Credible Challenge: How Can You Prove It Happens?

11/6/2019 - By Jason Keith, CIA, CISA

A couple of years ago during my bank director training, I kept hearing an unfamiliar term - “Credible Challenge”. I left the training with a strong impression that boards are expected to demonstrate the ability to credibly challenge management on key decisions.

Let's start with a definition that in theory applies to all financial institutions in the FFIEC IT Management Booklet:

A credible challenge involves being actively engaged, asking thoughtful questions, and exercising independent judgment.

That sounds easy enough but I think there may be some value in further refining what a credible challenge is, especially with this definition in the Appendix C Glossary of the Comptrollers Safety and Soundness Management Handbook M-CRG Corporate and Risk Governance Section:

Credible challenge: The method that directors use to hold management accountable by being engaged and asking questions and eliciting any facts necessary, when appropriate, to satisfy themselves that management’s strategies are viable and in the bank’s best interests.

Credible challenge is active, thoughtful, and requires accountability. It challenges management as deemed necessary, is fact-based and demonstrates independent conclusions.

The Comptrollers Handbook references credible challenge 14 times. Three of those references provide insight into the expected attributes of credible challenge:

The ability to provide credible challenge is predicated on the qualifications of the directors and receipt of accurate, complete, and timely information.
Effective credible challenge among directors is healthy and can suggest that the board is independent and not operating under undue influence by management or from an individual director.
Is there evidence of a credible challenge of management’s decisions and recommendations recorded in the board meeting minutes?

Developing an environment that allows for credible challenge is possible and below are three practical applications for your consideration:

Institutions should seek to recruit or develop directors with expertise in specialized areas. As a practical matter all institutions could benefit from board expertise in Credit, Compliance, Technology, Finance, Interest Rate Risk/ALM. This expertise, if being developed, may need to include learning plans, certifications, and coursework covering more than a couple of hours in a webinar.
Those healthy discussions that sometimes get recorded in board minutes as “discussion ensued” could be broken out to document what questions were asked. Minutes may need to record who pushed back and if further research was required or a disagreement occurred. Directors with expertise or committee assignments should be encouraged to ask probing questions of management.
The Board may wish to perform a self-assessment to determine its effectiveness at developing expertise, challenging management (through review of documented minutes) and the validity of information sources (board packets) it uses for key decision making.

Documenting your board’s participation and encouraging thoughtful discussion of counterpoints is key to ensuring credible challenge. Spend a little time now to develop a proactive, engaged and well-documented board environment and you will be glad you did.

About the Author | Jason Keith, CIA, CISA
Jason is a consultant in the Financial Institution Advisory Group of Saltmarsh, Cleaveland & Gund. Jason specializes in technology solutions for various practice areas within financial institutions. Over the past 18 years, he has served in financial institutions as a Compliance Officer, Internal Bank Director, Operations Officer, Credit Administration Officer, Lender, Accountant, Chief Information Officer, Internal Auditor and Risk Officer.