ABA Banking Journal - September/October 2015 - (Page 43)
> BOARD MATTERS
The problem of Two masters
bY teD KNUtsoN
wHEN IT cOmEs TO cOmpENsATION, boards are faced with the problem of
two masters: Institutional Shareholder Services and the bank regulators.
"They don't always agree. Bank regulators have their own guidelines. ISS
has an entirely different set," says Susan O'Donnell, a banking compensation
and governance consultant with Meridian Compensation Partners.
O'Donnell, who has spoken at
numerous ABA conferences,
explained that bank regulators
are focused on risk mitigation,
so they believe pay incentives
are bad since they feel incentive
compensation is risky.
ISS, on the other hand, likes
incentive pay because it believes the
practice creates a win-win situation
for banks and shareholders.
She called this tug-of-war between
regulators and the leading
shareholder advisory services one of
bank directors' biggest challenges.
O'Donnell says the biggest change
in how ISS rates compensation
practices lately has been in
regard to equity plan proposals.
When the firm comes up with its final
report card for a bank (inevitably
more complicated every year with
more boxes to check for those filling
out the rating agency's forms), ISS
wants boards to devote themselves
to what it calls the four pillars of
good governance: board structure,
compensation, shareholder rights
and audit and risk oversight.
ISS has always been controversial.
Since it doesn't put its money
whether its mouth is, the service does
not risk the downside of losing money
if its recommendations are approved
only to lead to declining share prices,
profits and potentially worse.
"You can be a high incentive
compensation payer and get good
marks from ISS as long as you are
a high performer," says O'Donnell.
According to O'Donnell, there are
many cases where bank consultants
tell ISS that banks have to follow
regulations and ISS simply doesn't
care. The end result is that a lot
of bank compensation programs
have come to look alike, as boards
have to find a happy medium.
and 35 percent to grant practices
including clawbacks, vesting
requirements and historical grants.
Until this year, ISS focused on
the concept of shareholder value
transfer (SVT), which is simply the
value of equity given to directors
and executives that dilutes the
holdings of other shareholders.
Now, the advisory firm has come
up with a score sheet of pluses and
minuses where SVT is one factor of
several. In the revised ranking system
for stock and stock option grants
to board members and executives,
45 percent of the weight goes to
SVT, 20 percent to plan features
Likewise, since its advice is taken
by many of the largest pension
funds in the nation, ISS acts as a
super institutional investor. This
has some concerned that the
company wields too much power
over corporate America and the fate
of the millions of retirees who are
owed a fiduciary duty directly by the
institutional investors who hire ISS.
While the shareholder advisory rating
is important, O'Donnell says board
members have to keep in mind a
"You don't have to do everything
ISS says," she says. "You have
to do what is right for you."
teD KNUtsoN is a financial services writer
in Washington, D.C.
Table of Contents for the Digital Edition of ABA Banking Journal - September/October 2015
POISED AND PROACTIVE ON THE FARM
MEETING CUSTOMERS WHERE THEY ARE
INVESTING IN STRONG RURAL COMMUNITIES
ABA COMPLIANCE CENTER INBOX
BANKS IN INSURANCE
REAL ESTATE LENDING
FROM THE STATES
INNOVATIONS IN SOCIAL RESPONSIBILITY
INDEX OF ADVERTISERS
ABA Banking Journal - September/October 2015
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