A Cautionary Tale for Compensation Committee Members

August 25th, 2017

committee-8-25-17.pngThe Office of the Comptroller of the Currency (OCC) recently took an enforcement action in the form of a consent order against a bank director that serves as a cautionary tale for the banking industry. The consent order, agreed to by and between the OCC and a director and former senior vice president of a small national bank in Wisconsin, reminds bank boards of directors of their fiduciary duties with respect to executive compensation and the consequences of breaching those duties. In particular, this action puts board compensation committee members on notice that they may be found liable for unsafe or unsound executive compensation practices that occur on their watch.

Enforcement Action Details
The consent order described that the director had a longstanding affiliation with the bank, serving in multiple operational positions throughout her tenure, culminating in her election to the bank’s board of directors in 2005. Despite these 32 years of service, the OCC’s findings in the consent order focused on the director’s relatively short period of service on the board’s executive compensation committee, where she served from 2010 to 2013.

During this period, it appears, based on a notice of charges issued in 2016 and a $1.6 million civil money penalty issued in 2017—both against the bank’s former chief executive officer (who also held the titles of president and chairman of the board)—that this individual abused his power and used it to reap excessive compensation from the bank. In particular, the notice of charges cited a report finding that the former CEO “was a dominant influence in all aspects of bank operations,” which ultimately led to insider abuse with respect to compensation and breaches of his fiduciary duties.

Based on such abuse and the resulting action against the former CEO, the OCC apparently then turned its attention to the director. Indeed, the consent order identified the director’s conduct during the period of 2012 to 2013 as the relevant period leading to the issuance or the consent order. During this time, the OCC said that the director failed to do the following:

  • Oversee or control the use of bank funds by its former CEO for his personal expenses despite knowing that he had previously used bank funds for personal expenses.
  • Ensure that disinterested and independent directors determined and approved the compensation of the bank’s former CEO, thereby allowing him to receive excessive compensation.
  • Recuse herself from voting on the bank’s former CEO compensation even though she had a conflict of interest because he was personally indebted to the director and her husband in an amount exceeding $2 million.

Based on these failures as a member of the board’s executive compensation committee, the OCC concluded that the director engaged in conduct satisfying 12 U.S.C. 1818(i) and ordered her to pay a civil money penalty in the amount of $5,000.

Takeaways for Bank Directors
As banks continue to report an uptick in regulatory inquiries and examination findings focusing on executive and incentive compensation, agency enforcement actions relating to compensation issues may become more common in the coming years. This is a trend that is developing even in the face of recent reports that some of the federal banking agencies are likely to postpone consideration of currently proposed regulations regarding incentive compensation required under the Dodd-Frank Act.

Boards should utilize this trend and the lessons learned from the consent order as a reminder to periodically review compensation arrangements and compensation standards at their bank to ensure they are adequately fulfilling their fiduciary duties. Such reviews should critically analyze executive and incentive compensation arrangements and seek to ensure that bank and board policies governing such arrangements meet regulatory expectations. In addition, boards should periodically inquire about and analyze any relationships board compensation committee members may have with senior management to be able to confirm the independence of the committee members.

dfreeman

David Freeman is a partner and head of the firm's Financial Services practice group. He represents financial institutions, investment managers, and broker-dealers on a variety of matters including banking and securities regulatory issues, legislation, mergers and acquisitions, private investment funds, and new product development and documentation.

razarow

Rob Azarow is a partner at Arnold & Porter Kaye Scholer LLP, based in the New York office. He leads the firm’s financial institutions M&A practice and concentrates his practice in securities, corporate and banking law.

kwechter

Kathleen Wechter is a counsel for Arnold & Porter Kaye Scholer LLP. She has more than 20 years' experience in employee benefits and executive compensation, drafting and advising clients on tax-qualified retirement and incentive plans as well as on employee stock ownership plans (ESOPs) and medical and welfare plans

mmancusi

Michael Mancusi is a partner at Arnold & Porter Kaye Scholer LLP. He is in the firm’s Washington, DC office and is a member of the financial services practice. He represents domestic and foreign banks, credit unions and other financial services clients in a wide range of state and federal regulatory, compliance and enforcement matters.

ezanias

Eleni Zanias is an associate in the Corporate and Securities practice group in Arnold & Porter Kaye Scholer LLP's New York office. Her practice focuses on corporate and financial transactions, particularly mergers and acquisitions.

kmtoomey

Kevin Toomey is an associate at Arnold & Porter Kaye Scholer LLP. He represents bank and nonbank financial services companies and individuals in a wide range of state and federal enforcement, regulatory, compliance, and governance matters before the bank regulatory agencies, the CFPB, FinCEN, OFAC, and the Department of Justice.