42
© 2013 Winston & Strawn LLP 1 Forum for Financial Institution Directors Second Session: 2014 Proxy Season Preparations December 16, 2013

Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

  • Upload
    others

  • View
    1

  • Download
    0

Embed Size (px)

Citation preview

Page 1: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 1

Forum for Financial Institution Directors Second Session: 2014 Proxy Season Preparations

December 16, 2013

Page 2: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 2

Today’s Presenters

Christine A. Edwards Financial Services Regulatory &

Corporate Governance Chicago

[email protected]

Jerry Loeser Financial Services

Regulatory/Compliance Chicago

[email protected]

Erik Lundgren Executive Compensation

Chicago

[email protected]

Mike Melbinger Executive Compensation

Chicago

[email protected]

Oscar David Corporate Governance

Chicago

[email protected]

Page 3: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 3

Today’s Guest Presenter

Patrick McGurn Special Counsel

Institutional Shareholder Services, Inc.

Page 4: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 4

Winston & Strawn LLP Forum for Financial Institution Directors • Three Part Series

– What Do Regulators Expect from Directors? • November 22, 2013-available @ Winston.com

• Speaker: James W. Nelson, Federal Reserve Bank of Chicago

– 2014 Proxy Season Preparations 12/16/13

– How Do Directors Prepare for the Worst? • January 15, 2014

• Securities Derivative Litigation, Criminal enforcement, D&O Liability Insurance issues.

• Mark your calendar now for the January 15, 2014 Webinar

Page 5: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 5

Overview

• Second in a series of Webinars directed to Financial Institution Directors • Focus: to inform Directors what you need to know when expectations for

Boards and Committees are increasing • Today's Topic: Preparing for the 2014 Proxy Season with implications for Board

Governance

Page 6: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 6

Agenda: Preparing for 2014 Proxy Season

I. Introductory Comments: C. Edwards II. Introductory Comments: P. McGurn III. Roundtable Discussion of Issues: All

– Board Composition, Independence and Tenure

– Executive Compensation and Committee Oversight

– Proxy Results 2013 and decision making for 2014

– Shareholder rights; M&A transactions

– Governance Issues

Page 7: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 7

Introductory Comments: Chris Edwards • Overview of Governance Changes as perspective for 2014 Proxy Season

Page 8: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 8

Are Director Responsibilities Changing from Oversight to Management?

• Increasing regulatory expectations appear to move Directors from an oversight role to actual management.

• Trend began as traditional state corporate law dominance (Delaware) was supplemented by Federal corporate governance laws – Sarbanes-Oxley Audit Committee requirements

– Dodd-Frank Compensation Committee and Board requirements

Page 9: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 9

Regulatory Expectations of Directors

• Prudential regulators have substantially increased requirements for Financial Institutions Boards and then examine Board performance of, and management reporting to the Board regarding those responsibilities.

• Examples: – review and approve incentive compensation plans for risk incentives

– review and approve information security programs

– approve resolution plan

– proposed liquidity coverage approval

• "Directors must exercise their independent judgment when managing the bank's affairs…A board that is excessively influenced by management, a single director, or a shareholder, or any combination thereof, may not be fulfilling its responsibilities…" – Source: FRB Commercial Bank Examination Manual

Page 10: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 10

Example: Regulation O

• Limits on the amount a bank may lend Directors of bank and bank holding company – Subjects Directors and their related interests to special restrictions on loans,

overdrafts and different treatment on bank services.

• Additional Layer: Hedging and Derivative Prohibition in Dodd-Frank

Page 11: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 11

Introductory Comments: Patrick McGurn • Overview of ISS Priorities as they relate to Financial Institutions

Page 12: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 12

Evolving Governance Practices at Banks and Diversified Financials (2007-2013)

Pat McGurn Special Counsel

Institutional Shareholder Services

Data Source: ISS’ QuickScore Database

Page 13: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 13

Directors More Accountable

2007 2010 2013Banks 44.4 53.3 86.7Diversified Financials 57.1 65.4 75

0102030405060708090

100

% S

&P

500

Prevalence of Annual Elections

Page 14: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 14

Elections More Meaningful

2007 2010 2013Banks 5.6 73.3 86.7Diversified Financials 28.6 76.9 89.3

0102030405060708090

100

% S

&P

500

Prevalence of Majority Voting in Uncontested Elections

Page 15: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 15

Board Leadership Changes

2007 2010 2013Banks 5.6 13.3 13.3Diversified Financials 4.8 23.1 28.6

0

5

10

15

20

25

30

35

% S

&P

500

Prevalence of Independent Board Chairs

Page 16: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 16

Takeover Defenses Fall

2007 2010 2013Banks 16.7 0 0Diversified Financials 28.6 0 0

0

5

10

15

20

25

30

35

% S

&P

500

Prevalence of Poison Pills

Page 17: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 17

Rising Support for Pay Practices

2009 2010 2011 2012 2013Banks 85.9 84.3 93.5 91.7 92.4Diversified Financials 88.9 86.9 87.2 88.1 91.3

78808284868890929496

% V

otes

Cas

t For

and

Aga

inst

S&

P 5

00

Vote Support on Say on Pay

Page 18: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 18

Background: Board Governance Issues

• Governance Environment and Director Qualifications • Director Tenure Issues

Page 19: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 19

Governance Environment and Director Qualifications

• Governance Environment Observations: – Greater frequency of Board and Committee meetings

– Increasing detail and size of Board and Committee materials

– Increasing regulatory mandated reviews and approvals

– Level of sophistication to understand requirements increasing

– Number of Director/Regulator meetings is increasing (many in Executive Session)

– Holding Company: across line of business oversight requirements increasing

• Implications of Environment on Director Qualifications – Director knowledge and experience in the industry critical

– Director candidates who are in Executive Positions availability decreasing

– Board size is shrinking

– Greater responsibility for each director on smaller boards

– Complexity of issues reviewed in Committees (particularly Risk Committees) requires substantial time for preparation.

– Professional boards?

Page 20: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 20

Governance Environment and Director Qualifications

• Director Qualifications and Tenure – Question: with this level of time, knowledge and sophistication required of directors, is

a shorter tenure for directors a good thing?

– Said another way, how long does it take for directors of financial institutions know their institution and be capable of doing their job well?

Page 21: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 21

Page 22: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 22

Executive Compensation and Compensation Committee Responsibilities

Erik Lundgren Executive Compensation

Chicago

[email protected]

Mike Melbinger Executive Compensation

Chicago

[email protected]

Page 23: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 23

Executive Compensation and Compensation Committee Issues • Independence of Compensation Committee and Advisors • Say on Pay Strategies - Shareholder Proposals • Hedging, Pledging and Rule 10b5-1 Trading Plan Policies • CEO Pay Ratio Disclosure • Limits on Awards to Directors

Page 24: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 24

Dodd-Frank Report: SEC Rulemaking

• Effective Now – Shareholder Say on Pay and Say on Pay Frequency

– Shareholder Approval of Golden Parachute Compensation

– Disclosure Regarding Chairman and CEO Structures

– Elimination of Discretionary Voting by Brokers on Executive Compensation Proposals

– Whistleblower Bounties

– Independence of Compensation Consultant, Legal Counsel, and Other Advisers

– Compensation Committee Member Independence

• Effective 2015/2016? – Pay Ratio Disclosure

• Still Waiting – Policy on Recovery of Erroneously Awarded Compensation

– Disclosure of Hedging by Employees and Directors

– Disclosure of Pay Versus Performance

– Incentive Compensation for Financial Institutions

Page 25: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 25

Independence of Compensation Committee Advisors

• Action Items for Compensation Committees and Companies – Confirm the independence of the compensation committee members under new

standards - annually

– Update D&O questionnaire

– Complete certification re: compensation committee matters (NASDAQ)

– Verify that Compensation Committee Charter prior to compliance deadline has been amended

Page 26: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 26

Say On Pay Results

• Overall passage rate for Say on Pay remains high • So far in 2013, 69 companies failed to obtain majority approval of their Say on

Pay proposals – Institutional Shareholder Services (“ISS”) cited Pay for Performance Disconnect or

Problematic Pay Practices at most of these companies

• 72% of companies have passed with over 90% approval • ISS recommended a vote AGAINST Say on Pay at approximately 13% of

companies it reviewed • ISS effect?

– Average approval with ISS “for” - 95%

– Average approval with ISS “against” - 65%

Page 27: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 27

Say On Pay Results

• Companies that adopted a triennial frequency in 2011 must again include a Say on Pay proposal in the 2014 proxy statement

• Not less frequently than once every three years, Company's annual proxy statement must include a separate non-binding resolution asking shareholders to vote to approve the compensation of executives, as disclosed under Item 402 of Regulation S-K

• For smaller reporting companies, confirm whether Say on Pay proposal is to be included again in 2014 (dependent on frequency decision)

Page 28: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 28

Shareholder Resolutions

• Shareholder proposals regarding executive compensation decreased in 2011, as shareholders and their advisors gained Shareholder Say on Pay right – 39 shareholder proposals on executive compensation in 2011

– 61 shareholder proposals in 2012

– More than 100 in 2013

– Many more withdrawn – but often only after the targeted company agreed to make changes

• Extremely high success rate of companies’ SSOP resolutions and the lack of response by some companies that failed to achieve a majority vote in favor of their SSOP resolutions seem to have led shareholders and their advisors back to shareholder proposals

Page 29: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 29

Shareholder Resolutions

• The most common shareholder proposals in 2013 were requests for – Adoption of a stock retention policy

– Adoption (or improvement) of a compensation clawback policy

– Pro-rata vesting of equity awards, rather than acceleration, upon a change in control

• The strategy for avoiding a shareholder proposal is much like the strategy of achieving a majority vote in favor of Say on Pay. The Compensation Committee should review the areas where its compensation policies and practices differ substantially from those demanded by shareholders and their advisors (i.e., ISS)

Page 30: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 30

Hedging and Pledging Policy

• Dodd-Frank Act Section 955 requires disclosure in annual Proxy Statement whether the Company permits any employees or directors to purchase financial instruments (including prepaid variable forward contracts, equity swaps, collars, and exchange funds) that are designed to hedge or offset any decrease in the market value of equity securities that are/were: – Granted to the employee or director as compensation; or

– Held, directly or indirectly, by the employee or director

Page 31: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 31

Hedging and Pledging Policy

• ISS Final Policies for 2013 • Key Change: hedging of company stock and significant pledging of company

stock by directors and/or executives are considered failures of risk oversight • Examples of failure of risk oversight include, but are not limited to: bribery; large

or serial fines or sanctions from regulatory bodies; significant adverse legal judgments or settlements; hedging of company stock; or significant pledging of company stock

Page 32: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 32

CEO Pay Ratio Disclosure

• Dodd-Frank Act Section 953(b) requires every public company to disclose: – A.) The median of the annual total compensation of all employees, except the CEO

(including employees outside the U.S.)

– B.) The annual total compensation of the CEO (or any equivalent position) of the company

– C.) The ratio of the amount described in subparagraph (A) to the amount described in subparagraph (B)

Page 33: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 33

CEO Pay Ratio Disclosure

• SEC proposed rules on September 18, 2013 • Likely to be first effective for the 2016 proxy statement, for calendar year-end

companies • However, some shareholder activists have announced their intention to

pressure targeted corporations to make this disclosure in 2014

Page 34: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 34

CEO Pay Ratio Disclosure

• Will this disclosure become a magnet for new litigation? – The calculation will inevitably involve assumptions and discretion

– This disclosure is easier to understand (for judges) than stock plan approval

– It will be easy to find an “expert” who will testify that any given formula for calculating the ratio is misleading

– Resolution sponsors are likely to push litigation and may even initiate litigation

– Advisers are certain to create innovative formulas for calculating the ratio – some of which are likely to be on the aggressive side

Page 35: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 35

Limiting Shares Available: Director Awards

• A condition precedent to filing a shareholder derivative suit is to file a demand with the company’s board of directors that it investigate and/or bring legal action to remedy the alleged wrong against the company

• However, this “demand” is excused if (a) a majority of the board was “interested” in the allegedly wrong decision or lacked independence, or (b) decision was not the result of valid business judgment

• Since the SEC changed the “disinterested director” requirements, conventional wisdom has been to provide for stock awards to non-employee directors from the same stock incentive plan that the company uses to provide awards to everyone else.

• Seinfeld v. Slager, Delaware Chancery Court declined to dismiss plaintiffs’ stock incentive plan related claims alleging that the company’s directors had breached their fiduciary duty to shareholders by paying themselves excessive compensation.

Page 36: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 36

Limiting Shares Available: Director Awards

• Four risk based alternatives for company/board action (see following chart)

• Board Action: weigh the costs of seeking shareholder approval under the first two alternatives, versus the potential litigation risk during the time before the company can adopt more comprehensive protection

• Recent Towers Watson survey found that 22% of the Fortune 500 companies that adopted or amended stock plans this past year added a director-specific annual grant limit to their plans.

Page 37: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 37

Risk of Shareholder Derivative Litigation Compared to the Cost of Reducing the Risk

Cost/ Effort

Risk

Higher

Higher

Lower

Lower

Adopt a New, Separate Stock Plan for Non-Employee Directors Amend Stock

Plan to Impose Limits on Awards to Non-Employee Directors and Seek Shareholder Approval

Amend Stock Plan to Impose Limits on Awards to Non-Employee Directors No Action

Page 38: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 38

Roundtable Discussion

• OTHER TOPICS: – M&A

– Resolutions seemingly remote from financial services business

– International initiatives

Page 39: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 39

Page 40: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 40

Questions?

Page 41: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 41

Winston & Strawn LLP Forum for Financial Institution Directors • Three Part Series

– What Do Regulators Expect from Directors? • November 22, 2013-available @ Winston.com

• Speaker: James W. Nelson, Federal Reserve Bank of Chicago

– 2014 Proxy Season Preparations 12/16/13

– How Do Directors Prepare for the Worst? • January 15, 2014

• Securities Derivative Litigation, Criminal enforcement, D&O Liability Insurance issues.

• Mark your calendar now for the January 15, 2014 Webinar

Page 42: Forum for Financial Institution Directors Second Session ...€¦ · III. Roundtable Discussion of Issues: All – Board Composition, Independence and Tenure – Executive Compensation

© 2013 Winston & Strawn LLP 42

Thank You