	Scope and Methodology

To determine the extent to which the current system of appointing  Reserve Bank directors effectively ensures that they are elected without  discrimination on the basis of race, creed, color, sex, or national origin,  and that, for some directors, they are elected with due but not exclusive  consideration to the interests of agriculture, commerce, industry, services,  labor, and consumers, as required by section 4 of the Federal Reserve  Act, we reviewed the Reserve Banks’ processes for identification,  nomination, and selection of directors. Also, we interviewed selected Reserve  Bank directors and Reserve Bank officials from each Reserve Bank to  collect information on directors’ roles and responsibilities, any conflict of  interest concerns and procedures for addressing the appearance of or  actual conflicts, and potential changes to Reserve Bank governance. 1). Class A directors represent the member banks, while Class  B and C directors represent the public with, as required by the Federal  Reserve Act, “due but not exclusive consideration to the interests of  agriculture, commerce, industry, services, labor, and consumers.” As  required by the Federal Reserve Act, six of the nine directors, Class A  and Class B, are elected by the member banks, and the remaining three,  the Class C directors, are appointed by the Federal Reserve Board. For example, in 2006, minorities  accounted for 13 of 108 director positions; and in 2010 they accounted for  15 of 108 director positions. More specifically, in 2010, head office  directors comprised 78 white men, 15 white women, 12 minority men, and  3 minority women. Reserve Bank officials said they generally focus their search on senior  executives. In general, Reserve Banks  use a combination of personal networking and community outreach  efforts to identify potential candidates. Federal Reserve Bank directors often serve on the boards of a variety of  financial firms as well as those of nonprofit, private, and public  companies. In addition, as the financial services industry has evolved, more  companies are involved in financial services or otherwise interconnected  with financial institutions. These steps  include defining the roles and responsibilities of directors to avoid  conflicts, managing and mitigating conflicts of interest through adherence  to federal law and the Federal Reserve board’s conflict-of-interest  policies, and establishing internal controls and policies to identify and  manage potential conflicts. According to Federal Reserve Board and Reserve Bank officials, because  the Federal Reserve Board has delegated the examination of bank and  financial holding companies, member banks, and affiliates to the Reserve  Bank staff, the staff report through the Reserve Bank presidents to the  Federal Reserve Board and not directly to the boards of directors of the  Reserve Bank. The Bank of Canada does not have a waiver process. Third, some in Congress and others recommended that the Federal  Reserve System’s role in supervision and regulation be eliminated, which  would have eliminated concerns about conflicts of interest involving  directors affiliated with institutions supervised by the Reserve Banks. However, Reserve Banks lack transparency in their  governance practices compared with those of other organizations we  reviewed. Most Reserve Banks do not routinely disclose governance practices to  the public, while most comparable institutions we reviewed do. These unprecedented actions resulted in  Congress and the public raising questions about the Reserve Banks’  governance practices and potential conflicts of interest involving the  directors. Our analysis shows that from  2006 through 2010 labor and consumer groups tended to be less  represented than other industry groups on both head office and branch  boards. As such, we recommend that the Chairman of the  Federal Reserve Board take the following four actions:    To help enhance economic and demographic diversity and broaden  perspectives among Reserve Bank directors who are elected to  represent the public, encourage all Reserve Banks to consider ways  to broaden their pools of potential candidates for directors, such as  including officers who are below the senior executive level at their  organizations.   As part of the Federal Reserve System’s continued focus on  strengthening governance practices, develop, document, and require  all Reserve Banks to adopt a process for requesting waivers from the  Federal Reserve Board director eligibility policy and ethics policy for  directors. With respect to our three recommendations to improve transparency, the  Federal Reserve Board stated that it will work with the Reserve Banks to  consider ways to more clearly include the directors’ roles and  responsibilities in the bylaws and the Federal Reserve System will  continue to ensure that Reserve Bank directors are fully aware of their  roles and the policies that govern their positions on the Reserve Bank  boards. 2. 12. a.
Why GAO Did This Study

Events surrounding the 2007 financial crisis raised questions about the governance of the 12 Federal Reserve Banks (Reserve Banks), particularly the boards of directors' roles in activities related to supervision and regulation. The Dodd-Frank Wall Street Reform and Consumer Protection Act required GAO to review the governance of the Reserve Banks. This report (1) analyzes the level of diversity on the boards of directors and assesses the extent to which the process of identifying possible directors and appointing them results in diversity on the boards, (2) evaluates the effectiveness of policies and practices for identifying and managing conflicts of interest for Reserve Bank directors, and (3) compares Reserve Bank governance practices with the practices of selected organizations.

What GAO Found

The Federal Reserve Act requires each Reserve Bank to be governed by a nine-member board--three Class A directors elected by member banks to represent their interests, three Class B directors elected by member banks to represent the public, and three Class C directors that are appointed by the Federal Reserve Board to represent the public. The diversity of Reserve Bank boards was limited from 2006 to 2010. For example, in 2006 minorities accounted for 13 of 108 director positions, and in 2010 they accounted for 15 of 108 director positions. Specifically, in 2010 Reserve Bank directors included 78 white men, 15 white women, 12 minority men, and 3 minority women. According to the Federal Reserve Act, Class B and C directors are to be elected with due but not exclusive consideration to the interests of agriculture, commerce, industry, services, labor, and consumer representation. During this period, labor and consumer groups had less representation than other industries. In 2010, 56 of the 91 directors that responded to GAO's survey had financial markets experience. Reserve Banks generally review the current demographics of their boards and use a combination of personal networking and community outreach efforts to identify potential candidates for directors. Reserve Bank officials said that they generally limit their director search efforts to senior executives. GAO's analysis of Equal Employment Opportunity Commission data found that diversity among senior executives is generally limited. While some Reserve Banks recruit more broadly, GAO recommends that the Federal Reserve Board encourage all Reserve Banks to consider ways to help enhance the economic and demographic diversity of perspectives on the boards, including by broadening their potential candidate pool. The Federal Reserve System mitigates and manages the actual and potential conflicts of interest by, among other things, defining the directors' roles and responsibilities, monitoring adherence to conflict-of-interest policies, and establishing internal controls to identify and manage potential conflicts. Reserve Bank directors are often affiliated with a variety of financial firms, nonprofits, and private and public companies. As the financial services industry evolves, more companies are becoming involved in financial services or interconnected with financial institutions. As a result, directors of all three classes can have ties to the financial sector. While these relationships may not give rise to actual conflicts of interest, they can create the appearance of a conflict as illustrated by the participation of director-affiliated institutions in the Federal Reserve System's emergency programs.

What GAO Recommends

To increase transparency, GAO recommends that all Reserve Banks clearly document the directors' role in supervision and regulation activities in their bylaws. One option for addressing directors' conflicts of interest is for the Reserve Bank to request a waiver from the Federal Reserve Board, which, according to officials, is rare. Most Reserve Banks do not have a process for formally requesting such waivers. To strengthen governance practices and increase transparency, GAO recommends that the Reserve Banks develop and document a process for requesting conflict waivers for directors. The Federal Reserve System's governance practices are generally similar to those of selected central banks and comparable institutions such as bank holding companies and have similar selection procedures for directors. However, Reserve Bank governance practices tend to be less transparent than those of these institutions. For instance, comparable organizations make information on their board committees and ethics policies available on their websites; most Reserve banks do not.