We recently presented a session titled “Investor Communications in the Dodd-Frank Era” at the ABA’s Community Bank Investor Conference in New York. Following is a synopsis of that presentation, which also serves as a follow up to our August 2010 Viewpoint article in American Banker on potential implications of the Dodd-Frank Act.

If there is one thing most people are sure of in the months since the passage of the Dodd–Frank Wall Street Reform and Consumer Protection Act, it is that they are still unsure of what, exactly, the details of the law ultimately will look like. What we do know is that banks will be required to provide an increased level of public disclosure, which is going to invite greater scrutiny by shareholders, the media, customers and local communities, not to mention activists and other potentially adversarial groups.

It bears repeating that public perception is going to be of upmost importance to banks. The media will tell the story as they see fit. Banks must control their own message to mitigate the negative, and maximize the positive, impact from regulatory reform.

This won’t be easy as it will require banks to translate in simple and clear language how this complex legislation will impact stakeholders. However, there are guidelines that banks can follow to help overcome the challenges.

Let’s take a look at two of the more pressing issues that likely will impact banks’ communications in the coming months and years.

Executive Compensation

Banks and other financial services companies will have to be much more forthcoming about their executive compensation practices. In addition to increased disclosure requirements, Dodd-Frank calls on banks to offer a non-binding vote on executive compensation to be held every 1-3 years.  

In light of this, it will be incumbent on companies to show the relationship between compensation and financial performance. Management should clearly define the metrics that demonstrate their value to the company, such as reduced NPAs/improved credit quality, a diversified lending portfolio and positive shareholder returns, etc., while demonstrating how their interests are tied to shareholders’ interests.

Articulate how executives have made progress or reached performance goals. Keep the key messages relatively simple and straightforward. Do not get too technical or you may blunt the impact you are trying to create. Use milestones as a way to regularly communicate with the public, noting progress achieved towards stated goals such as reducing NPAs by X percent.

Focus on the core principles guiding the executive compensation, e.g., a competitive program to attract, retain and motivate the best talent, aimed at generating long-term value creation while providing transparency to shareholders. Shift the conversation to the progress achieved by management and the values driving the compensation policy, as opposed to having the focus on the compensation figures themselves.

A recent article in the Wall Street Journal noted that some companies are fighting against giving shareholders a vote on executive pay. One tactic is to denounce proxy-advisory firms that tell shareholders how to cast their ballots. While this may not affect most community banks, it makes a larger point: the attitude by which banks approach the issue will impact how they are perceived by the public. Fighting against what is largely seen in the public as a positive is not smart policy.

To be sure, criticizing banks for their executive compensation policies has become a spectator sport, especially as it relates to large “Wall Street” banks. It is something easy and tangible to ridicule, while defending the payouts is a PR battle that no company is going to win.

With that in mind, persuading shareholders to move to a biennial or triennial vote could be tricky. Polls show most shareholders and proxy advisor firms prefer annual votes.

Management should first contact their largest investors to gauge feelings on the matter. When presenting the case, do not look defensive. Be positive. Highlight good pay practices and remind shareholders of any past changes to executive compensation programs that had shareholder input.

Give a roadmap for next 2-3 years so that shareholders know exactly what to expect (knowledge breeds comfort), show that compensation programs are in line with banks of similar size (if true) and continue to engage shareholders between votes to show accountability and transparency. If shareholders believe they can contact the bank at any time, be heard and get feedback, they likely will give management more leeway in setting the timeframe for the votes.

Whistleblower Protection

Dodd-Frank includes new whistleblower provisions designed to encourage employees and others to report securities law violations to the SEC. Key to these provisions is the fact that individuals are now entitled to 10-30 percent of any financial penalty.

Some legal experts fear this could create a cottage industry of whistleblowers where employees are incentivized to bypass internal compliance systems, limiting executives’ ability to internally manage potential breaches of securities law.

The first step in preparing for this new law is to ensure that the bank has a robust employee communications program that offers a two-way conversation between employees and management. Communicate regularly with employees to foster a culture of openness and promote corporate integrity, which can reduce unwarranted whistleblower risk.  

As with other stakeholder audiences, give employees a perceived sense of transparency in how the bank operates. Remind employees about company standards for ethical behavior, sales practices, the use of company technology, etc., and clearly spell out the bank’s internal reporting mechanisms.

Develop key messages to communicate externally as well, in case internal issues become public. If an employee decides to go outside the bank’s reporting procedures, management could first learn about the issue by a call from a reporter.

Give key executives media training so they have the necessary skills to communicate effectively with the media and in public. This gives management the skills necessary to steer conversations in the direction whey want to go, and away from areas that pose problems.

General Guidelines

Since much of the law’s details have yet to be finalized, banks will be best served by focusing on key messages that communicate the core principles by which the bank operates. As provisions of the law are finalized, place the new stipulations into the context of these principles.

Publicly-traded banks need to communicate beyond the proxy. All stakeholders are now focused on governance matters, and it is vital that banks develop consistent communications across its key audience groups. This will require ongoing coordination among the CEO, CFO, IR, legal, corporate communications and HR functions.

Consider creating an ad hoc group that focuses on communications of regulatory matters. Similar to crisis communications planning, banks should have a plan in place to respond quickly to governance issues as they arise. Do not leave a vacuum in which speculation and misinformation could grow.

In addition to these guidelines, effectively managing the fallout of Dodd-Frank from a communications standpoint is going to take a change in outlook for some executives. As a veteran community bank CEO told us, compliance has always had a negative connotation among bank management as a necessary evil, which rubs off on the staff's communications with customers, yet many customers do not share this sentiment. A positive tone must come from the top down.

To view and download a copy of the ABA presentation, please click here.

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