Senior Officers Compensation Disclosures - Proposed Rule
April 5, 2012
Mr. Gary K. Van Meter, Director
Office of Regulatory Policy
Farm Credit Administration
1501 Farm Credit Drive
McLean, VA 22102–5090
Dear Mr. Van Meter:
On behalf of the Farm Credit West (“FCW”) board of directors’ compensation and evaluation committee (Committee), I am writing to share our perspective on the Farm Credit Administration’s (Agency or FCA) proposed rule regarding “Compensation, Retirement Programs, and Related Benefits” published January 23, 2012, in the Federal Register. The Committee has carefully reviewed and discussed the provisions of the proposed rule as well as the comments developed by the Farm Credit Council (FCC), CoBank, and FCW management. We fully support the comment letters submitted on behalf of the Farm Credit System (FCS), CoBank and FCW management. While these comment letters provide specific responses to issues raised by the proposed rule, the Committee determined that it is critically important to voice its own observations on several provisions.
In short, we are dismayed that FCA seeks to regulate compensation committees when the existing policy guidance and examination process are working effectively. We see no need or justification for FCA to further regulate the compensation committee’s role and responsibility considering the current regulatory structure has worked successfully for numerous years. We also very strongly object to the proposed enactment of a say-on-pay vote. The proposed say-on-pay provision is overregulation that creates a referendum on elected directors and interferes with the Committee’s responsibilities to oversee compensation programs in the best interests of its customer-stockholders. The proposed say-on-pay provision erroneously applies a requirement applicable to publicly traded companies to cooperatively structured FCS institutions.
The Committee is proud of the efforts it makes to fulfill and achieve its fiduciary duties. Consistent with the intent of the FCA Bookletter on Compensation Committees (Bookletter), we receive education and consultation to prepare us to act on behalf of our customer-stockholders. The Committee’s decisions are guided by extensive access to a variety of resources. This access includes FCW resources and personnel, particularly senior officers with human resources responsibilities and expertise, to obtain necessary information and gain the best overall understanding of each compensation program. We also have direct and confidential access to an independent executive compensation consultant. The Committee obtains the advice and recommendations of its independent compensation consultant as the Committee deems appropriate. We rely on the input and recommendations of independent consultants and data provided by broad-based executive compensation surveys to specifically ensure that compensation decisions reflect stockholder interests, within a sound cooperative governance structure. With the use of these resources, our Committee devises and implements prudent compensation strategies for recruiting and retaining talent in a manner that maximizes FCW’s value to customer-stockholders.
The Committee needs appropriate flexibility to execute compensation strategies that are within market norms and do not pose any undue risk to FCW. How each FCS institution compensates its employees depends on a variety of factors. These factors include institution size, complexity, current needs, employees’ skills, and geographic region. Conditions in the market, future business plans, and the competitive landscape are also significant considerations when establishing compensation programs. Importantly, FCW competes with financial institutions and other entities for the top talent that has the skills and ability to consistently deliver superior customer service and products to customer-stockholders. Fundamentally, FCW’s employees are the core value proposition for customer-stockholders and it is the responsibility of the Committee to ensure that the compensation program delivers on this value proposition every single day. Hiring, retaining, and motivating human capital is not something that can be addressed by regulations in any form, particularly in the prescriptive approach proposed by FCA. Through the proposed provisions on compensation committee responsibilities and say-on-pay, the FCA is undermining the flexibility of the Committee to ensure FCW’s compensation programs deliver on their value proposition.
The Bookletter and other guidance provide the Committee the flexibility to adopt best practices used at institutions of comparable size and complexity to FCW. In contrast, the proposed rule encompasses a rigid one-size-fits-all compensation practice that is imposed uniformly on all FCS institutions. The best outcome will be achieved if FCA continues its principles-based approach and examines each institution against those principles. Therefore, there is no identified need to codify guidance on compensation committee responsibilities and enact non-binding advisory say-on-pay stockholder votes.
The Committee is strongly opposed to FCA’s say-on-pay proposal. Application of a non-binding stockholder say-on-pay vote to FCS institutions is inconsistent with the unique structure of cooperatives, an inappropriate directive to our members, and denigrates our role in overseeing the design and implementation of compensation strategies. In stark contrast to investor-owned public companies, FCS institutions are customer-owned cooperatives. FCS institution compensation committees have true independence in that no member of management may serve on a board of directors. FCS institution boards are exclusively comprised of customer-stockholders and independent directors. This results in an elected board of directors that represents the interests of cooperative members and negates the risk that senior officers can enrich themselves at the expense of the company. Conducting say-on-pay votes regarding executive compensation disregards this governance discipline. In a cooperative, if customer-stockholders determine the board has failed in its oversight of executive compensation, they have the capacity to change director leadership through the election process. This mechanism of cooperative governance has consistently resulted in strong and effective boards of directors that represent the interests of all customer-stockholders . Rather than complement an effective board governance structure, the proposed say-on-pay provision creates an untenable referendum on board decisions that undermines the board and contravenes the existing well-functioning governance processes.
In a cooperative, customer-owners have a voice in the operation of the institution. Their engagement is a matter that should be managed by a board of directors given that they are elected to represent stockholder interests. At FCW, Committee members and other directors interact with customer-stockholders at our fourteen customer events held throughout FCW’s territory each year. This platform gives stockholders abundant opportunity to share their views with FCW’s board and, by design, produces constructive dialogue. These face-to-face interactions are invaluable to the Committee and a hallmark of the cooperative business model. We think it is wholly inappropriate for the Agency to diminish the significance of these meetings by prescribing how FCW should engage its stockholders to discuss senior officer compensation matters. Customer-stockholder feedback equips the Committee with what it needs to effectively represent its peer customer-stockholders. In contrast, a “yes” or “no” vote will yield little value. Simply put, it is inappropriate for the Agency to get in the middle of the relationship between directors and the customer-stockholders who elected them to the board and prescribe in what manner compensation discussions should occur. Moreover, the proposed say-on-pay provision replaces the current collaborative customer-stockholders interaction with an approach that has proven to incubate stockholder controversy and conflict.
We urge FCA not to utilize processes designed for investor-owned companies and try to apply them to the FCS. Mandatory say-on-pay votes are needed where there is a deficiency in company-stockholder communications at publicly traded companies, particularly considering the inconsistency in their stockholder base. Cooperatives’ ownership and governance structure results in a consistent customer-stockholder base and fosters cooperative members’ participation in management, control, and ownership. In addition, say-on-pay votes are warranted when a company’s senior officers receive compensation in the form of shareholder equity. It is noteworthy that FCW and other FCS institutions do not issue stock to senior officers, stock options, or similar compensation that dilutes the ownership of existing stockholders. Being a cooperatively organized entity means that FCW’s board, stockholders and customer interests are aligned for a singular long-term interest – customer-stockholder needs. Power and influence in the boardroom are equitable and democratic as all FCW common stockholders have the same at-risk investment and homogenous voting power. In contrast, public company stockholders possess diluted ownership rights among a diverse group of investors with inconsistent ownership stakes. For illustration, an investor’s stock ownership in a public company may be one of many holdings (e.g. index funds or large mutual funds) and its holdings may change regularly and frequently (based on a change in portfolio strategies, investment criteria, or a company’s market capitalization). Say-on-pay votes befit those companies because stockholders of publicly traded entities need an efficient method to provide input to boards concerning compensation issues. In sharp contrast, FCW customer-stockholders are separately and collectively committed to FCW’s long-term mission – ensuring dependable competitively priced credit and superior customer service, while at the same time providing a reasonable patronage refund.
By regulation, FCW’s directors retain ultimate responsibility for the oversight and approval of senior officer compensation programs. The proposed say-on-pay rule interferes with carrying out this responsibility in the best interest of customer-stockholders by enacting a referendum on the FCW board’s decision making. To the extent any such vote is negative, Committee members will be challenged with having to decide between fulfilling their fiduciary duty to all stockholders and having to conform to the position of customer-stockholders, who did not have the benefit of access to the information, and independent expert advice and consultation available to the Committee. It is technically impossible and legally inappropriate to provide stockholders all of the confidential and comprehensive compensation information and related director training that forms the foundation of an effective compensation program. Therefore, if imposed, these votes will result in an increased burden on directors and introduce arbitrary uncertainty to the Committee’s senior officer compensation decisions.
The cooperative business model works best when customer-stockholders participate in the process and evoke change through director elections. Since public companies adopted say-on-pay votes, we have noticed boards of directors become litigation targets after negative say-on-pay votes. These lawsuits occur after stockholders deliver a negative say-on-pay vote and the board of directors nonetheless fails to rescind or alter its senior officer compensation. By requiring involuntary stockholder participation through say-on-pay votes, we think the outcome is the introduction of controversy, discord, and the possibility of lawsuits to the FCS’s cooperative institutions. Therefore say-on-pay votes are harmful to the cooperative business model.
In conclusion, we see FCA as proposing regulatory provisions in areas that are inconsistent with its regulatory philosophy. We ask FCA return to the principles stated in its Policy Statement on Regulation Philosophy, which in their entirety do not support the promulgation of the proposed compensation committee responsibilities and say-on-pay provisions. Our evaluation of FCA’s principles concludes the proposed provisions make it more difficult to carry out our fiduciary responsibilities, create inefficiencies, discourages broad and appropriate customer-stockholder engagement, fails to focus on an identified risk, and invites discord.
For the reasons discussed previously, we ask FCA to substantially revise the proposed provision on compensation committee responsibilities to be a flexible, principles-based approach rather than prescribing specific requirements. Similarly, we ask that FCA withdraw its problematic say-on-pay provision in its entirety. We see FCA’s proposed regulatory provisions as unnecessary considering the current cooperative governance structure and existing regulatory framework has performed in a highly effective and appropriate manner for numerous years under a wide variety of agricultural and financial market environments.
Please do not hesitate to contact me if you have any questions regarding the Committee’s comment on the proposed rule.
Robert E. Amarel Jr.
Farm Credit West Director
Compensation Committee Member
 See FCA BL 060 – Compensation Committees, July 9, 2009.
 FCA-PS-59 Regulatory Philosophy, July 8, 2011.