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CHAPTER XII

ADMINISTRATION

87. Stockholders.-Great care should be exercised in selecting the stockholders of a bank for they are the source of all ultimate authority. Stockholders receive from the banks certificates of stock, signed by the president and cashier certifying to the number of shares of stock to which they are entitled. The par value of national bank shares is $100. Every bank keeps a stock book containing blank certificates attached. When a certificate is issued to a stockholder, it is numbered, and the same number is put on the stub together with the date of issue, the number of shares and the name of the holder. In this way the stub is a copy of the essential parts of the certificate. Stock certificates are usually transferable only on the books of the bank upon surrender of the certificates. Transfers must be made in person or by authenticated power of attorney. When transfers are made a new certificate is issued to the new holder, and the surrendered certificate is cancelled and pasted in the stock book opposite its stub. If a stockholder transfers only a part of his shares, the old certificate is surrendered and two new ones are issued, one to the new holder for the number of his shares, and another to the old owner for the number of shares still re

tained. Most banks keep a stock ledger containing a record of stockholders' accounts and each transaction in the stock. Stockholders of national banks, and of some state banks, are liable in case of failure of the bank for an amount equal to their holdings. Suppose, for example, that through bad management or fraud a bank having a capital of $2,000,000 and deposits of $5,000,000 fails; in such a case the stockholders not only lose their investment, but they are liable for $2,000,000 more which will be used to pay the depositors as far as it will go. In the past there has been much evasion of this liability and efforts have been made to fix more firmly the liability of stockholders for the debts of failed banks. This has at last been brought about by the Federal Reserve Act, a section of which provides as follows: "The stockholders of every national banking association shall be held individually responsible for all contracts, debts and engagements of such association, each to the amount of his stock therein, at the par value thereof in addition to the amount invested in such stock. The stockholders in any national banking association who shall have transferred their shares or registered the transfer thereof within sixty days next before the date of the failure of such association to meet its obligations, or with knowledge of such impending failure, shall be liable to the same extent as if they had made no such transfer, to the extent that the subsequent transferee fails to meet such liability.”

88. Directors. The national bank act requires that every national bank shall have at least five directors. There is no legal limit to the maximum number and some of the large city banks have boards of fifteen, twenty-five, or more directors. Every director must be a citizen of the United States and at least three-fourths of them must be residents of the state or territory where the bank is located during their continuance in office, and must have resided there for at least a year before their election. Each di rector must own at least ten shares (five shares where the capital is $25,000) of the capital stock of the bank, which

must not be hypothecated or pledged for any loan or debt. The board of directors are responsible in a general way for the entire policy and administration of the bank, and the measure of its success will depend upon their ability and integrity. They choose from their own number the president of the bank who is usually the president of the board also, and the cashier who acts as secretary of their meetings. They appoint all the employees either directly or by approval of those selected by the officers. They are responsible for the employment of the bank's funds in loans and investments, and they determine the disposition of its earnings. In short, though the details of conducting the bank's everyday business must be left to the officers and clerks, the board of directors are responsible ultimately for everything done or projected by the bank. Furthermore, each director takes an oath that he will, as far as the duty devolves upon him, diligently and honestly administer the affairs of his bank, and will not knowingly violate, or willingly permit to be violated, the banking law. In case of such violation every director who participates in or assents to it is liable for damages which may have been sustained in consequence of it.

In earlier years these very important duties and responsibilities were often lightly assumed and just as lightly performed, but more and more public opinion is demanding of bank directors closer attention to the affairs of the bank. It is not customary to pay salaries to directors, yet the conscientious director has to give a good deal of his valuable time and thought to the bank's affairs. In some of the larger city banks directors receive a fee for each meeting they attend, but this does not compensate for the time they must take from their own business. Occasionally an influential business man will permit his name to be proposed for director though he realizes that he cannot give the position proper time and attention. He may feel flattered by the honor of so dignified a position, or he may think that it will give him added business prestige. No one, however, should accept the position of director who

cannot faithfully discharge the obligations of the position. Various considerations enter into the selection of the board of directors. Sometimes they are chosen because they are among the largest stockholders, and so have a keen interest in the prosperity of the bank. In too many cases a small group of men secure a majority of the shares and elect themselves and their close associates to the board in order to control the policy and resources of the bank. Often an influential citizen is chosen because he will bring a large amount of business to the bank. A bank tries to have on its board prominent representatives of leading lines of business in the town. The most important duty of the directors is lending the funds of the bank. Applications for loans come from men in various lines of trade, and it is advantageous to have on the board a person who has special knowledge of the business in which the applicant is engaged. Above all, a bank director should be a man of unblemished character, enjoying the respect of the community, and a reputation for sound judgment, prudence and common-sense. If he is a director in other important business concerns, insurance companies, trust companies, banks and railroads, it indicates that other men think well of him, and can work harmoniously with him in positions of responsibility. There has been a marked tendency in recent years toward "community of interest" among different types of financial institutions by means of interchange of directors. Thus one or more directors of a powerful trust company are elected to the directorate of a national or state bank and vice versa. Something of the same purpose is found in the growing practice of electing to the board of the large city banks directors of financial institutions in other cities with which it may be desirable to have close business relations. The Clayton Act of 1914 forbade "interlocking directors" in banks with more than $5,000,000 of capital, surplus, and deposits, and provided that no bank in a city of over 200,000 inhabitants should have as an officer, or employee and director, an officer or employee of any other bank in that place. The Kern

amendment to the Clayton Act, approved May 15, 1915, provides, however, that with the consent of the Federal Reserve Board bank directors or officers of member banks in the Federal reserve system may be officers or directors of two other banks organized under state or national laws where such other banks are not in substantial competition with such member banks. A bill was passed in May, 1920, further amending this Act so as to permit private bankers to serve as directors of foreign banking corporations organized under the Edge Act.

89. Duties and responsibilities.—In recent years no question affecting banking affairs has been more widely discussed than that of the duties and responsibilities of directors. The legal duties and responsibilities are clearly defined and to-day, it may be said, are performed with reasonable care and fidelity. But in the banking business there is a great range of duties other than those prescribed by law, and it is here that bad judgment, dishonesty or ignorance may work lasting harm to the bank. Some years ago, Comptroller Ridgely said in a public address: "When a bank does fail, it is the fault of the board of directors.” Now, it is clear that directors cannot have personal knowledge of all the varied details of the bank's business. To do so would require them to give almost as much time and attention to the bank as they do to their own business. Few men would be willing to serve under such onerous conditions. Moreover, this detailed work is what the president, cashier and clerks are employed to do. It would seem that directors have discharged their duty when they exercise care in selecting the officers of the bank, attend directors' meetings with a fair degree of regularity, and keep careful watch upon the loans of the bank. The courts have held, however, that "the duty of the board of directors is not discharged by merely selecting officers of good reputation for ability and integrity, and then leaving the affairs of the bank in their hands without any other supervision or examination than mere inquiry of such officers, and relying upon their statement until some cause for sus

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