This section is from the "Practical Banking" book, by Albert S. Bolles.
We may properly open this chapter with some general remarks concerning the duties of bank directors. Whatever may be their shortcomings they usually begin their duties with honest intentions toward their stockholders and the public. The misconduct which may supervene, will proceed from temptations incident to their office, and perhaps from the absence of well-digested notions of their duties. Some years ago, a person was asked whether he would accept the office, then vacant, of director in a bank. After deliberating, he replied, that as the office might result in some benefit to him, he would accept. When the answer was reported to the Board who were to fill the vacancy, they refused to appoint him, lest he should sit at the Board mousing to catch something beneficial to himself, while they wanted a director who would accept office to benefit the bank. A man ought to watch his own interest, when conducting his own affairs, but when he is acting officially, he should lose himself in his public duties. We expect a soldier to sacrifice his life, if necessary, to the discharge of his duty, and we should condemn him for professing a less self-denying creed, how much soever our knowledge of human fallibility might induce us to pardon his short-comings, when death should obstruct his path. Fortunately the performance of bank duties will peril only some forbearance from pecuniary acquisitions, and our creed ought to be self-denying enough to renounce these, instead of avowing them to be the motive of our services; nor is the principle new. The law will not permit a trustee to derive any indirect benefit from his trust, or any judge or juror to decide in his own controversies; and the State of New York has, in its Constitution, consecrated, the principle, by prohibiting our legislators from regulating their own compensation, or even the number of days which shall be occupied in legislative duties. In some cities, also, no civic officer can become legally interested in any municipal contract; and who censures not some recent high officers of our National Government, for participating in a private claim, which they officially aided in adjusting and paying. Thus thinking, the president of a large railroad corporation of New York refused to supply iron for his road, though his associate directors, with the complaisance which is as vicious as it is common, offered him the contract. In this case, no contractor could have been more eligible, but the rejector established a precedent that is more profitable for his corporation than the money it would have saved in purchasing the iron of him.
The remuneration of bank directors, consists, too often, in an indefinite claim for bank loans. This claim led formerly to so great an absorption of the funds of country banks, whose capitals are small, that a law was enacted by the New York Legislature interdicting bank directors* from engrossing, directly or indirectly, more than a third part of the capital of their respective banks; a quota which is, in some banks, divided equally among the directors, irrespective of any business merits of the borrower. This mode of compensation, when founded on ample security for the borrowed money, and when the amount taken, directly or indirectly, is limited to the legal quota, may, in small banks, constitute a less objectionable mode of remunerating directors than any other indirect mode, or than most other direct modes. A man may, however, very properly refuse the office of bank director, unless he can obtain for his services a satisfactory pecuniary compensation; and banks must comply with such a requirement, if suitable men are not otherwise obtainable; but such a contingency promises to be remote, under the desire for accidental distinctions by our citizens, consequent, probably, on their legal equality. But when such a contingency shall occur, a direct compensation will generally be purer than any indirect, and a definite compensation cheaper than an indefinite; and usually money is the most economical mode of paying for services that are not to be deemed honorary.
* This law, like most other legal regulations of bank directors, was made before the existence of banking associations; hence the directors of such associations are not included therein.
* The National Banking Law limits the amount that may be loaned to any applicant.
The law usually regards bank directors as an entirety under the title of a Board. The duties and powers which are usually conferred on the board by the National and State laws may be classed as legislative, supervisory, and appointing. The legislative power consists in creating such offices as the business of the bank shall render necessary, regulating their duties and salaries; directing the modes in which the bank shall be conducted, and generally all that pertains to the management of the stock, property, and effects of the corporation. The appointing power consists in selecting proper incumbents for the created offices; while the supervisory power is indicated by all the foregoing, and by the ability to dismiss the appointees at pleasure. But a man cannot properly supervise himself in the performance of public services, nor limit and regulate their scope and extent, nor fix his compensation therefor; hence the powers of the board can be exercised efficiently only on persons who are not members of the board. Nor is the inexpediency of uniting in the same person the duties of grantor and grantee, master and servant, agent and principal, a contrivance of man; it proceeds from his organization. No person can sit at a board of directors without observing that agents who are not directors, are supervised more freely than agents who are directors. A practical admission of this is evinced by some discount boards, who, in deciding on paper offered by directors, vote by a species of ballot, while in other boards, the offered notes are passed under the table, from seat to seat; and a note is deemed rejected, if, in its transit, some director has secretly folded down one of its corners. Had the United States Bank been supervised by a board disconnected from executive duties, it would not have permitted its chief officer to persevere in the measures which ultimately ruined the corporation, though its capital was thirty-five millions of dollars. Even the separation of a legislature into two chambers, checks the esprit du corps, and pride of opinion which would urge one chamber into extremes, with no means of extrication from a false position. A separation operates like the break of continuity in an electric telegraph, arresting a common sympathy, passion, or prejudice, which, in a single chamber, rushes irresistibly to its object. Still, in many banks (the Bank of England included) the president (entitled governor in the Bank of England) is the chief executive officer, as well as head of the legislative department. The Bank of England is, however, controlled by twenty-four directors, the largeness of which number naturally mitigates the influence of the members individually, and hence diminishes ratably the objection against its executive organization. Such an organization may operate well, where the board consists of a small number of members, yet the good is not a consequence of the organization, but in despite thereof; for, whatever weakens the power of supervision, must diminish its benefits. The joint-stock banks of England are all controlled by officers called managers, and who are not members of the board, though they sit thereat ex officio for mutual explanation and instruction.