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
Forum for Financial Institution Directors • 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 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. 2
Forum for Financial Institution Directors 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 3
Forum for Financial Institution Directors 2016 Proxy Season Preparations 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 4
Forum for Financial Institution Directors 2016 Proxy Season Preparations 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 5
Forum for Financial Institution Directors Proxy Advisors • 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 6
Forum for Financial Institution Directors 2016 Proxy Season Preparations Guest Speaker: Patrick McGurn Special Counsel Institutional Shareholder Services, Inc. 7
Forum for Financial Institution Directors 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 0 1 of 26 Truants on boards at # firms 2 of 17 0 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 Proxy Access, Double Trigger Access, Lobbying, Employment (Source: ISS Voting Analytics (AV), Lobbying, Independent Diversity, Simple Majority Vote, Database) Chair (IC) & Clawbacks AV & Data Security. Voting on (Derivatives out at SEC) climate change and CEO pay. 8
Forum for Financial Institution Directors 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 9
Forum for Financial Institution Directors Role of Financial Institution Board • 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 10
Forum for Financial Institution Directors Role of Financial Institution Board • 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 11
Forum for Financial Institution Directors Role of Financial Institution Board "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 12
Forum for Financial Institution Directors 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 • 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? 13
Forum for Financial Institution Directors Director Qualifications • 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? 14
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