Forum for Financial Institution Directors
The Directors’ Perspective April 29, 2016
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 • In our first webinar, we discussed the progress that had been made on a significant executive compensation rule. Last week, the agencies reached an accord and have started to publish proposed rules. Because of the importance of this rule, we are holding an additional webinar in May to discuss the proposal. • The first addressed regulatory expectations. • The second highlighted issues with the upcoming 2016 proxy season. • The third highlighted important issues in securities class actions and derivative litigation, criminal enforcement, and D&O liability insurance.
• Please see here for a copy of the presentations and a link to the audio recordings from the prior presentations.
• This session provides an opportunity to engage in a round-table discussion with some leading financial institution directors on fiduciary responsibilities and key challenges in today’s environment. • At the conclusion of the course, we will provide each participant in these webinars with a Certificate of Completion, certifying the Director has participated in Continuing Director Education courses.
3
Forum for Financial Institution Directors Christine Edwards • Chair of Winston & Strawn’s bank regulatory practice • Nationally recognized expert on corporate governance • Over 30 years of financial services regulatory experience
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
4
Forum for Financial Institution Directors
Today's Corporate Governance Panelists The Honorable Cynthia A. Glassman, Ph.D. Director, Discover Financial Services and former Commissioner of the Securities and Exchange Commission Cynthia A. Glassman is a Board member of Discover Financial Services, where she chairs the Audit Committee, and of Navigant Consulting, where she chairs the Nominating and Governance Committee and serves on the Compensation Committee. She is also a Senior Research Scholar in the Institute for Corporate Responsibility at the GWU Business School. Previously, she was Under Secretary for Economic Affairs at the U.S. Department of Commerce and a Commissioner of the U.S. Securities and Exchange Commission, including serving as Acting Chairman. Cyndi has spent over 40 years in the public and private sectors focusing on financial services regulatory and public policy issues, and also serving on nonprofit boards. Cyndi received her M.A. and Ph.D. in Economics from the University of Pennsylvania and her B.A. in Economics from Wellesley College, and is an Honorary Fellow of Lucy Cavendish College, Cambridge, England.
William Haraf Director, Charles Schwab Corporation and former Commissioner of the California Department of Financial Institutions Mr. Haraf has been a director on Charles Schwab’s board since 2015 and also serves as a director of Charles Schwab Bank. He serves on the Audit Committee, Nominating and Corporate Governance Committee, and Risk Committee. He also serves as a special advisor for Promontory Financial Group, a financial consulting firm where he was a managing director from 2012 until 2014. From 2008 until 2012, he served as Commissioner of the California Department of Financial Institutions. Mr. Haraf served as a member of the Financial Stability Oversight Council from 2010 until 2012, as managing director of Banc of America Securities from 1999 until 2003 and as Senior VP of Strategic Policy Development and Planning at Bank of America from 1994 until 1999.
5
Forum for Financial Institution Directors
Today's Corporate Governance Panelists Eileen Kamerick Principal, The Governance Partners, LLC and Director, Associated Banc-Corp. and Legg Mason Closed End Funds Eileen A. Kamerick serves as an independent director of approximately 31 closed-end mutual funds in the Legg Mason Inc. Fund Complex and has been a director of Associated Bank since 2007 where she is Chair of the Audit Committee and member of the Corporate Development Committee and the Corporate Governance Committee. She serves as Senior Adviser to the CEO and Board, CFO of ConnectWise.com, Inc. and is an adjunct professor at leading law schools and consults on corporate governance and financial strategy matters. From October 2012 until July 2013, Ms. Kamerick was CFO of Press Ganey Associates, a leading health care analytics and strategic advisory firm. She previously served as the Managing Director and CFO of Houlihan Lokey, an international investment bank, from May 2010 to October 2012. She also served as President of the Houlihan Lokey Foundation. From August 2008 to May 2010, she served as Senior VP, CFO and Chief Legal Officer of Tecta America Corporation, the largest commercial roofing company in the United States. Prior to joining Tecta America Corporation. Ms. Kamerick has also served as CFO at several leading companies including Heidrick & Struggles International, Inc.; Leo Burnett; and BP Amoco Americas. Ms. Kamerick served on the board of directors of The ServiceMaster Company from 2005 to 2007. She also currently serves on the board of directors of Westell Technologies, Inc.. She also serves on the board of several nonprofit organizations, including Eckerd Kids, a national not for profit where she is Vice Chairman of the Board, and Boys & Girls Clubs of Chicago.
6
Forum for Financial Institution Directors
Agenda • Director Workload • Director Candidates • Preparing for Meetings with Regulators • Boards' "Effective Challenge" of Management • Information Security and Security Breaches • Ever Increasing Capital Standards • Regulation of Financial Services Firms • Looking into the Future
7
Forum for Financial Institution Directors
Director Workload • How taxing is Board service on a financial services company Board? • Note the additional time added by Board Committee service: • For example, in 2014 the National Association of Corporate Directors found that : • The audit committee meets an average of 8 times per year and typical meetings last 2.7 hours • The compensation committee meets an average of 6 times per year and typical meetings last 2.7 hours
8
Forum for Financial Institution Directors
Director Workload continued • How long does it take you to prepare? For financial institution boards, how much jargon is there? How long does it take to learn and understand it? • The 2015 PwC Annual Corporate Director Survey found that over three-quarters of directors participated in some form of board education or training during the last year; nearly one quarter participated in more than 16 hours of education.
• More than half of directors at least “somewhat” wish board materials were shorter and more summarized.
• The 2015 PwC Annual Corporate Director Survey asked directors if they thought the board was spending sufficient time on the following 9 categories: Strategic Planning, Succession Planning, IT Risks, Talent Management, Industry competitors, Risk Management, IT Strategy, Crisis Management/Planning, and Executive Compensation. • From the 2014 to 2015 Survey, the percentage of directors who thought more time should be spent on: • Strategic Planning decreased 13% • Succession Planning decreased 15% • IT Risks increased 4% • Risk Management decreased 14% • IT Strategy decreased 9% • Crisis Management/Planning decreased 4% • Executive Compensation decreased 17%
9
Forum for Financial Institution Directors
Director Workload continued • Should only industry professionals be on the board or is there “room” for other areas of expertise? • Among director attributes considered desirable, areas like Financial Expertise, Industry Expertise and Operational Expertise predictably continued to top the list in the 2015 PwC Annual Corporate Director Survey.
• However, 37% of directors listed IT Strategy Expertise as very important. • 33% of directors also listed Cyber Risk Expertise as very important. • And, a tech background can be very useful. • (i) 25% of directors now say they meet with the company’s CIO at every formal meeting and 34% say they do so at least twice annually (up from 18% and 30%, respectively, in 2012)
• (ii) nearly half of directors disclosed that their board retains outside consultants on a continuous or project-specific basis to advise the Board on Technology, compared to just 27% who said so in 2012.
10
Forum for Financial Institution Directors
Director Candidates • Should every financial institution have an IT expert on its board? • Highlights • The 2015 PwC Annual Corporate Director Survey stated: • 37% of directors stated that IT Strategy Expertise was very important on the list of director attributes
• 33% of directors stated that Cyber Risk Expertise was very important on the list of director attributes
• IT Risk was the only topic specifically mentioned by directors as a topic on which they should be spending more time and focus
• Additionally, directors said their board was “moderately” engaged in overseeing/understanding: • The risk of cyberattacks (83%) • The company’s annual IT budget (67%) • How the company uses social media and other emerging technologies (49%)
11
Forum for Financial Institution Directors
Board Attributes and Impact on Company Performance and Board Monitoring Efforts Board Attribute
Findings from Research
Board Attribute
Findings from Research
Independent chairman
No evidence that this matters.
Financial experts
Lead independent director
Modest evidence that this improves performance
Positive impact for accounting professionals only. No impact for other financial experts
Politically connected directors
No evidence that this matters
Employees
Mixed evidence on performance
Majority of directors serving on multiple outside boards
Negative impact on performance and monitoring
Interlocked boards
Positive impact on performance, negative impact on monitoring
Board size
Positive impact on performance to have smaller board if company is “simple,” larger board if company is “complex.”
Diversity
Mixed evidence on performance and monitoring
Classified (or staggered) boards
Mixed evidence on performance and monitoring
Director compensation
Mixed evidence on performance and monitoring
Number of outside directors
Mixed evidence that this can improve performance and reduce agency costs. Depends primarily on how difficult it is for outsiders to acquire expert knowledge of the company and its operations.
Number of independent directors
No evidence that this matters beyond a simple majority
Independence of committees
Positive impact on earnings quality for audit committee only. No evidence for other committees.
(Source: NYSE: Corporate Governance Guide, December 2014)
CLE Code
29416 13
Forum for Financial Institution Directors
Preparation for Meetings with Regulators • Frequency? • Preparations? • Increased expectation of Board? • Highlights: • Recent or proposed heightened federal regulatory requirements for boards include the following: • The Office of the Comptroller of the Currency’s (“OCC”) vendor management guidelines; • The Federal Reserve Board’s Dodd-Frank Section 165 rules on the risk committee and risk management (the FRB Enhanced Prudential Standards);
• The OCC’s “heightened expectations” program for risk governance and boards of directors; • The FRB’s guidance on board and audit committee responsibilities with respect to internal audit, SR 13-1;
• The FRB’s supervision and regulation letter on the consolidated supervision framework for large financial institutions, SR 12-17, which applies to banking organizations with $50 billion or more in assets; and
• Risk management and corporate governance components of rules and guidance on capital planning, stress testing, resolution planning, sound incentive compensation, and the Volcker Rule. 14
Forum for Financial Institution Directors
Boards' "Effective Challenge" of Management • How do directors demonstrate that they provide effective challenge of management? • Highlights: • The OCC in their Guidelines Establishing Heightened Standards for Certain Large Insured National Banks, Insured Federal Savings Associations, and Insured Federal Branches noted that directors were to provide “active oversight of management” which meant: • “A covered bank’s board of directors should actively oversee the covered bank’s risktaking activities and hold management accountable for adhering to the risk governance framework. In providing active oversight, the board of directors may rely on risk assessments and reports prepared by independent risk management and internal audit to support the board’s ability to question, challenge, and when necessary, oppose recommendations and decisions made by management that could cause the covered bank’s risk profile to exceed its risk appetite or jeopardize the safety and soundness of the covered bank.”
15
Forum for Financial Institution Directors
Boards' "Effective Challenge" of Management continued • The FDIC’s Office of Inspector General cited the failure by the board to effectively challenge or otherwise exercise proper oversight as a contributing factor in the failure of at least 4 banks last year • The Bank of England Prudential Regulation Authority to “challenge effectively executive management” in the failure of Halifax Bank of Scotland
• Consulting and auditing firm Protivity, has provided further color on what they think an effective challenge would entail: • Promote a range of views in the decision-making process, allow for testing of current practices, and stimulate a positive, critical attitude among employees and an environment of open and constructive engagement.
• Directors need to ask questions focused on the underlying economics, changes to the risk profile, ability to measure and manage the assumed risks and other fundamentals, and apply their business sense.
• However, directors must exercise discretion and should be careful of challenging every aspect of management’s agenda with the intention of getting “on the record” just for the sake of challenging and satisfying regulators. The result of such an adversarial relationship could be counterproductive to the overall safety and soundness of the institution.
16
Forum for Financial Institution Directors
Information Security and Security Breaches • How can the Board effectively conduct IT oversight? • Highlights: • The 2015 PwC Annual Corporate Director Survey: • Directors want to give more time and attention to the IT issues that are closely tied to strategy; 65% want at least “some” additional time and focus on IT risks like cybersecurity and 46% want at least some additional attention given to overall IT strategy. • Overall, the percentage of directors who spend between 6% and 10% of their board time discussing IT increased from 31% to 37%. Fourteen percent of directors now say they spend 11% to 20% of their annual board hours discussing IT risks and opportunities.
• The Ernst & Young Center for Board Matters: Top Priorities for 2016 • A mere 7% of organizations claim to have a robust incident response program that includes third parties and law enforcement and is integrated with their broader threat and vulnerability management function.
• Accounting firm BDO’s 2015 annual survey: 69% of corporate directors report that their board is more involved with cybersecurity than it was 12 months ago, (an increase of 10% from the prior year). 17
Forum for Financial Institution Directors
Ever Increasing Capital Standards • How much is too much? • The Federal Reserve Board adopted a final rule implementing Basel III in 2013 • Last year alone, the Federal Reserve issued 5 SR Letters (15-4, 15-6, 15-13, 15-18, & 15-19) related to capital
• Relevant Articles: • Wall Street Journal, April 12, 2016 -- Regulators Set to Reject Some Big Banks’ ‘Living Wills’
• Wall Street Journal, February 19, 2016 -- Europe’s Biggest Banks Ordered to Boost Capital
• American Banker, February 16, 2016 -- More Radical Approach called for by president of the Federal Reserve Bank of Minneapolis
• Wall Street Journal, November 24, 2015 -- More Capital Punishment for Big Banks • Wall Street Journal, November 9, 2015 -- Big Banks Could Be Forced to Raise Up to $1.19 Trillion in New Securities
18
Forum for Financial Institution Directors
Regulation of Financial Services Firms • Financial Services firms are highly regulated, and therefore board relationships with company counsel are very important. • What have you seen as best practices or the most helpful processes that corporate counsel have used to assist the board with their responsibilities?
19
Forum for Financial Institution Directors
Looking into the Future • What is the future of annual meetings? Will anything replace them? • Can you imagine a scenario where company sponsored chat rooms, or even more formal information exchanges between the company and shareholders, would take the place of annual meetings? • Link to Edwards Article: Into the Looking Glass: The Future of Corporate Governance, Boards of Directors, and Investor Communication
20
CLE Code
29416 21
Forum for Financial Institution Directors
Questions?
Christine A. Edwards
Jerry Loeser
Sterling Sears
Chair Bank Regulatory Practice Chicago
Bank Regulatory Practice Chicago
Bank Regulatory Practice Chicago
[email protected]
[email protected]
[email protected]
22
Thank You
