Senior Officers Compensation Disclosures - ANPRN - Fall 2010
Mr. Gary K. Van Meter
Office of Regulatory Policy
Farm Credit Administration
1501 Farm Credit Drive
McLean, Virginia 22102-5090
RE: ANPRM on Executive Compensation Disclosures
Dear Mr. Van Meter:
ArborOne, ACA (ArborOne), on behalf of its board, appreciates the opportunity to comment on the Farm Credit Administration’s (FCA) ANPRM regarding requirements for institutions of the Farm Credit System (System) to disclose to stockholders and investors on executive compensation that was published in the November 18, 2010 Federal Register.
ArborOne supports the overall comments being submitted by the Farm Credit Council on behalf of the System. Due to the significance of this subject, we felt the urgency to submit our own comments on various aspects of the proposed rule.
ArborOne, too, remains committed to adhering to both the “letter and the spirit” of the Farm Credit Act in regard to timely, meaningful and accurate disclosure of financial information, including information relating to compensation programs. We are also proud of the cooperative style of governance at our institution, including the director election process. These governance procedures continue to serve ArborOne well, and have helped to avoid some of the problems encountered by other financial institutions during recent years. As such, the FCS did not utilize TARP funds, and did not engage in abusive subprime lending.” Recognizing this fact, Congress “insisted that the institutions of the FCS not be subject to a number of the provisions of” Dodd-Frank including those related to executive compensation.
An important aspect of the cooperative structure is that our boards truly operate independent of the institution’s management. Unlike virtually all publicly traded companies, and even many non-public companies, System institution boards have no members who are employees. Instead, they specifically represent the customers who use the cooperative. Our directors seek to maximize value for the stockholders as customers of the cooperative. Of course, there is no compensation to any employees in the form of stock or stock options, and, therefore, no incentive to seek to “manage” financial performance to increase stock-based compensation.
We also note that in terms of stockholders and investors, it is always important to focus on the unique structure of the System. At ArborOne, stockholders have an “at-risk” investment typically not more than $1000. Their primary business motivation in joining the association is for the credit and related services offered. In turn, the System FCBs are owned by the associations and the benefit of ownership for the associations comes in the form of a reliable low cost source of loan funds. There is no “investment” return in the normal market context of that term. ArborOne pays patronage dividends to our members based on the member’s level of business activity with the association, not the amount of stock purchased. Patronage is therefore directly related to the member’s cost of borrowing.
The “Background” section of the ANPRM cites a number of factors that contribute to the need for this new rule. While some updating of existing regulations may be appropriate we are unaware of circumstances where the existing statutory and regulatory framework does not result in comprehensive compensation disclosures to stockholders. Rather we believe that additional regulatory requirements are not necessary given that we adopt appropriate policies and procedures that ensure complete meaningful, timely and accurate compensation disclosures consistent with the objectives of the Act and regulatory requirements. We believe the FCA should adopt the approach being proposed by other financial institution regulators, i.e., require the establishment of a compensation program that addresses delineated areas and then examine against implementation of that program. Given the absence of any significant safety and soundness issues in regard to current compensation programs, it would create little, if any, additional burden on FCA to examine those institutions against their own policy. In the event the FCA was to uncover any unsafe or unsound governance practices in a System institution, it has the requisite enforcement power necessary to correct the situation.
We believe it is helpful to consider the actions of the other financial regulators, and specifically note that the National Credit Union Administration (who is participating in the proposed rulemaking referenced above) do not require compensation disclosures (or a non-binding shareholder vote) for “individual member” credit unions, (but did recently amend their rules in regard to “corporate” credit unions). As you are aware, Sec. 5.17 (a)(8) of the Farm Credit Act provides generally that the requirements of FCA in regard to the preparation of financial statements “may not be more burdensome or costly than the requirements applicable to national banks…”
Finally, we want to reiterate our commitment to complete, accurate financial reporting in accord with industry standards. However, unless there is a compelling business justification based on the System’s unique characteristics, compensation disclosure should be no more detailed than those used by other regulated entities. As more fully described in the specific comments, we strongly object to any requirement for a non-binding “say on pay” vote for executive compensation or a change in the current format for reporting senior officer compensation.
ArborOne has been proactive in its disclosure program regarding executive compensation. But perhaps even more significantly, the ArborOne’s directors have been vigilant in fulfilling their fiduciary responsibility to ensure that our institution’s programs have operated in a safe and sound manner and not exposed the institution to material adverse risk. Simply stated, in comparison to other financial institutions, ArborOne’s compensation programs are well within industry norms. ArborOne has not, and does not, engage in the type of abusive incentive compensation programs that Congress has sought to correct. ArborOne does not utilize stock or stock options in compensating employees, and the total compensation paid to the CEO and senior officers are fully disclosed and completely transparent.
Existing ArborOne practices and current FCA requirements meet or exceed the requirements of the other regulators of financial institutions. We urge FCA to adopt the approach taken by those regulators and utilize the examination process to evaluate compensation programs.
Once again, we appreciate this opportunity to comment on the ANPRM and trust that our comments will assist the Agency. If you have any questions, please do not hesitate to contact me.
Jasper W. Shuler
President and CEO