Senior Officers Compensation Disclosures - ANPRN - Fall 2010
Henry Adams III
Black Brook Farm
4556 Kyte Road
Shortsville, NY 14548
March 18, 2011
Mr. Gary K. Van Meter
Deputy Director, Office of Regulatory Policy
Farm Credit Administration
1501 Farm Credit Drive
McLean, Virginia, 22102-5090
Dear Mr. Van Meter:
Subject: ANPRM Regarding Disclosure to Shareholders and Compensation
RIN 3052-AC41 (12 CFR Part 612, 620 and 630)
I have been a member/borrower of Farm Credit for thirty years. For the past fourteen years I have served as an association director. My comments which follow regarding System executive compensation disclosure draw on my fourteen years experience as an ACA director.
Let me begin by agreeing that it is incumbent on System institutions to disclose sufficient information to allow stakeholders to assess performance. Specific to compensation policies, disclosure should provide enough detail to permit judgment on whether the policies could lead to excessive risk-taking, or abuse.
I share FCA’s view that the the structure and implementation of executive compensation plans, particularly incentive components, should not promote behavior that might threaten the safe and sound operation of a Farm Credit institution. I sense in the ANPRM there may also be concern about simple, excessive compensation. Presumably this explains the proposal of non-binding shareholder votes on senior officer compensation.
The recent requirement by the SEC of publicly-traded companies to give shareholders say-on-pay votes, and enhanced disclosure of compensation agreements, sets a precedent in the corporate world which the cooperative world could emulate. Whether this practice would be of benefit to the Farm Credit System is worthy of discussion.
In the realm of publicly traded companies, advisory votes will be dominated by majority stockholders. One would hope that owners with large investments will take the time to understand the underlying rationales for the compensation decisions that are implemented. There will be some risk of casual, “anyone who makes more than me is evil” negative votes undermining the compensation decisions of the board.
Under the cooperative structure used by Farm Credit associations, the impact of a voter does not reflect their level of investment or participation in the institution. Our one person, one vote methodology gives every member an equal say in electing board representation, and would do the same regarding advisory votes. I believe this is an important contrast.
It is correct to state that those who use the cooperative should control it. The cooperative process of representative member control through democratic election of board directors is a proven and successful model. To begin effecting member control through direct votes risks undermining the delegated authority of directors to exercise their fiduciary responsibilities, and may lead to untenable situations for boards. To specifically reference Question , I reject the notion that non-binding advisory votes would enhance shareholder understanding of compensation programs and practices. Turning this supposition on its head, my concern would be the mischief wrought by shareholders voting without understanding compensation programs, or the reasoning behind them.
While some level of compensation disclosure to shareholders is prudent and appropriate, as a practical matter, shareholders could never have the level of understanding of the executive’s performance, the knowledge of market rates for compensation, or the training in compensation practices that institution board directors have. Adherence to best governance practices dictates that the board be allowed to formulate and administer an executive compensation policy without interference from the membership, which elected the board to do this in the first place.
Some related thoughts on this topic:
- FCS associations, with defined geographic service areas, numerous local branch presences, and high degree of member participation, have significant opportunities for member-director interaction, where opinions regarding compensation can be exchanged.
- Elected directors, by definition also borrowers, tend to reflect the conservative views of members generally, and always face the prospect of losing re-election if their compensation decisions are viewed as excessive.
- Bringing too much pressure to bear on the executive compensation issue could threaten System institutions’ ability to attract and retain top executive talent. Managerial excellence which has been a hallmark of the FCS, a key contributor to its success.
- While compensation committees are certainly responsible for understanding the financial commitment and total cost of institution compensation programs, re-emphasizing that responsibility through new rule-making should not even in-advertently de-emphasize the responsibility of the board as a whole. In practice I believe over-reliance on committees can stifle constructive (and often moderating) debate by the full board – where the ultimate authority resides.
Here are some suggestions of what I think could be done to enhance shareholder and investor understanding of our FCS institution’s compensation practices without compromising our current and successful governance process:
- Disclose to shareholders enough detail regarding the components of CEO pay packages, including salary, short and long term incentive plans, retirement plans and severance provisions, that shareholders can understand and assess the appropriateness of the plan for themselves.
- Do not disclose senior officer compensation in such detail that competitive issues emerge, either within the institution, or from the outside. This would not enhance safety and soundness.
- Require compensation committees to document in narrative form, the components of their executive compensation plan, including the methodology and resources employed to craft it, and the member benefits expected to accrue from it. The ability to articulate a program is strong evidence of understanding.
- Require incentive plans to include factors which reward good credit quality to offset factors which drive loan volume growth.
To summarize, I would characterize advisory shareholder votes to inform boards of their competence to administer compensation policy as an “end run” around proven good governance practices. Empowering shareholders to second guess board compensation decisions could place directors in the position of having to govern under a shadow of no-confidence, with attendant diminished credibility. The possibility of director resignations under such a scenario would not enhance a Farm Credit institution’s performance. It is far more preferable to let our existing democratic leadership selection process inform boards of membership approval.
Finally, I believe some degree of enhanced disclosure to stakeholders, and a formal documentation of an institution’s compensation philosophy and plan would address FCA’s concerns regarding compensation issues without triggering unintended consequences which could threaten the successful safe and sound System operation for which we all aspire.
Thank you for this opportunity to express my opinions.
Henry Adams III
Vice-Chairman, Farm Credit East