Pub. 8 2013-2014 Issue 2

www.nebankers.org 24 Extraordinary Service for Extraordinary Members. Bert Ely’s FARM CREDIT WATCH ® Shedding Light on the Farm Credit System, America’s Least Known GSE © 2012 Bert Ely FCS Goes All Out to Kill Say-on-Pay T he Farm Credit Council, the trade association for Farm Credit System (FCS) institu- tions, has gone all out to kill the advisory say-on-pay rule the Farm Credit Administration (FCA) adopted last September. This rule gives an FCS institution’s “shareholders [i.e., its borrowers] the opportunity to cast a non-binding, advisory vote on senior officer compensation. The vote would be required if either the CEO’s or the aggregate of all other senior officers’ compensation . . . increased or de- creased by 15 percent or more from the previous reporting period.” As a practical matter, say-on-pay advisory votes most often would occur when a retiring FCS CEO gets a large retirement bonus in his final year’s compensation or when the CEO of an FCS association merging into another association gets a bonus for agreeing to the deal. As a long-time observer of FCS pay practices, I have noticed that these two events tend to trigger big paydays for FCS executives. The Farm Credit Council has now mounted a two-prong attack on say- on-pay, starting in the Senate. The Senate version of the Farm Bill now states that the FCA should consider “the unique cooperative structure of the [FCS]” when issuing regulations. Due to that uniqueness, electing FCS boards of directors “provides stockholders the opportunity to participate in the management of their institutions.” Therefore, FCS directors, not stock- holders, should determine executive compensation “to ensure the safe and sound operation of those institutions.” The Farm Bill then states that “any [FCA] regulation should strengthen and not hinder the ability of [FCS] boards to oversee compensation prac- tices.” Now the kicker in the bill: “not later than 60 days after enactment of [the Farm Bill] the [FCA] shall review its rules to reflect congressional intent that a primary responsibility of the boards of directors of [FCS] institu- tions, as elected representatives of their stockholders, is to oversee compensa- tion practices.” Translation: FCA, repeal your advisory say-on-pay rule, and do it pronto! Although a seemingly minor provision in the Farm Bill, this leg- islative maneuver by the council is sufficiently outrageous that it drew the attention of Politico, which provides authoritative reporting on congres- sional actions. The council has taken a different approach in the House, asserting that the FCA’s say-on-pay rule represents an attempt to extend the Dodd-Frank Act to the FCS, at least with regard to executive compensation. Rather than trying to amend the Farm Bill, as was done in the Senate, the council suc- ceeded in getting the appropriations bill for USDA and related farm agen- cies, including the FCA, amended to bar the FCA from spending any funds to implement its say-on-pay rule. Such a ban would make the rule a dead-letter since the FCA could not then enforce the rule. The provision provides that “no funds available to the [FCA] shall be used to imple- ment or enforce those portions of the final regulation . . . establishing a requirement that [FCS] institu- tions hold an advisory vote on officer compensation.” Having gotten this far, and on a track independent of the Farm Bill, there is a good chance this spending prohibition will be enacted, unless the FCA can convince congressional appropriators that FCS borrowers, as stockholders, should have a say on the pay of FCS insiders. The big question is why the council is expending an enor- mous amount of political capital to kill say-on-pay. Perhaps the council is try- ing to send amessage to the FCA—don’t adopt rules we don’t like! To its credit, in response to con- gressional inquiries, the FCA has expressed support for the rule and provided justification for its adop- tion. So far, though, the FCA has not publicly expressed opposition to these congressional attempts to kill say-on-pay. Given her long-standing interest in increased transparency, FCA Chairman Jill Long Thompson should lead the charge in protecting the say-on-pay rule for two reasons. First, it is a good rule because it does increase FCS transparency in the all-important area of executive com- pensation. Second, and perhaps more importantly, preserving the rule will enhance the reputation of the FCA as an independent regulator. Far too often the FCA is viewed, and correctly so, as serving the interests of the FCS and the council rather than the public. FCA OKs Final Rule on Unin- corporated Business Entities On May 9, the three-member FCA Board of Directors approved a final rule on the use of unincorporated business entities (UBEs) by FCS institutions. While there are some situations where