nominating committee at the 

annual meeting, so they have more flexibility in determining when 

and how long nominating committee members serve. However, it 

is incumbent upon banks as well as associations to ensure that the 

selection of nominating committee members is fair and open to all 

voting stockholders. 

Impartiality. Nominating committees must conduct themselves in 

the impartial manner prescribed by the policies and procedures 

adopted by their institution under FCA regulation § 611.320 of the 

Act. The provisions of § 611.320(b) explain the limitations on the 

assistance that employees may offer the nominating committee. 

Directors, employees, and agents should not be present when the 

committee deliberates and votes on its slate of candidates. Directors, employees, and agents are not allowed to make oral or written statements intended to influence the choice of nominees. 

Resources. The bank or association must provide the nominating 

committee a current list of institution stockholders, the most recent 

bylaws, the current policy on desirable director qualifications, and 

a copy of the policies and procedures that the bank or the association has adopted ensuring impartial elections. Upon the request of 

the nominating committee, the institution must also provide a 

summary of the current board’s self-evaluation. The bank or association may require a pledge of confidentiality by committee 

members before releasing evaluation documents. 
For Questions About This Publication, Contact:

Office of Congressional and Public Affairs

Farm Credit Administration

1501 Farm Credit Drive

McLean, VA 22102-5090

703-883-4056

www.fca.gov

info-line@fca.gov

500/0406