forum for financial institution directors...forum for financial institution directors •...

Forum for Financial Institution Directors2017 Proxy Season Preparations

March 24, 2017

Guest Speakers:

John Roe, Institutional Shareholder Services, Inc.

Rhonda Brauer, New York City Office of the Comptroller

Forum for Financial Institution Directors

• Winston & Strawn LLP conducts an annual webinar series to assist financial institution directors to understand issues, regulatory requirements, investor priorities, and market realities.

• This series complements our Financial Services Update,which is designed to provide quick, readable, and ongoing information about what Congress, regulators, courts, and competitors are doing.

• If you wish to sign up to receive the Update, please visit Winston.com/subscribe.

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• MARK YOUR CALENDARS!• Three more 75-minute webinars:

• April 28 – Regulation in the Trump Administration: Prospects for Deregulation

• May 19 – The Current M&A Environment: Transactional and Litigation Perspectives

• June (date TBD) – The Directors’ Perspective: Financial Institution Directors Discuss Their Challenges

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Forum for Financial Institution Directors• 2017 Proxy Season Preparations• Speakers:

• Christine Edwards• Chair of Winston & Strawn LLP’s Bank Regulatory Practice• Nationally Recognized Expert on Corporate Governance• More than 30 years of experience, including as Former EVP and Chief Legal Officer of

Bank One and Morgan Stanley• Julius L. (“Jerry”) Loeser

• Of Counsel in Winston & Strawn LLP’s Bank Regulatory Practice• 46 years of bank regulatory experience• Former Federal Reserve Board lawyer, Chief Regulatory Counsel of Wells Fargo & Co.,

and Deputy General Counsel of Comerica Bank• Mike Melbinger

• Partner in Winston & Strawn LLP’s Executive Compensation Practice• Author of CCH Treatise Executive Compensation and Melbinger’s Compensation Blog• Nationally Recognized Expert on Executive Compensation• More than 30 years of experience

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Forum for Financial Institution Directors• 2017 Proxy Season Preparations

• Guest Speaker:• John Roe

• Chief Analyst, Institutional Shareholder Services, Inc., a business line of Institutional Shareholder Services focused on developing data and analytics products used by financial market participants. In this capacity, Mr. Roe also oversees the development of ISS’s quantitative methodologies covering compensation evaluation and governance scoring and coordinates the firm’s thought-leadership initiatives.

• Previously, Mr. Roe led Advisory & Client Service at ISS Corporate Solutions (“ICS”), a wholly owned subsidiary of Institutional Shareholder Services, where he grew and led a team of governance, executive compensation, and ESG experts. Prior to ICS, Mr. Roe was Chief Operating Officer and Chief Compliance Officer of a registered institutional investor. Mr. Roe also served on the White House staff, was a consultant with McKinsey & Company, and served as a military officer.

• Contact information:• [email protected]

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mailto:[email protected]

Forum for Financial Institution Directors• Institutional Shareholder Services, Inc. (“ISS”)

• Largest proxy advisor in U.S. controlling 61% of the market• Provides resources for companies such as:

• Objective governance research and recommendations;

• Socially responsible investment data, analytics, and research;

• End-to-end proxy voting and distribution solutions;

• Reliable global governance data and modeling tools.

• Institutions rely on ISS to understand the corporate governance environment, identify governance risks, and manage proxy voting needs.

• ISS provides voting recommendations to institutional clients in accordance with policies updated annually.

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ISS | Institutional Shareholder Services Inc.

Institutional Shareholder Services Overview

ISS Data

ISS Analytics

ISS ResearchISS

Corporate Solutions

• More than 900 employees in 18 offices across 12 countries

• Review and recommend on more than 350,000 agenda items at 28,000 public companies annually across 117 global markets

• Research staff averages 6 years of ISS tenure

• Owned by Vestar Capital Partners, a private equity firm

• Registered with the SEC as an RIA and subject to periodic inspection

• Strong physical and IT firewall separating ISS Research from ISS Corporate Solutions

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Conceptual ISS organization structure*

* Does not include certain parts of the organization, including Securities Class Action Services and Global Proxy Voting

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Benchmark ISS policies• U.S. Benchmark Policy• European Benchmark Policy• NAPF Policy (for the UK)• International Benchmark Policy

Specialty ISS Policies

• Taft-Hartley Labor Policy• Socially Responsible Policy• Faith-based Policy • Sustainability Policy• Public Fund Policy

Client-Specific policies• 400+ client-specific custom policies• Fastest growing area of research, as our

clients increasingly want to execute votes consistent with either their overall governance philosophy or that of their clients

ISS delivers policy and research services that cover a spectrum of shareholder interests to align with client philosophies as they serve their underlying clients

The world is getting more complicated

A real world example: ISS produced more than 250 research reports for Apple’s 2016 annual meeting, each

based on a different policy implementation.

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Institutions do not vote in lock-step with ISSMore than 200 custom policy vote recommendations issued on each of these firms

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For11%

Against74%

Refer 15%

For82%

Against7%

Refer 11%

Widely-held S&P 500 company, received “For” recommendation from ISS

Widely-held S&P 500 company, received “Against” recommendation from ISS

Recommendations issued under custom client voting policies

Recommendations issued under custom client voting policies

Goal of ISS benchmark policy is to address the needs and mirror the philosophy of the largest number of ISS client shares voted as possible

Forum for Financial Institution Directors• 2017 Proxy Season Preparations

• Guest Speaker:• Rhonda Brauer

• Director of Corporate Engagement for the Bureau of Asset Management in the Office of New York City Comptroller, which serves as investment advisor, custodian and a trustee to the New York City Pension Funds, which have more than $170 billion in assets and a long history of active ownership on issues of corporate governance and sustainability.

• Ms. Brauer is a securities attorney and corporate governance expert with extensive experience working with both boards of directors and investors on a wide range of issues. Prior to joining the Comptroller’s Office, she advised company management and directors on governance and shareowner engagement issues, both as Secretary & Corporate Governance Officer for The New York Times Company and as Senior Managing Director for Corporate Governance at Georgeson, a leading proxy solicitation firm. Ms. Brauer was also a Senior Fellow at The Conference Board’s Governance Center, and is a member of the Council of Institutional Investors and the Society for Corporate Governance (formerly the Society of Corporate Secretaries & Governance Professionals).

• Contact information: • [email protected]

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• City of New York Office of Comptroller• Investment advisor to, and custodian for, the City’s five public pension

funds, holding nearly $170 billion in assets.• Providing retirement security to 700,000 current and former City employees.

• Trustee to four of those funds.

• Advocates corporate governance policies and practices to improve the long-term financial performance of portfolio companies.

• In fall 2014, launched the Board Accountability Project.

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• New Environment for Financial Institutions• Executive Compensation• Director Compensation• Proxy Access• Shareholder Activism• Shareholder Engagement• Key Issues: Corporate Integrity and Corporate Culture• Overboarding• Restrictions on Shareholder Rights• Emerging Issues

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• Questions • Do you consider governance standards for regulated financial

institutions differently than for other companies? Are the statistics different for this industry than others?

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• New Environment for Financial Institutions• New Administration and Appointees• Flurry of Presidential Executive Orders and Memoranda

• Additional layer of review before new regulations are finalized• Agency hiring freeze• Repeal two regulations for every new regulation• Seven core principles for regulating the financial system• Each agency to designate a regulatory reform officer and establish a regulatory reform task force• Reorganization and streamlining of executive branch

• Other Personnel Changes• Federal Reserve Board

• By June 2018, five new Governors of seven-member Board

• New General Counsel

• Federal Deposit Insurance Corporation• Comptroller of the Currency • Securities and Exchange Commission

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• Question• How will the new leadership in the Administration and in independent

Government Agencies affect public company governance?

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• Executive Compensation• The SEC is on high alert for non-GAAP financial disclosures,

including in the executive compensation area.• Review the compensation risk assessment process and disclosure in

light of regulator concern.• Compensation clawback issues still a focus of investors, policy

makers and the media.

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Forum for Financial Institution Directors• Director Compensation

• NASDAQ issued a “golden leash” rule in 2016.• Individual director compensation is to be published on company’s website or in the

definitive proxy statements.• Litigation over excessive non-employee director compensation.• Some companies submit non-employee director compensation programs for

shareholder ratification.• In assessing whether to recommend in favor, ISS will consider:

• The relative magnitude of director compensation compared to companies with similar profiles;• The presence of problematic pay practices;• Director stock ownership guidelines and holding requirements;• Equity award vesting schedules;• Mix of cash and equity-based compensation;• Limits on director compensation;• Availability of retirement benefits or perquisites; and• Quality of disclosure of director compensation.

• ISS may not favor option repricing or liberal change in control vesting.

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• Director Compensation – Evolving Best Practices • Meaningful limits on directors’ stock awards and total compensation,

approved by shareholders;• Independent compensation consultant review of the board’s

compensation package;• Benchmarking board members’ compensation against that of the

company’s peer group (part of the independent review); and• Enhancing disclosure made in the proxy statement as to the process

for setting board compensation and proudly disclosing the fact that the board has retained an independent consultant to review of its compensation program and benchmarked it against the company’s peers. (If board’s compensation is at or near the high end of the peer group, disclosure can explain the reason why the board believes this level is appropriate.)

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• Questions• Is executive compensation a more important priority than it has been

in the past?• How should director compensation be viewed in the context of

increasing responsibilities and amount of time required?

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Forum for Financial Institution Directors• Proxy Access

• Remains in spotlight• The market standard position for proxy access is:

• 3% voting stock ownership requirement; • such shares being held for at least 3 years; • limiting the nomination rights of such shareholders to the greater of 2 or 20% of the

Board; and • limiting to 20 the maximum number of investors that can aggregate their holdings

for purposes of reaching the above ownership thresholds.• This is commonly known as “3/3/20/20 standard.”

• Expected to be the most common shareholder proposal for 2017.• In fall 2014, New York City Comptroller launched the Board Accountability Project.

• Since then, at least 400 companies have adopted proxy access.

• Proxy access represented 54 of 231 proposals submitted to the SEC for no-action letters in 2016.

• ISS estimates that over 52% of S&P 500 companies and 13.2% of Russell 3000 companies have adopted proxy access bylaws.

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Forum for Financial Institution Directors• Proxy Access (continued)

• SEC staff proxy review process• Proponents may seek to amend proxy access terms with which they disagree.

• Potential changes to:

• percent voting stock ownership requirement,

• length of share ownership,

• nomination rights on percent of board, or

• maximum number of investors that can aggregate their holdings to reach the ownership thresholds.

• The SEC has provided guidance on SEC Rule 14a-8(i)(10) on the issue of “substantially implemented.” Will new SEC leadership review guidance for changes?

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• Question• What do the ISS statistics demonstrate in the number of financial

institutions adopting proxy access bylaws?

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• Shareholder Activism• In 2016, there were 233 publicly reported activist shareholder

campaigns in the U.S.• Many activist campaigns may not have been publicly reported because they

were privately resolved.• There are approximately 4,200 public companies in the U.S.; thus,

approximately 5% of them experienced activist campaigns last year.• Former SEC Chair White suggested management should not assume the term

“shareholder/investor activism” has a negative connotation.• Will new SEC leadership change this perspective?• How will private ordering impact this change if it occurs?

• Should boards and management adopt a different attitude and willingness to examine issues related to governance?

• Query: do activist campaigns promote short-termism at the expense of long-term strategy?

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• Question• How do your organizations view shareholder activism versus the

ability of management and the board to address long-term strategy?

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• Shareholder Engagement• Provides management and boards of public companies with information

regarding the priorities of their shareholders and analysts.• Engagement should be defined as listening exercises and mutual-

education.• Parameters should be established at the outset that information should be

provided by the CEO, CFO and management re: director involvement.• Directors should provide an overview of governance priorities and practices.• Key discussion includes CEO and executive management compensation.

• How do you know you have the right people in the board room?• Are they competent on diversity, ESG and governance?

• New development: State Street and Blackrock publicly address new engagement priorities.• Both organizations may vote against nominating or governance committees that

do not reflect a commitment to board diversity.

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• Question • What are company best practices to proactively address shareholder

engagement?

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• Key Issues: Corporate Integrity and Corporate Culture• Focus of Regulators• Affects share value• Director Oversight

• Ethical conduct and compliance• Evaluate officers and the Board as well• Evaluate compensation programs to ensure incentives are properly

structured and do not detract from integrity• Company culture emphasizes criticality of ethical conduct and compliance• Scrutinize conflicts of interests• Effectiveness of compliance systems• Consider periodic third-party assessment of management and director

oversight

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• Question • Is your organization developing a standard on corporate integrity?

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Forum for Financial Institution Directors• Overboarding

• ISS’s and Glass Lewis’s new policies take effect in 2017.• Recommend against directors who are not sitting public company CEOs if they serve

on more than five public company boards.• Only 26 directors now serve on more than five public company boards.• Only one director at a Russell 3000 company in 2016 received less than majority support for

holding too many board seats.

• ISS will also recommend against• Public company CEOs if they serve on more than three public company boards.

• Glass Lewis will also recommend against• Public company executive officers if they sit on more than two public company boards.

• Neither will recommend against executives at their home company boards.• Glass Lewis will consider

• Size and location of companies• Director board duties• Service on large private company boards• Director tenures• Director attendance records

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• Questions• What do ISS statistics for overboarding look like for financial institution

directors?• Will overboarding standards make it harder to attract director

candidates?

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Forum for Financial Institution Directors• Restrictions on Shareholder Rights

• Bylaw provisions:• securities class actions may only be brought in Delaware• setting voting standards for directors or bylaw amendments• limiting action by written consent• restricting right to call special meetings

• A new ISS policy• ISS will recommend against members of the governance committee if the

company “unduly” restricts shareholder ability to amend bylaws.• “Undue” restriction includes:

• A prohibition against the submission of binding shareholder proposals and• Share ownership requirements or time holding requirements in excess of SEC Rule 14a-8

($2,000 or 1% for at least a year).

• ISS will continue to recommend a negative vote until the restrictive provision is removed.

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• Questions• If you had to pick one of the bylaw provisions mentioned on the prior

page, which one would be your highest priority?• For the new ISS policy, what about newly spun-off companies?

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• Emerging Issues• Priorities in the Trump Administration

• Will the environment for governance standards shift from the Federal Government/Agencies to investors/shareholders/proxy advisory firms?

• Gender equality and board diversity

• Climate change• Changing priorities of the EPA versus increasing investor focus on environmental and

climate change issues.

• Board awareness of social issues• A 2016 survey of 631 directors revealed that corporate social responsibility was

among the five items they believed needed more board discussion time.

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• Question• What other issues are emerging?

• Equator Principles• 89 financial institutions across 37 countries are signatories.

• Consider project finance due diligence procedures (e.g., indigenous rights).

• Snap Inc. IPO• Multiple class ownership/voting structure.

• First public offering of common shares with no voting rights.

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• Contact Information• Chris Edwards, Partner

• 1-312-558-5571• [email protected]

• Jerry Loeser, Of Counsel• 1-312-558-5985• [email protected]

• Mike Melbinger, Partner• 1-312-558-7588• [email protected]

• Sterling Sears, Associate• 1-312-558-6208• [email protected]

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