4. How They Must Exercise Their Authority

They must exercise their authority solely in the interest of the bank they represent. "They have no authority, under any circumstances, to use their official positions for their private benefit."1 It has, therefore, been decided that directors could not vote to themselves salaries, however pure might be their motives or valuable their services. In doing this they act as both parties to the procedure, and the impropriety of their conduct is manifest. Clearly the shareholders are the rightful person's to take such action. Says one of the best known legal writers on this subject, "The directors of a corporation can not represent it in any deal ings with themselves personally; nor can they bind the company to third persons by a contract in which they have a private interest at stake."2 But a director can act as the legal adviser of his company and charge for his services this has always been done.

5. Their Legal Duty

The duty of a bank director can not easily be defined. The national banking law declares that a bank can "exercise by its board of directors, or duly authorized officers or agents, subject to law, all such incidental powers as shall be neccessary to carry on the business of banking; by discounting and negotiating promissory notes, drafts, bill of exchange and other evi-dences of debt; by receiving deposits by buying and selling exchanges, coin and bullion; by loaning money on personal security; and by obtaining, issuing, and circulating notes." 1 Such are their general powers, but what must directors do in the way of executing them?

1 Morawetz, Private Corporations 519 2 bid

In one of the latest and best-considered cases Judge Wallace remarked that the directors of a national bank were authorized to appoint a cashier and delegate to him all the usual powers pertaining to his office, including the discounting of notes. And when they have acted in good faith and with ordinary diligence in exercising their duty of general control and supervision, they are not liable for losses sustained through his misconduct. They are not required to devote themselves to the details of the business management, nor to adopt any system of espionage over their cashier or other officers. But they must be honest and bring to the discharge of their duties ordinary competency. "They can not excuse imprudence or indifference by showing honesty of intention coupled with gross ignorance and inexperience, or coupled with an absorption of their time and attention in their private affairs. . . . They are responsible for their own acts and omissions, but not for those of co-directors in which they have not actively and passively participated."2

In the case calling for these remarks the bank was wrecked through the action of the cashier, who was left quite to himself in lending its funds. The court declared that it "was incumbent upon the directors, in the exercise of ordinary prudence, and as a part of their duty of general supervision, to cause examinations of its paper to be made with reasonable frequency and to keep themselves sufficiently informed about it to enable them to pass an intelligent judgment upon its value." This they neglected to do.

1 Revised Statutes, Section 5, 136.

2 Warner v. Penoycr, 91 Fed. 587.

In another case, which has been often quoted, the court decided that to make a director liable it must be shown that he has done or omitted to do some act essentially equivalent to fraud.1 If he should neglect some plain unequivocal duty, or if he knew that the cashier was plainly violating the law and took no steps to stop him, that would be an obviously plain violation of duty.

One more illustration may be given on this important matter. In one of the cases the directors knew that their cashier was speculating and with funds not belonging to himself, yet made no inquiry. Afterward he took some securities belonging to a depositor from the vaults of the bank and sold them. The owner sued the directors for neglecting their duties in keeping their cashier after they had learned of his venture into the whirlpool of speculation. The case reached the Supreme Court of the United States, and the directors were held liable. They knew that he was not a fit person to conduct the offices of the bank, and yet was continued in office. This the court declared was clearly negligence on their part.

The popular conception of the duties of a bank director is very different. It is enough to say that if they were required to attend meetings, look into the affairs of their banks a closely as many people suppose they ought to do, very few doubtless who are on the present boards would be willing to serve. It would be needful to make up hank hoards largely with men who are not the most active and successful in business; men who perhaps have acquired or inherited wealth or have leisure; men who would bring to the hank the best intentions, who would be punctual in attendance, but whose services, after all, would possess very little worth.

1 Spering's Appeal, 71 Pa. 11.