2016 Proxy Season Preparations March 11, 2016 Guest Speaker - - PowerPoint PPT Presentation

Forum for Financial Institution Directors

2016 Proxy Season Preparations

March 11, 2016 Guest Speaker Patrick McGurn, Institutional Shareholder Services, Inc. Christine Edwards, Winston & Strawn LLP Karen Weber, Winston & Strawn LLP Jerry Loeser, Winston & Strawn LLP

• Winston & Strawn conducts an annual webinar series to

assist Financial Institution directors in understanding issues, regulatory requirements, investor priorities and market realities.

• This series complements our weekly Financial Services

Update which is designed to provide quick, readable, and

• ngoing information about what Congress, regulators, courts

and competitors are doing.

• If you wish to sign up to receive the Update, please visit

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MARK YOUR CALENDARS!

Three More 75-minute Webinars:

• Today

2016 Proxy Season Preparations

• April 8

Personal Liability and Other Considerations

• April 29

The Directors’ Perspective

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Christine Edwards

• Chair of Winston & Strawn’s bank regulatory practice
• Nationally recognized expert on corporate governance
• Over 30 years of experience, including as Former EVP and Chief

Legal Officer, of Bank One and of Morgan Stanley

• Karen Weber
• Partner in Winston & Strawn who concentrates her practice in public

securities offerings, securities law compliance, and corporate governance.

• Represents companies and underwriters in debt and equity offerings

Forum for Financial Institution Directors

2016 Proxy Season Preparations

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Julius L. (“Jerry”) Loeser

• Of Counsel in Winston & Strawn’s bank regulatory practice
• 45 years of bank regulatory experience
• Former Federal Reserve Board lawyer, chief regulatory counsel at

Wells Fargo & Co., and Deputy General Counsel at Comerica Bank

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2016 Proxy Season Preparations

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• Institutional Shareholder Services, Inc. (“ISS”) and Glass Lewis & Co. (“Glass Lewis”)

are the largest proxy advisors in the US, respectively controlling 61% and 36% of the proxy advisory market.

• Proxy advisors provide resources for companies with services such as: objective

governance research and recommendations; socially responsible investment data, analytics, and research; end-to-end proxy voting and distribution solutions; turnkey securities class-action claims management; and reliable global governance data and modeling tools.

• Institutional clients use proxy advisors to better understand the corporate governance

environment, identify various governance risks and manage their proxy voting needs.

• Proxy advisors provide voting recommendations to their investor clients in

accordance with their policies, which are updated each year. Some proxy advisors employ a process to solicit outside views through policy surveys regarding possible changes.

• Available resources to companies and investors:
• ISS policies by contacting the “ISS Research Helpdesk” at Usresearch@issgovernance.com or

301.556.0576

• Glass Lewis policies at info@glasslewis.com or 888.800.7001

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Proxy Advisors

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Guest Speaker: Patrick McGurn Special Counsel Institutional Shareholder Services, Inc.

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2016 Proxy Season Preparations

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Governance Practices at Banks and Diversified Financials

ISS QuickScore Data for S&P 500 Banks (17) Diversified Financials (26) Board size 13.6 directors 12.2 directors % of independent directors 87.2% 83.8% % of current/former insiders 10% 11% # of financial experts 2.8 2.7 Combined CEO/chair 13 of 17 15 of 26 Independent chairs 3 of 17 7 of 26 Independent “lead director” 15 of 17 18 of 26 Overboarded CEOs 3 of 17 1 of 26 Overboarded outside directors 1 of 26 Truants on boards at # firms 2 of 17 Majority voting 14 of 17 24 of 26 Average support for directors in ’15 97.4% of votes cast (218) 98.6% of votes cast (288) Average support for MSoP in ‘15 91.3% of votes cast 95.2 percent of votes cast (24) Top SH proposal topics for ’16 (Source: ISS Voting Analytics Database) Proxy Access, Double Trigger (AV), Lobbying, Independent Chair (IC) & Clawbacks (Derivatives out at SEC) Access, Lobbying, Employment Diversity, Simple Majority Vote, AV & Data Security. Voting on climate change and CEO pay.

1. Role of Board 2. Director Qualifications 3. 2016 Proxy Issues: Proxy Access 4. 2016 Proxy Issues: Activist Shareholders 5. 2016 Proxy Issues: Executive Compensation 6. Other Issues:

I.

Diversity

II.

Lobbying Spend and Political Contributions

III.

Related Party Disclosure Standard

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• Increasing regulatory expectations
• Oversight vs. approvals vs. 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

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Role of Financial Institution Board

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• Prudential regulators have substantially increased requirements for

Financial Institutions boards. Examinations include board performance, and management reporting to, the board, regarding those responsibilities.

• Examples:
• Capital Adequacy Plans: approve the plan and oversee implementation
• Internal Audit Annual Report: review for independence and approve
• Information Security: review plan, approve and oversee
• Risk Committee: monitor implementation of liquidity risk-management and

liquidity stress-testing

• Incentive Compensation Plans: review, evaluate for risk incentives and

approve

• Federally mandated Resolution Plan: review and approve
• Proposed Liquidity Coverage Rule: oversee implications and adoption

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Role of Financial Institution Board

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"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 Forum for Financial Institution Directors

Role of Financial Institution Board

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• 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
• Increasing level of sophistication to understand requirements
• Increasing number of Director/Regulator meetings (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
• Availability of director candidates who are in Executive Positions is 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?

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Director Qualifications

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• Director Tenure and Term Limits
• Proxy advisors: Is nine years the limit?
• ISS: no change yet in voting policy that tenure can lead to a determination that a director is not
• independent. Shareholders should scrutinize average tenure of all directors if their tenure exceeds

15 years in order to promote independence and alternative perspectives.

• State Street Global Advisors (SSGA) revised its view on board tenure in 2014 to reflect its support

for board refreshment and planning for director succession.

• The Council of Institutional Investors supports board turnover in order to guard against a

“seasoned board member” losing his or her independence or thinking more like an insider over time.

• Glass Lewis does not believe in an inflexible rule. Glass Lewis supports “periodic director rotation”

through shareholder monitoring to promote fresh perspectives, new ideas, and business strategies.

• Question: with the amount of time, knowledge and sophistication required of financial

institution directors, is a shorter tenure a good thing?

• Said another way, how long does it take for directors of financial institutions to know

their institutions and be capable of doing their job well?

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Director Qualifications

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• Major developments in Proxy Access
• On July 22, 2011, the United States Court of Appeals for the District of

Columbia Circuit vacated the U.S. Securities and Exchange Commission’s Rule 14a-11. This “proxy access” rule was adopted shortly after Section 971 of the Dodd-Frank Act clarified the SEC’s authority to promulgate the rule. The Court held that the SEC was arbitrary and capricious in adopting the rule

• Following these developments, proxy advisory firms and institutional

shareholders began to demand changes in company bylaws relating to proxy access.

• Many companies have voluntarily implemented proxy access bylaws and other

companies have done so prompted by institutional shareholders.

• Since November 2014, the number of firms with proxy access bylaws has grown from

6 to 115. -- New York City Comptroller Press Release, PR16-01-005, dated January 11, 2016

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Proxy Access

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• Growing Success for Proxy Access resolutions
• In 2014, 28% of proxy access proposals were approved by

shareholders

• In 2015, that grew to more than 50% of proxy access proposals were

approved by shareholders

• Percentage of shareholders voting in favor: 34% in 2014; 55% in 2015
• Institutional shareholders are more likely than retail investors to vote

for proxy access proposals.

• 85% of retail shareholders voted against the proposals;
• 61% of institutional shareholders voted for the proposals.

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Proxy Access

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Proxy Access

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SEC Proposal Most Common Company Provision Proxy Advisory Firm Ownership Threshold 3% 3% (minority position of 5%) 3% (some institutional shareholders favor 5%) Duration of Ownership 3 years 3 years 3 years Nomination Limit 25% of Board 20% of Board (significant minority position of 2 directors or 20% of Board; minority position of 25% of Board) At least 2 directors or 25%

• f Board

Shareholder Aggregation No limit 20 shareholders No limit

• ISS Position on Company Adopted Bylaws: if either
• (1) the bylaw standards differ from the approved shareholder proposal

without sufficient disclosure, or

• (2) a company implements a Proxy Access bylaw that is substantially

below the above standards,

• then ISS may issue an "adverse recommendation" as to the

company's board of directors in advance of the company's annual meeting.

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Proxy Access

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• In 2016, the New York City Comptroller is targeting 72

companies for proxy access proposals. 36 are repeat firms from 2015 where no acceptable proxy access bylaw was implemented.

• Other Institutional Investors that support proxy access

bylaws include: Blackrock, CalPERS, CalSTRS, TIAA- CREF, T. Rowe Price, and Vanguard.

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Proxy Access

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• Defensive Strategies Are Diminishing
• Companies may try to implement their own proxy access standards

and exclude shareholder proposals as having already been “substantially implemented”.

• Note: Adoption of multiple No-Action Letters from SEC:
• In mid-February 2016, the SEC largely allowed companies to block shareholder

proposals on proxy access if the company had “substantially implemented” proxy access on its own—however additional letters then began to define "substantially implemented". The SEC denied No-Action Relief to three companies who set the minimum ownership threshold at 5% rather than 3%.

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Proxy Access

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Defense Strategies are Diminishing

• Propose a management-favored proxy access rule for vote by the

shareholders and exclude shareholder proposals as “directly conflicting".

• Ability of company to find "direct conflict" limited by SEC issued guidance in

October 2015 that in evaluating whether two proposals “directly conflict” the SEC will consider whether a “reasonable shareholder could logically vote for both proposals”

• Submit both the management and shareholder proposals in the proxy

materials

• ฀

Negotiated settlements whereby the company either agrees to adopt a bylaw or will agree to recommend that shareholders adopt proxy access the following year

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Proxy Access

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Question for Directors: If your company has adopted proxy access, have you discussed how the bylaw will work in light

• f various potential activist strategies?

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Proxy Access

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• Bylaws are structured to discourage use by short term,

financial activist investors:

• Proxy access bylaws frequently restrict use to passive investors
• Activist investors often do not meet the 3-year holding period
• Limitations on nominating a maximum of 25% of the board: designed

to avoid allowing activist investors to gain control of the board.

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Proxy Access and Activist Campaigns

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• Activist campaigns have been increasing
• 2010 – Activist campaigns: 219.
• 2011 – Activist campaigns: 242.
• 2012 – Activist campaigns: 262.
• 2013 – Activist campaigns: 274.
• 2014 – Activist campaigns: 347.
• 2015 -- Activist campaigns numbered 355 as of mid-December 2015.
• Prior maximum: 353 in 2008
• Through mid-December of 2015, 127 of the campaigns resulted in the activist

investor acquiring at least one board seat (35.77% of all campaigns that year).

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Activist Campaigns

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• Activist investors are having a significant impact on the corporate governance

landscape.

• Examples of Recent Activist Campaigns
• Appaloosa Management in combination with Harry Wilson, Hayman Capital

Management, HG Vora Capital Management, and Taconic Capital Advisors campaign against General Motors for a board position and/or return of capital

• Carl Icahn’s bid for a Merger or Acquisition or board position on eBay
• Corvex Management’s campaign for Yum Brands Inc. to effect Business strategy and/or

Merger or Acquisition

• JANA Partners bid for Qualcomm for return of capital and/or Merger or Acquisition
• Marcato Capital Management’s campaign for BNY Mellon for a board position and

certain management changes

• PAR Capital Management, Inc. and Altimeter Capital Management, L.P campaign for

board positions on United Continental Holdings, Inc.

• Starboard Value bid for Yahoo Inc., for return of capital and/or Merger or Acquisition
• Trian Fund Management’s separate bids for PepsiCo Inc. and DuPont E.I. De Nemours

& Co., in each case for Merger or Acquisition or board position

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Activist Campaigns

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• Other Considerations:
• Motivations for activist shareholders include:
• Increase in stock price and company valuation
• Board changes
• Strategy changes
• Mergers and Acquisitions
• Poison Pills. Proxy advisors are not categorically against them. Considerations

include:

• Whether the board adopts a poison pill with a term of 12 months or less ("short-term

pill");

• The date of the pill's adoption relative to the date of the next meeting of shareholders-

i.e. whether the company had time to put the pill on the ballot for shareholder ratification given the circumstances;

• The issuer's rationale;
• The issuer's governance structure and practices; and
• The issuer's track record of accountability to shareholders.

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Activist Campaigns

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• Total Shareholder Return (“TSR”)
• There is a market trend to use relative TSR as the sole or key performance

metric for long-term incentive performance plans.

• A WSJ/Hay Group CEO pay survey found that TSR rose 34.6% in 2013, while

CEO pay only rose 5.5%. In 2014, TSR increased by 16.6%, but pay rose by

• nly 4.6%
• A turbulent 2015 resulted in negative total shareholder return (TSR)
• MSCI ESG Research showed that declining stock values have resulted in the average
• ne-year TSR falling to negative 2.93%
• First time since 2009 that TSR has been negative.

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Total Shareholder Return

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• TSR
• BUT, there is disagreement over whether TSR should be used as a

sole, or even primary metric.

• Relative TSR (company TSR measured against an external comparator group)

is often replacing a broad portfolio of other key business metrics such as profitability, cash flow and capital returns. Depending on the length of potential claw-back provisions, this change may have negative consequences on executive motivation and possibly encourage excessive risk taking.

• In order to beat the median relative TSR over a given period a company would

need to take on above median risk.

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Total Shareholder Return

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• Shareholder Resolutions pertaining to Diversity—where previously the

focus was on gender diversity—now have broadened to ethnic and racial diversity.

• Apple’s 2016 proxy contained a shareholder resolution to require the company

to increase diversity—including particularly Hispanic, African-American, Native-American and other people of color--of senior management and its board of directors

• Management urged shareholders to vote against the resolution as “unduly

burdensome and not necessary” and described the diversity already existing within their board and senior management.

• The New York City Comptroller has specifically highlighted lack of board

diversity as an area ripe for additional proxy resolutions. Forum for Financial Institution Directors

Other Issues: Diversity

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• Although lobbying and political contributions proposals again were frequent shareholder

proposal topics, the total number of such proposals has decreased in recent history, with shareholders submitting 110 such proposals for 2015 stockholder meetings, compared to 126 proposals for 2014 shareholder meetings.

• Shareholder proposals range from requests for disclosure of lobbying costs and political

contributions to prohibitions against such spending.

• ISS Policy: Vote CASE-BY-CASE on proposals requiring greater disclosure of a

company’s lobbying activities, policies or procedures; generally vote FOR proposals requesting greater disclosure of a company's political contributions and trade association spending policies and activities.

• 2015 Support
• Disclosure of Lobbying Activities: 30 proposals voted on and an average of 25.5%

support, with 0 proposals passing.

• Political Contributions: 25 proposals voted on and an average of 33.9% support, with

0 proposal passing.

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Other Issues: Lobbying Costs and Political Contributions

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• Auditing Standard 18: new definition of “related party” is very broad and

includes anyone who can control or influence a principal owner, director

• r member of management
• Standard 18, by itself, does not change public disclosure rules, but is intended to

broaden reporting to external auditors and expand the range of potential relationships and transactions to review. Auditors can then assess the transactions identified as having a material impact, and discloseable in financial statements, and determine whether the company's processes are sufficient.

• Companies must have sufficient processes and controls to identify and

monitor related party transactions

• Prior emphasis focused on the related-party transaction itself
• New emphasis is on sufficient processes to identify all related parties
• New focus on all directors’ and officers’ respective relationships, including

extended families, friends, and outside business partners.

• Question: Has your company changed its D&O questionnaire?

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Other Issues: Related Party Transaction Disclosure

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• On March 30, 2011, the federal banking agencies proposed a rule on

incentive compensation.

• Applicable to financial institutions with more than $1 billion in assets
• Complemented guidance issued by the regulators
• Incentive compensation arrangements should not incent inappropriate risk
• Financial institutions with $50 billion or more in assets
• Defer at least 50% of incentive compensation of certain officers for at least three

years

• Amounts ultimately paid should reflect losses and performance over time.
• Not yet adopted.

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Executive Compensation

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• SEC’s Pay Ratio Disclosure Rule
• Effective for 2018 Proxy Season
• Most companies are beginning preparations now
• Dodd-Frank Act Section 953(b) requires every public company to

disclose: 1.

The median of the annual total compensation of all employees, except the CEO (including employees outside the U.S.);

2.

The annual total compensation of the CEO (or any equivalent position) of the company;

3.

The ratio of the amount described above in bullet 1 to the amount described in bullet 2; and

4.

The methodology and material assumptions used to calculate the above. Forum for Financial Institution Directors

CEO Pay Ratio Disclosure

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• In August 2015, the SEC issued final rules on the CEO pay

ratio rules

• The new disclosure requirements do not apply to:
• Smaller reporting companies
• Foreign private issuers
• Multijurisdictional filers
• Emerging growth companies
• Registered investment companies

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CEO Pay Ratio Disclosure

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Dodd-Frank Report: SEC Rulemaking

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Provision Proposed Final Effective Applicable To CEO Pay Ratio September 18, 2013 August 5, 2015 W/r/t compensation in fiscal years beginning on

• r after January 1, 2017

(reported in 2018 proxy statement). Transition for newly public companies Reporting companies

• ther than emerging

growth companies, smaller reporting companies and foreign private issuers Clawback July 1, 2015 TBD SEC – TBD; exchanges have 1 year to adopt rules following effectiveness of SEC rule; companies then have 60 days to adopt policy All issuers listed on a national exchange. Covers compensation based on financial info for periods ending on and after SEC effectiveness Pay for Performance Disclosure April 29, 2015 TBD TBD; phase-in for number

• f covered years in the

new table Reporting companies

• ther than emerging

growth companies and foreign private issuers. Hedging Disclosure February 9, 2015 TBD TBD Reporting companies

• ther than foreign private

issuers

Chris Edwards

Partner 1-312-558-5571 cedwards@winston.com

Karen Weber

Partner +1 (312) 558-8794 kweber@winston.com

Jerry Loeser

Of Counsel 1-312-558-5985 jloeser@winston.com

Sterling Sears

Associate 1-312-558-6208 ssears@winston.com

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Contact Information