|ABA COMMUNITY BANK INVESTOR CONFERENCE|
Dodd-Frank casts shadow on investor communications
Increased disclosures will prompt increased scrutiny. Banks need to be ready to tell their story
April 15, 2011
By Steve Cocheo, executive editor
Since the Dodd-Frank Act passed last summer banks have been preoccupied with its immediate impacts on profitability and expense—such as the interchange issue and compliance duties and costs. But Dodd-Frank presents an additional challenge to management and boards of directors: communicating about the multitude of impacts with the bank’s various publics—especially shareholders.
In many ways, “the impact of Dodd-Frank is unknown” on this dynamic, said Mus. “But ongoing communication of the bank’s guiding principles will help navigate a changing landscape.”
Ultimately, said Mus, “banks will be left on their own to tell their own story. Nobody is going to do it for you.” The perception of stakeholders regarding Dodd-Frank will hinge tremendously on how well banks do that job. Much of that communication will have to be direct. “The media will tell the story as they see fit,” he explained.
While Mus was addressing an audience of larger publicity, traded community banks many of the challenges and solutions that he outlined concern all banks, or will in years to come.
The three key issues that Mus addressed are executive compensation; the whistleblower sections of Dodd-Frank; and compliance costs. Towards the end of his talk he presented communications tips. (Marsh Communications handles investor and public relations and marketing in traditional and new media channels.)
Executive compensation, performance, and milestones
Pay for executives and incentive pay programs in general have been under increasing scrutiny in recent years, and both Dodd-Frank and independent actions by financial regulators stepped up this attention. Dodd-Frank included a nonbinding “say on pay” vote for shareholders that these owners can determine to be conducted annually, or every two or three years.
Mus’ message on this score can be summarized as: “be short and simple—yet specific.”
Clearly, he said, Dodd-Frank puts the onus on banks to demonstrate a clear relationship between compensation and financial performance. Banks must show that executives’ actions advance the interests of the bank and its shareholders.
“An effective way to do this is using milestones,” said Mus. “Talk about things that management has been able to move forward.” Examples of such measurable factors include reducing nonperforming assets; diversifying a formerly concentrated loan portfolio; increasing shareholder returns; and expanding market share.
“You want to show that needle moving, indicating progress,” said Mus. He advocates using a literal dashboard approach when practical in communications to represent progress graphically.
Mus urged banks to demonstrate transparency, but to manage that transparency. “Make the conversation about what you are doing, rather than about the compensation itself,” he advised.
Regarding “say on pay,” Mus stressed the need to communicate to shareholders the principles that guide the bank’s compensation policies.
Related to that, he acknowledged that while corporate executives would prefer to see triennial say-on-pay votes, proxy advisory firms and many shareholders prefer annual votes. In the face of that tension, executives must sell their shareholders on the triennial timing, and key to that is to not look defensive. That requires presenting a roadmap for the next two to three years that includes “skin in the game” for the executive corps—if they produce, they get paid for it. The bank’s largest investors represent the most important audience for these messages.
Mus also encouraged bank leaders to show shareholders comparisons of their institution’s pay practices and those of peer banks. Demonstrating that the company maintains reasonable policies within its immediate universe will help ease shareholder concerns.
No matter what the frequency of the bank’s say-on-pay vote, Mus said continuing engagement with shareholders must be maintained to demonstrate management accountability and transparency.
Dodd-Frank whistleblower provisions
Dodd-Frank adds another form of whistleblower legislation to that which public banks already face under the Sarbanes-Oxley Act. In Title IX of the new act, not only new protections, but also new incentives, have been added for whistleblowers. In terms of protections, employers are barred from retaliating against any lawful whistleblower. If they do, whistleblowers may sue them for reinstatement and double their back pay, with interest. In terms of incentives, whistleblowers may receive between 10%-30% of monetary sanctions that the Securities and Exchange Commission obtains, so long as the agency’s sanctions exceed $1 million.
Mus noted that corporate governance experts fear that the new law will create a “cottage industry of whistleblowers.” With a potential carrot of $100,000 or more looming, he said, employees could be encouraged to bypass a bank’s internal compliance systems.
“You don’t want to be learning about something from a reporter instead of from a branch manager,” said Mus. To address issues before they reach the level of public and expensive whistleblowing, Mus said, banks must ensure that they have a robust employee communications program in place. “Foster a culture of transparency and openness in your organization,” said Mus.
Employees need to be reminded of the avenues the bank has established for internal reporting of suspected wrongdoing and misrepresentation. (ABA, in its comment letter on the SEC’s implementing rule, urged that whistleblowers be required to have tried the organization’s internal procedures first. The matter is still pending.) In addition, he said, the company’s mechanisms must ensure that both the board and top management know as soon as possible that a potential issue has arisen.
“Governance is now part of corporate reputation management,” said Mus. “Governance is part of your brand now.”
Dodd-Frank compliance burdens
One of the greatest uncertainties posed for shareholders is the cost of the added compliance and regulatory burdens that Dodd-Frank is bringing to banking on multiple fronts. The continual talk in the media about this challenge often deals in generalities, as many rules remain to be written and finalized, and many unintended consequences continue to be discovered as regulators and industry representatives alike delve into the nitty gritty of implementation.
“You want to give comfort to investors that management is on top of these issues,” said Mus. “If the shareholders are comforted, that will go a long way towards alleviating their fears.”
Compliance burden concerns also lend themselves to a roadmap approach to communication, suggested Mus.
However, compliance issues involve more than the shareholder audience. As Dodd-Frank implementation and other regulatory actions become effective, consumers and bank customers in general have been feeling the impact, and have been hearing and reading in the media of coming effects. Consider the articles and coverage already seen concerning the demise of free checking as an example. Mus noted that some institutions have handled the early stages well, and others not so well.
The message that customers are reading is that they face new fees, more fees, and reduced services. Mus advised bankers to be very open with customers about what is going on.
First, he said, “don’t hide fee changes in the small print.”
Second, he added, make it clear how fees can be avoided, through maintaining minimum balances, or choosing more appropriate account options.
Strategic communication strategies
Mus outlined tips for improving the bank’s communications approaches as it adapts to Dodd-Frank. One overall bit of advice concerned frequency of the bank’s messages.
“Don’t be afraid to say the same thing over and over again,” said Mus. “That’s how things get to be understood.”
Other tips include:
1. Focus on specific publics. Consider how individual constituent groups may be affected.
2. Tailor the message. Deliver targeted messages to each group that allay their fears, and, where appropriate, communicate benefits of the act.
3. Don’t dally. Put procedures in place enabling rapid response to shareholder concerns.
4. Tap big holders. Reach out to top shareholders to identify concerns proactively.
5. Inform the leadership. Ensure that management and board members know the bank’s key messages on hot issues.
6. Give swimming lessons. Provide communications training to appropriate parties in the bank.
7. Accentuate the good stuff. Wherever possible, turn regulatory reform into a positive, rather than a negative. One example is highlighting increased deposit insurance levels and extended coverage of noninterest-bearing transaction accounts. Similarly, small businesses will want to hear more about Dodd-Frank’s provision concerning interest on corporate demand deposits.
8. Turn lemons to lemonade. Turn the necessity of making increased disclosures about the bank’s condition into a positive by educating investors. (Mus pointed out that the Financial Accounting Standards Board is requiring more detail on bank credit quality.)
Dashboard graphics can be used to differentiate the bank from peers. They can also help illustrate strengths, such as high capital levels. Mus showed how a visual approach could show how much higher a bank’s capital level exceeded federal thresholds.
“You need to give shareholders context, so they aren’t overwhelmed” by raw data, said Mus. Such context helps the bank establish the parameters of the resulting conversation, he added.
9. Begin, but don’t end, with the proxy. Communicate in ways beyond the bank’s proxy statement, using a variety of communication channels.
10. Spread the message inside first. Coordinate communications efforts among all relevant functions, including Investor Relations, the Chief Financial Officer’s department, Legal, Corporate Communications, and Human Resources.
In a related vein, Mus, who favors appropriate use of social media for the shareholder audience, urged bankers to include the bank’s compliance people on the team overseeing social media.
“They need to have a say on it,” he insisted.
[This article was posted on April 15, 2011, on the website of ABA Banking Journal, www.ababj.com, and is copyright 2011 by the American Bankers Association.]
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