The board of governors is a bunch of people who have the official capacity to supervise the workings and business operations of an organization. Their responsibilities include the decision-making about all business and financial matters.
For example, the banks in the Federal Reserve System in the U.S. have a Federal Reserve board of governors that are responsible for regulating the banking and credit-related operations. The Federal Reserve board of governors serves the most crucial role in making and regulating a nation’s monetary policy.
What is a Board of Governors?
Definition: The board of governors is defined as the main governing body of a system that has the task to oversee all the operations and help the system to implement its policies. For example, the board of governors of a central bank regulates banks functioning in the country and performs banking supervision.
The shareholders of that institution appoint the board of governors by electing the members. The upper management can also be responsible for electing the member of the board of governors; this is to the organization’s discretion.
Various institutions, universities, colleges, media houses, the IMF, the US Postal Service, etc., all have their board of governors who are responsible for managing the organization. Additionally, different professional organizations such as the Financial Industry Regulatory Authority and the CFA Institute also have their board of governors.
Board of Governors of the Federal Reserve System
When it comes to the U.S. Federal Reserve (the U.S.’s central bank), the board of governors is selected by the President himself for a term of 14 years. The seven members of the US Federal Reserve Board are supposed to be confirmed by the Senate as well once the President chooses them.
The national monetary policy of any nation is taken care of by the central bank of the country. The central bank of the United States, the Federal Reserve System, with being the financial advisor for the U.S. government and regulating banks, also decides the country’s monetary policy. The system is under a board of directors appointed by the President and confirmed by the senate. Employing over 1800 people, it has seven board members who hold the office for 14 years.
History of Federal Reserve Board of Governors
Started with a small number of 5 members, the Federal Reserve System was pretty different from today. For starters, it didn’t operate with the level of freedom that it has today. Created in 1914, the board had the secretary of the Treasury and the comptroller of the currency as default members, and the rest three were appointed by the President, obviously, with the approval of the senate.
The chief administrators of the Board were the governor and the vice governor, with the secretary of the Treasury assuming the role of the chairman. The earliest of the conflicts included one where the power of the secretary of Treasury and the comptroller of the currency, William McAdoo and John S. Williams, respectively, was under scrutiny. The Board meetings were suspected to be held in the treasury department, and a link was being established between them and the administration.
The link with the administration created room for undue influence of the Treasury in political decisions and the monetary policy having a shadow of the administration. The independence of the institutions was in danger. The solution to this was suggested to hold the Board meetings out of the treasury department at Washington, D.C., basically to keep the secretary and the comptroller from attending.
This solution, instead of a proposal by other Board members, wasn’t given any wind because the Banking Act of 1935 removed the secretary of the Treasury and the comptroller of the currency from the list of the Board members. The act gave the role of the chairman to the governor, the vice governor became the vice-chairman, and the number of Board members was increased to 7 from 5 earlier.
Later in 1937, the Federal Reserve System was given its headquarters in Washington. To prove the absence of polarisation in the reserve system, both major political parties chose the same chairman. This served the apolitical nature of the Board.
Appointing Members to the Board of Governors
As given by the law, the President of the United States is supposed to nominate the Board members that depicts a “fair representation of the financial, agricultural, industrial, and commercial interests and geographical divisions of the country” nature of the appointment.
- While the governors are elected for 14 years, no two governors can be from the same district (having 12 official Federal Reserve Districts).
- A governor can’t be removed from the office for their policy views. Governors who have completed their term can’t be reappointed, but a governor who is elected to complete the unfinished term can be reappointed to serve a full 14-year term. The 14-year term is staggered, having a term expiring on 31st January of every even-numbered year.
- The staggard-term condition is there to ensure the insulation of the Board from the political happenings in the country. The Banking Act of 1935 made it mandatory for every President’s four-year term to select one of the seven governors.
- That governor chosen by the President during their term will be the spokesperson of the Board, the chairman at the Board meetings, and the representative of the Board as a whole.
- Ben S. Bernake, who was appointed as the chairman of the Board in 2006, also chairs the Federal Open Market Committee, which is the System’s principal monetary policymaking body.
Duties of the Federal Reserve Board of Governors
Seven of the twelve seats of the Federal Open Market Committee (FOMC) that form the country’s monetary policy are taken by the members of the Board of the Federal Reserve Bank.
The rest of the five members are the presidents of the 12 regional reserve banks. The chairman of the Federal System’s board members chairs the FOMC. Let us have a look at some of the duties of the board of governors are-
- The Board has the responsibility to analyze all the economic happenings in the country and make decisions according to them.
- Regulating the regional banks, managing the operations of the Federal Reserve System, handling the country’s payment system, and making laws that protect the consumers’ credit are some of the critical functions of the board.
- Other essential operations of the Board include the changes in the reserve requirements, approving budgets, making appointments for the directors, and testifying before the congress for various issues such as monetary policy, consumer credit protection, etc.
Board of Directors vs Board of Governors
Some institutions such as non-profit organizations, academic institutions, government divisions, etc have a board of directors as their governing body. On the other hand, corporations are mandated by the law to appoint a board of governors to regulate business operations and financial decisions. However, when an organization has two or more boards, the board of governors has the supreme authority.
Board of Governors FAQs
1. How many members can be on the board of governors of the Federal Reserve System?
2. Who appoints the members?
The President of the U.S. nominates the members who are confirmed by the senate.
3. Why are members elected for a staggered 14-year term?
The staggered term ensures the stability of the Board.
4. What are the 12 Banks of the Federal Reserve?
The 12 banks of the Federal Reserve are the Federal Reserve Banks of San Francisco, Minneapolis, Dallas, Kansas City, St. Louis, Chicago, Cleveland, Atlanta, Boston, New York, Richmond, and Philadelphia.
The board of governors of the Federal Government Agency of the U.S. is a group of highly competent members who make regulations for the US central bank.
Hence, it is clear that the board of governors is a group of qualified people who are responsible for managing and regulating a system or organization.
How important do you consider the board of governors in overseeing an institution? Share your opinion with us in the comment section below.