April 22, 2016

Excessive Incentive Pay: Financial Firm Proposal – 60% at Risk for Up to 11 Years

As I blogged yesterday on, the banking regulators are finally rolling out a permanent proposal under Dodd-Frank’s Section 956 regarding excessive incentive pay. The NCUA kicked the proposing off. Here’s the summary from this Sullivan & Cromwell memo (also see this WSJ article – and this blog):

Earlier today, the National Credit Union Administration issued a notice of proposed rulemaking for a new interagency rule on incentive-based compensation that applies to financial institutions with consolidated assets of at least $1 billion. Today’s new proposal replaces one originally issued 5 years ago in the first half of 2011. The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the Office of the Comptroller of the Currency and the Securities and Exchange Commission are all expected to propose the same new rule.

The new proposed rule establishes general qualitative requirements applicable to all covered companies, additional specific requirements for institutions with total consolidated assets of at least $50 billion and further, more stringent requirements for those with total consolidated assets of at least $250 billion. The general qualitative requirements applicable to all covered institutions include (1) prohibiting incentive arrangements that encourage inappropriate risks by providing excessive compensation, (2) prohibiting incentive arrangements that encourage inappropriate risks that could lead to a material financial loss, (3) establishing requirements for performance measures to appropriately balance risk and reward, (4) requiring board of director oversight of incentive arrangements and (5) mandating appropriate recordkeeping (which replaces the annual reporting contemplated by the 2011 proposal).

As noted in this MarketWatch article – and this WSJ article – Senator Warren is once again taking aim at the SEC, saying it has let down investors by allowing Steven Cohen back into the hedge-fund business…

FINRA: Proposes Delay for New Debt Research Rule

As noted in this MoFo blog, FINRA has proposed delaying further the implementation date of its new debt research rule (Rule 2422) until July 16, 2016. Rule 2422 was set to take effect today, after the implementation date was extended from the initial February 22nd deadline.

The Challenges of Landing a Board Seat

The topic of landing a board seat is hot. We have our own checklist about how to use a recruiter to become a director nominee – and these other materials from the “Director Recruitment” Practice Area. And here’s a useful excerpt from Jill Griffin’s “Earn Your Seat on a Corporate Board: 7 Actions to Build Your Career, Elevate Your Leadership, and Expand Your Influence“:

The Board Seat Audit – Gauge Your Fit

To help you access your suitability, I’ve developed what I call the “Board Seat Readiness Audit.” Over many years, I’ve designed for clients a ton of research audits and surveys that used some fancy measurement metrics. (Likert Scale, anyone?) But my goal was brevity, and so I’ve kept this audit simple! I envision someone completing this on a flight from Houston to New York, for instance.

I’ve worked hard to reduce your responses to the good ole “Yes, No, or Maybe,” with the following values: Yes = 3 points; No = 0 points; Maybe = 1 point. Before you begin, take a moment to reflect on your work style and employment history. Above all, be truthful and candid with yourself. (You can find the online version at

1. Do you truly have the time to serve?

Saying “yes” to a seat can carry a commitment of five to ten years. In fact, it’s not unusual to serve for ten years or more. This includes attending, on average, six to eight meetings a year (and the travel time to and from those meetings), serving on at least one committee, and being “on call” when unexpected issues arise.

2. Is compensation a secondary motive for you in seeking corporate board service?

If to any degree you are driven by money to seek a seat on a corporate board, think again. There are probably far easier ways to earn it. Board service should ideally happen when you are financially stable and do not “need” the fees or stock.

3. Are you well-informed about board of directors’ liability?

Action 1: testing your readiness – Officers and directors of public companies always face the possibility that investors, regulators, and even criminal prosecutors might challenge their decisions. This increased scrutiny makes it more important than ever that you understand the obligations and potential liabilities inherent in public board service. Beginning in 2001, major corporate accounting scandals at Enron, WorldCom, and other large-cap companies cost investors billions of dollars when their share prices collapsed. This shook public confidence in the US securities markets. Soon thereafter, on July 30, 2002, the Sarbanes-Oxley Act was enacted, which covers the responsibilities of a public corporation’s board of directors, adds criminal penalties for certain misconduct, and addresses issues such as auditor independence, corporate governance, internal control assessment, and enhanced financial disclosure. Bottom line: Public board service comes with serious obligations. Proceed with caution.

4. Do you think like an entrepreneur?

The very best and the most successful companies in America (3M, for instance) have always managed to maintain an entrepreneurial spirit no matter how big they’ve become. A culture that encourages creativity and inventiveness instills in its people passion and an urgency to create, and in its leaders openness to entirely new ideas—many of which come from outside the firm’s respective industry.

5. Are you financially literate?

Financial acuity is an essential proficiency in a board director. While you don’t have to be a CFO or an accountant, you must have the know-how to analyze financial statements. Enron’s and other corporations’ scandals drove legislation to ensure this.

6. Are you a natural mentor?

The role of a director differs greatly from that of an operating executive who is accustomed to “running the show.” Most director time is spent reviewing and assessing strategy, risk, financial reporting, and management performance. Aspiring board members should be comfortable in the role of mentoring. On the Luby’s board on which I serve, we have used a “board buddy” system in which a board director and a senior executive are matched. In my case, I was paired with Scott Gray, the firm’s CFO. He and I meet periodically and exchange ideas. He’s taught me how to dig deeper into financial statements, and I’ve helped him build on his already savvy marketing acumen.

7. Can you bring valuable contacts to the table?

Board directors are expected to make their network of problem solvers available to the corporation’s management team. Do you have a wide network, especially in your field of expertise, and are you generously willing to share their names? For instance, I live in Austin, a city known for its software start-ups. Through networking, I came across a leading-edge technology. It allowed Luby’s to survey customers via a touch-point screen strategically located at the entrance of each restaurant. This information has helped us serve our patrons better. But even more gratifying for me was that, after a year of relentless system testing, Luby’s signed a contract with this deserving start-up, which moved it into profitability.

8. Do you naturally bring humor to stressful situations?

Great board members, like great leaders, have a sense of humor and know how to have fun. But they intuitively understand the rules of humor and don’t have fun at someone else’s expense. Instead, they make light of themselves.
Many stories told by President John F. Kennedy show the power of humor and the art of self deprecation.
The website The Hill shares a few great examples in the article, “Kennedy’s wit and humor: A legacy for political leadership” (November 20, 2013). Dan Glickman wrote, “During the 1960 campaign when pundits and opponents complained about his wealth, he simply replied ‘I just received the following wire from my generous Daddy. “Dear Jack, Don’t buy a single vote more than is necessary. I’ll be damned if I am going to pay for a landslide.”’. . . Or when a young boy asked him how he became a war hero, he gracefully responded that ‘it was absolutely involuntary; they sunk my boat.’ That’s one of my favorite examples.

9. Do you like to dig deep for insight?

Men and women with this gift have a natural curiosity that drives in-depth analysis. This innate talent is prized in the boardroom. James S. Turley, retired chairman and CEO of Ernst & Young, advises: “You are empowered to ask any question as a director. You are not management. Your job is to provide governance and oversight. Outside of board meetings, there is often a lot of homework to be done with managers and understanding how they see the business and how they think. These are serious roles. You don’t just hang out.”

10. Are you a team player?

A team player is generally described as one who communicates constructively, demonstrates reliability, works as a problem-solver, treats others in a respectful and supportive manner, shows commitment to the team, and is skilled at building on the ideas of others. Are these your strong suits?

11. Are you optimistic?

An optimistic mindset enables a board director to view a conflict as a problem to be solved. Rather than focus on blame, he or she will focus on solutions. Boards need men and women with this mindset to avoid gridlock and to move the firm forward. Ask yourself: Would your colleagues describe you as seeing the glass half-full rather than half-empty? Make no mistake: Boards want what Seth Godin calls “a generous skeptic.” That’s the director who can take the opposing position and help shed light on its merits. But, at the end of the day, the best boards work as a team and move ahead with an optimistic, can-do attitude.

12. Are you willing to speak up about sensitive topics?

Boards depend on directors who not only speak up about sensitive topics but also are skilled in framing their points in an honest, confident, respectful, and positive manner. Sensitive topics can range from nepotism and outward signs of prejudice to unanswered telephone calls and queries. In making such probing yet diplomatic remarks, it’s especially important to show respect for the work of the team. Does this kind of diplomacy come naturally to you?

13. Can you cast the lone vote?

Are you capable of casting the lone “no” vote? Can you do so even when your vote is clearly out of step with valued colleagues? My friend and valued colleague Ralph Hasson contributed this question and remembers the so- bering experience well. On a critical vote, he stood alone and voted “no” when the majority of his fellow directors voted “yes” and one abstained. Ralph recalls that afterward, the director who abstained turned to Ralph and said, “I wish I had voted ‘no.’” Like Ralph, I have cast the lone vote. You may be uncomfortable when you do it, but you eventually experience a satisfied feeling of knowing you have looked inside your heart and stood for your values.

What do your colleagues think? After reflecting on your own, have some close friends and colleagues take the same audit on your behalf, imagining you in the boardroom. How do their impressions of you compare with your own? What can their impressions teach you about your true fit for corporate board service?

Broc Romanek