In choosing directors, various factors are considered: The largest stockholders may be elected, the other shareholders feeling that large holdings will induce a keen interest in the success of the bank. Oftentimes small groups of shareholders having a majority of the shares will elect themselves or close associates so as to control the policy and conduct of the bank. Alen of large influence in the community or of large capital and business con nection stand a good chance of election because of the business which they will presumably bring to the bank. it is highly im portant that the directors be men of good financial record and possessed of conservative business sense and sound judgment.
Functions and Powers of Boards of Directors The bank may divide its business into departments and choose a separate board of directors to have control of each part; or it may have one board and divide it into committees, giving each committee control over certain functions, so that the resolutions of the committee within the scope of its business have the same force and effect as resolutions of the entire board. In the com mittee system it is essential that the board expressly define the powers conferred on a committee. One of the most common committees is the discount committee, which in lieu of the whole board passes upon the offerings of discounts.
The board exercises general control and government of all the affairs and transactions of the bank. With a few restrictions it can do anything the corporation can do under its charter and the law. What functions the board must perform are largely deter mined by the usage among banks. The directors must handle the general superintendence and active management of the bank. They are presumed to know all that is done, and the system and rules for doing it; they may appoint agents and endow them with powers sufficient for executing the resolutions of the board and for carrying out the ordinary transactions of daily business, without specific authority in each instance; but any such delegation of power does not divest the directors of their responsibility and duty, and they may be held for losses arising through officers in the selection and supervision of whom they have not acted in good faith or with ordinary diligence.
The conferment of too broad discretionary powers upon officers is dangerous and may amount to the delegation of the management of the bank; this exceeds the directors' authority. It is always held that the making of loans and discounts is an inalienable function of the directors, which cannot be conferred upon officers because it is so vital to the bank. The officer may not make loans and discounts unless specifically approved by the directors as to the aggregate amount, time, and other particulars.
The directors may authorize the cashier to let a certain borrower have such loans in such sums and at such times as he may wish within a certain time, up to a certain aggregate, to run specified periods, at named rates of interest, and according to designated conditions as to security. This is called extending a "line of credit"; but the cashier and his subordinates have no authority beyond this, nor do the directors pass upon each individual loan or discount.
The courts distinguish executory functions and management functions. The former are the medium through which manage ment and control are effected and consist of such acts as drawing checks, receiving deposits, paying drafts, etc., and may be done by the appropriate customary officers without an authorizing vote by the directors.
Limitations and Responsibilities of Directors The courts regard the directors as trustees for the stockholders and for depositors and noteholders. They insist not only that the directors be free from blame, but that they be prohibited from doing things where self-interest may bias them as against the bank. A director may not acquire any interest adverse to the bank of which he is director, nor may he secure by means of his trust any advantage not common to the other stockholders. In all such matters he must refrain both from voting and exercising his influence. If he applies for a loan he must not vote on the approval of his application and must behave as any other appli cant. In such a case there is great danger of favoritism for fear of offending the applicant director or because of his influence; but such favoritism is dangerous to the bank. In some states a loan to a director is prohibited; but this prohibition is often evaded by a loan to another person for the use of the director; such evasion is not necessarily unlawful, although the purposed destination of the funds may be known. The danger of favoritism to directors has led to the specific prohibition of certain acts which might work adversely to the bank; for instance, interest on deposits of a director may not be at a higher rate than to other depositors of the bank; paper offered for discount by a director must be discounted on the same terms and conditions as paper offered by others, and even then only with the affirmative vote of three-fourths of the directors; securities may be sold to a director, or to firms of which he is a member, in the regular course of business, on terms not more favorable to such director or firm than those offered to others, or when such sale is authorized by a majority vote of the board.