oversight

Board Policy Statements

Published by the Farm Credit Administration, Office of Inspector General on 2003-09-15.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

Office of
Inspector General

             Board Policy Statements

                                03-05




                      September 2003
FCA Board Policy Statements

                      03-05
   Farm Credit Administration                                     Office of the Inspector General
                                                                  Farm Credit Administration
                                                                  1501 Farm Credit Drive
                                                                  McLean, Virginia 22102-5090




September 15, 2003


The Honorable Michael M. Reyna
Chairman of the Board and
 Chief Executive Officer
Farm Credit Administration
1501 Farm Credit Drive
McLean, Virginia 22102-5090

Dear Mr. Reyna:

The Office of the Inspector General completed an inspection of the Farm Credit Administration’s
(FCA or Agency) Board Policy Statements. The objective of this inspection was to evaluate the
FCA Board Policy Statements to determine if they are consistent with sound business practices in
terms of relevancy, timeliness, coverage, and key elements. The establishment of policy is
completely within the Board’s discretion. We conducted this inspection because policies are a key
internal control process for governance of organizations.

The presentation by GAO on governance at the most recent Board meeting provides an excellent
segue to this report. The report suggests several FCA Board actions to strengthen its policies
consistent with that presentation. We found the policy statements need updating and refinement. It
appears the Board’s role in overseeing the operations of FCA could be enhanced if it establishes a
methodical approach to develop, review and update its policies. These practices would be more
consistent with sound business practices and the standards established in the FCA Examination
Manual. These are the standards FCA examiners use to evaluate management of the institutions it
regulates.

The inspection followed the President’s Council on Integrity and Efficiency Quality Standards for
Inspections. We conducted fieldwork during August and September.

I hope that you and the Board members find it useful in addressing governance as it relates to FCA.
If you have any questions about the inspection, I would be pleased to meet with you at your
convenience.

Respectfully,



Stephen G. Smith
Inspector General
                         FCA OFFICE OF INSPECTOR GENERAL
                          BOARD POLICY STATEMENTS 03-05




CONTENTS

BACKGROUND                                                 1

OBJECTIVE AND SCOPE                                        1

FINDINGS AND RECOMMENDATIONS                               1
  INCONSISTENT PROCESS                                     1
  MISSING ELEMENTS                                         3
  OUTDATED POLICIES                                        3
  POLICY STATEMENT 64                                      4
  RECOMMENDATIONS                                          5
APPENDIX – LIST OF POLICY STATEMENTS                       6




SEPTEMBER 15, 2003
                             FCA OFFICE OF INSPECTOR GENERAL
                              BOARD POLICY STATEMENTS 03-05


BACKGROUND

The Farm Credit Administration (FCA or Agency) is an independent Federal financial
regulatory agency. FCA has regulatory, examination and supervisory responsibilities for
the Farm Credit System (System) banks, associations, and related institutions. FCA
employs fewer than 300 people. A 3-person board governs FCA operations. Board
members are appointed by the President and confirmed by the Senate.

As part of its responsibilities, the FCA Board votes on and adopts Policy Statements.
These Policy Statements provide direction and guidance from the FCA Board and
represent a key internal control process. There are currently 22 Board Policy
Statements.

The FCA Board has adopted policies falling into two distinct areas. The FCA Board has
adopted seven policies that provide general direction to Farm Credit institutions. These
policies are closely related to the FCA Board’s role as a regulator of the Farm Credit
System. An example of this type of policy is Policy Statement No. 73 “Philosophy on
Intra-System Competition.” The other 15 policies relate to the Board’s governance of
the Agency and how it conducts business.

OBJECTIVE AND SCOPE

The objective of this inspection was to evaluate the FCA Board Policy Statements to
determine if they are consistent with sound business practices in terms of relevancy,
timeliness, coverage, and key elements. The scope of the inspection was limited to a
review and analysis all existing Board Policy Statements compared to criteria for board
governance established by FCA and other organizations such as Price Waterhouse
Coopers (PWC) and The Conference Board. We conducted this review following the
Quality Standards for Inspections issued by the President’s Council on Integrity and
Efficiency.

FINDINGS AND RECOMMENDATIONS

Overall, this review disclosed a need for a methodical approach to establishing and
maintaining the Board’s policies. The Board could improve the Agency’s management
system by adding policies and revising existing policies to incorporate key elements.
INCONSISTENT PROCESS
The FCA has not established a methodical approach to developing Board Policy
Statements. There is little consistency in the level of detail and the type of subjects
covered by the statements. For example, some policy statements contain detailed
procedures such as “Accountable Property Policy and Inventory Reconcilement.” Other
policies provide broad philosophy statements such as competition within the Farm
Credit System. Policy Statement 64 states that Board Policy Statements should “define
the goal(s) to be accomplished.” Beyond this, no document specifically outlines the
purpose of Board Policy Statements.

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                                 FCA OFFICE OF INSPECTOR GENERAL
                                  BOARD POLICY STATEMENTS 03-05


According to the FCA Examination Manual, “clear and concise policies … are an
essential ingredient in any management system.” The manual further states, “Policies
are guides for achieving the established objectives and strategies of the institution…
Policies are necessary to ensure sound business practices and policy weaknesses have
the potential to cause operational problems.” The American Bar Association states
boards’ responsibilities include “adopting policies of corporate conduct and monitoring
compliance with those policies … and other internal controls.”

A methodical approach to establishing Board policies could ensure that all critical
aspects of FCA operations are addressed in Board policy. Policy statements address
some key parts of the Agency operations. However, some aspects of Agency
operations are not addressed at all, only addressed in a cursory manner, or outdated.
The following chart outlines critical aspects of FCA operations that Board policies
should address. These are areas FCA examines in institutions or are suggested by
leading organizations such as PWC.

   Key Topic                                         Comment
                 PS-64 covers planning in general terms but it is outdated or not completely
                 followed. It indicates that there is a Strategic Planning Committee
Planning         responsible for planning and reporting to the FCA Board. However, this
                 committee has been dormant. PS-64 also indicates that there is an
                 Information Resources Planning Committee that is also dormant.
                 Accounting principles are incorporated in Board Policy Statements in a limited
Accounting       manner. PS-69 addresses capitalization of property and PS-66 address cash
                 management and liquidity.
                 Compensation principles such as how FCA defines key issues such as
Compensation
                 comparable compensation are not incorporated in Board Policy Statements.
                 Contracting principles such as FCA will adopt the Federal Acquisition
Contracting      Regulations unless the Agency adopts its own tailored guidelines are not
                 incorporated in existing Board Policy Statements.
                 PS-64 addresses legal counsel but there have been issues with interpretation
Legal Counsel
                 of the meaning.
Board
                 There is no Board policy that governs establishment of Board committees.
Committees
Conflicts of     PS-64 addresses conflicts of interest to a limited extent. In addition, PS-44
Interest         addresses some conflict of interest issues.
                 The Board has not adopted a code of ethics in its Policy Statements but has
Code of Ethics   adopted supplemental regulations to augment the Office of Government
                 Ethics Regulations.
                 Board policy addresses succession planning narrowly. PS-64 address
Succession       succession in the event of a national emergency. However, with the current
Planning         Board configuration, it is unclear who succeeds the Chairman because there
                 is no member of the Chairman's party.
Examination      PS-53 and PS-64 establish Board policy on examinations.
                 PS-37 addresses communication during rulemaking. PS-64 addresses the
Regulations
                 Board’s responsibility for rulemaking.




SEPTEMBER 15, 2003                                                                           PAGE 2 OF 6
                                FCA OFFICE OF INSPECTOR GENERAL
                                 BOARD POLICY STATEMENTS 03-05


MISSING ELEMENTS
FCA Board Policy Statements lack critical elements of sound policy. According to the
FCA Examination Manual, good policies contain six key elements:

          Purpose / Objective                                 Authority Retained
          Operating Parameters                                Exceptions
          Authority Delegated                                 Reporting

The seven policy statements that provide the FCA Board direction or philosophy to
regulated institutions would not necessarily contain these key elements. However, the
table below shows the remaining 15 Policy Statements related to Agency operations. It
indicates many key elements are missing.

                                          Authority   Authority
        Policy       Purpose   Parameters Delegated   Retained Exceptions Reporting
        PS-34
         PS-37
         PS-41
         PS-44
         PS-49
         PS-53
         PS-62
         PS-64
         PS-65
         PS-66
         PS-67
         PS-68
         PS-69
         PS-72
         PS-78
        Count          15          10         5           2          4             7


OUTDATED POLICIES
The FCA Board Policy Statements are outdated. Several of them refer to practices and
operations that no longer exist. The average age of the 22 policy statements is 6 ½
years. The Board has only updated or adopted 1 policy statement in the past three
years. According to the FCA Examination Manual, boards of Farm Credit Institutions
are expected to review their policies annually. PWC states “governance guidelines will
… be regularly refreshed, usually on an annual basis.”

Policy Statement 64 states, “Board Policy Statements and Bookletters should be
reviewed at least every five (5) years.” The Secretary to the Board maintains the Policy

SEPTEMBER 15, 2003                                                                     PAGE 3 OF 6
                                    FCA OFFICE OF INSPECTOR GENERAL
                                     BOARD POLICY STATEMENTS 03-05


Statements but the Office of Policy Analysis has a procedure to review policies every
three years. The most recent review was conducted in 1999. A workgroup (including a
policy analyst, an attorney, and the Board Secretary conducted the review and
recommended changes to 12 of the 22 policies. Three of the policies were ultimately
changed. The following table shows the workgroup’s recommendations and their
disposition.

Recommended          No. Of
                                                             Board Actions
   Action           Policies
        Keep           10      None required
                               Only two policies repealed (PS-70 and PS-63). Board adopted a new
       Repeal           4
                               policy, PS-78 to replace PS-63.
     Technical
                        5      No Acton.
    Amendments
    Substantive
                       31      Only one policy (PS-62) substantively revised.
    Amendments


POLICY STATEMENT 64
Policy Statement 64 is noted as criteria in several of the findings above. It
encompasses a broad range of Agency operation and is one of the most significant
governance documents at the Agency. As noted on the chart on page 3, the policy
contains all key elements of sound policy. However, the Policy Statement does not
address all key elements for each subject area contained within the policy. Bundling a
broad range of subjects in a single policy increases the likelihood that it will become
outdated. It may also make it more difficult for the Board to revise a single issue
because it opens the entire policy to revisions.

The OIG has previously suggested that the Board reexamine and obtain consensus on
this policy. During this review we noted multiple sections that are in need of substantive
review:

               Article II Sec. 5 indicates that in the event of a national emergency
               succession of the Chairman is to the member of the same party and then to
               the member of the minority party. The policy did not anticipate that the
               Chairman would be from the minority party.
               Article IV Sec. 1 provides the member from the Chairman’s party will preside
               over Board meetings if the Chairman is unable to do so. The policy did not
               anticipate that the Chairman would be from the minority party.
               Article VII Sec. 3 provides for oversight of financial and strategic
               management. It indicates the Board approves reallocation of budget amounts
               greater than $25,000. However, it does not address situations where funds
               are used from multiple offices, which potentially avoids Board review. This

1
    The workgroup suggested substantive changes to PS-62, PS-64, and PS-65.


SEPTEMBER 15, 2003                                                                        PAGE 4 OF 6
                            FCA OFFICE OF INSPECTOR GENERAL
                             BOARD POLICY STATEMENTS 03-05


          section also establishes the Strategic Planning and the IRM Steering
          Committees. However, these committees are not in operation. The section
          does not address the timing of the strategic plans and it leaves out critical
          planning efforts such as the Financial Management Plan and the Human
          Capital Plan. Finally, it lacks discussion of performance measures.
          Article VII Sec. 4 defines “heads of major administrative divisions” in a
          manner that is not consistent with the Farm Credit Act. Also, the section is
          silent with respect to removal of the heads of major administrative sections.
          Article VII Sec. 4 provides for relocation expenses of Board members. It
          states additional expenses may be authorized but does not delegate authority
          to any officer to make such a determination.
          Attachment B address Board oversight with regard to mass mailing but is
          silent regarding the FCA Website and mass emailing.


RECOMMENDATIONS

1) The FCA Board should establish a framework or methodology for its policies.
   The framework should:
   a) distinguish between policy over FCA operations and philosophy
      statements or directions provided to the Farm Credit System,
   b) outline the elements the Board expects its policies will contain,
   c) provide for more frequent review of and Board action on Policy Statements
      to ensure they reflect the position of the current Board members, and
   d) designate the Board Secretary as accountable to apply the framework.
2) The FCA Board should review its policies to ensure that it has established
   appropriate oversight of critical areas of FCA operations. The Board should
   specifically review the “key topics” noted on page 2 of this report.
3) The FCA Board should review Policy Statement No. 64 to consider:
   a) breaking the policy into several different policies,
   b) establishing a sunset provision after a change in membership, and
   c) revising the policy to eliminate oversights, inconsistencies and outdated
      items.




SEPTEMBER 15, 2003                                                           PAGE 5 OF 6
                              FCA OFFICE OF INSPECTOR GENERAL
                               BOARD POLICY STATEMENTS 03-05




   APPENDIX – LIST OF POLICY STATEMENTS


   Date        Months Old    Policy                                   Title
   3/25/1992      137       FCA-PS-37   Communications During Rulemaking
                                        Travel, Acceptance of Gifts and Travel-Related Expenses, and
  11/12/1992      129       FCA-PS-44
                                        Acceptance of Honoraria by the Board Members
                                        Implementing the 1992 Amendment to the Farm Credit Act,
   7/15/1993      121       FCA-PS-53
                                        Providing Flexibility in the Definition of an Examination
    3/6/1995      101       FCA-PS-66   Agency Cash and Liquidity Management
   3/20/1995      101       FCA-PS-65   Release of Consolidated Reporting System Information
   4/13/1995      100       FCA-PS-67   Nondiscrimination in Agency Programs and Activities
    5/9/1995       99       FCA-PS-59   Regulatory Philosophy
                                        FCS Building Association Management Operations Policies
    7/7/1995       97       FCA-PS-68
                                        and Practices
  12/11/1995       92       FCA-PS-69   Accountable Property Policy and Inventory Reconcilement
                                        Disclosure of the Issuance and Termination of Enforcement
   5/30/1996       87       FCA-PS-34
                                        Documents
   5/30/1996       87       FCA-PS-49   Disclosure of Camel Ratings
   6/13/1996       86       FCA-PS-71   Disaster Relief Efforts by Farm Credit Institutions
   2/10/1997       78       FCA-PS-41   Alternative Means of Dispute Resolution
    4/9/1998       64       FCA-PS-72   Financial Institution Rating System (FIRS)
   7/14/1998       61       FCA-PS-73   Philosophy on Intra-System Competition
  12/10/1998       56       FCA-PS-74   Interest Rate Risk Management
                                        Farm Credit System Service to Young, Beginning, and Small
  12/10/1998       56       FCA-PS-75
                                        Farmers and Ranchers
   1/14/1999       55       FCA-PS-76   Temporary Relief for Pork Producers
                                        Rules for the Transaction of Business and Operational
   9/24/1999       47       FCA-PS-64
                                        Responsibilities of the Farm Credit Administration Board
  11/10/1999       45       FCA-PS-77   Borrower Privacy
    5/3/2000       39       FCA-PS-78   Official Names of Farm Credit System Institutions
   9/12/2002       11       FCA-PS-62   Equal Employment Opportunity Programs and Diversity
Average            80




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