THOUGHTS FOR MANAGEMENT AND BOARDS

The coming year presents two challenges to management, boards, risk managers and HR directors of virtually all banks:

Implementation of new best practices and regulatory requirements arising from Dodd-Frank or relating to corporate governance

Ensuring that this implementation doesn't conflict with the primary mission of all boards and management teams of for-profit organizations: best serving share holder interests.

These challenges are complicated by the large number of Dodd-Frank regulations (over 240) and the uncertainty associated with their implementation.

In addition, shareholder activism is flourishing, as activists demand faster turnaround measures and short-term gains. This caused several CEOs to be deposed, and banks to be sold. This is also in direct conflict with the regulatory and compliance pressures bank experience, since addressing such issues is a profit drain with little return on the investment except for the license to operate.

The latest round of regulatory changes has embraced the shareholder rights agenda to an extreme extent. Board will need to increasingly solicit shareholder views to support a range of decisions, from executive compensation to director nominations, that have traditionally been outside the control or even influence of shareholders.

While various governmental bodies, including the SEC, now explore whether the pendulum has swung too far in favor of shareholders, boards and managements must implement the new regulations. As they do so, it is challenging to keep in mind that their ultimate responsibility is not to ensure perfect compliance but to provide strategic oversight to enhance long term shareholder value. This is particularly challenging as the cost of non-compliance skyrocketed in the recent past, and it is even higher than the cost of compliance...

Among the new corporate governance issues to be addressed in 2011 are:

A.Proxy access to shareholders. The specifics of this requirement are yet to be determined, but ignoring implementation is unwise. Initial thoughts as to implementation should be considered, as well as the impact of this change.

B.Executive compensation. This year annual meetings must include a non-binding say-on-pay resolution seeking shareholder approval of names executive officer compensation, and a separate shareholder vote on how often they should vie on say-on-pay. ISS and other proxy advisory firms are advocating annual vote. The new rules also require disclosure of certain golden parachute arrangements in merger proxy statements and tender offer materials, and to solicit shareholder approval for these arrangements.

Special emphasis is put on highlighting the relationship between executive compensation and the company's financial performance

Other features from Dodd-Frank include expansion of claw-back requirements as per SOX such that executive officers of companies which had to restate their financials downward will have to return part of their incentive compensation that was based on the old financials. Plus additional disclosure of policies regarding incentive compensation.

As management and boards review compensation policies, they also must ensure that these policies safeguard against excessive risk taking by company employees without inhibiting the bank's s ability to recruit top notch executives which is so key to the long-term success of the company.

C. Risk management. The SEC added proxy requirements for discussion of a company's board leadership structure and role in risk oversight and monitoring. Special emphasis has been put on the relationship between executive compensation policies and risk management. Companies must now discuss risks that arise from the compensation policies and how those relate to risk management and risk taking.

D. Board composition and director qualifications. According to Spencer Stuart 2010 Board Index, the CEO is the only non-independent director in over half of S&P boards, up sharply from 22% in 2000. Independence standards of both regulators and proxy advisors are now more stringent and include insignificant business and personal relationships.

Further, a joint statement issued cast year by the Fed, FDIC, OCC and Treasury instructed banks to review their existing board membership "to assure that the leadership of the firm has sufficient expertise and ability" to manage risk and maintain sufficient balance sheet capacity.

At the same time, finding qualified directors, especially financial experts, is more difficult than ever, and the universe of interested oar ties is shrinking as the risk of being a bank directors increases.

These various requirements have several inherent conflicts embedded in them. As management and boards seek to resolve those conflicts while effectively addressing regulatory requirements, I offer the following:

1. Never forget the primary purpose of the enterprise - serving the bank's various constituencies, first and foremost the shareholders who invested their precious capital in the institutions.

2. Always remember the board's role is to provide strategic oversight, NOT to manage the daily operations of the company, not even with respect to risk management.