Proxy Preview: From Performance to Politics, Banks Under Scrutiny

Annual meeting season is nigh, and with it the corporate proxy statements that often set the agenda for those meetings. It’s the time of the year when anyone who owns a given number of shares can bring their grievances to the board and shareholders, all with the cudgel of director elections hanging over the proceedings. 

For the banking industry, this year’s iteration promises to be busier than 2023, according to ISS-Corporate, a Rockville, Maryland-based data and analytics provider that tracks proxy filings. Through April 2, 56 shareholder proposals had already been filed. That’s ahead of last year’s pace, with more banks set to release their proxy statements in the next month.

Greater scrutiny is also coming to executive pay. This marks the second year since the U.S. Securities and Exchange Commission began requiring that proxy statements disclose, via chart or some other visual means, the relationship between compensation and company performance. The rule, mandated by the Dodd-Frank Act of 2010, has taken more than a decade to pass and implement. 

Big Bank, Small Bank
As much as anything, the proxy season tells the tale of a bifurcated industry. While large and small banks share many things in common, their differences often take center stage in the types of proposals and scrutiny they entertain. This year is no exception. 

For the big guys, environmental and social (E&S) issues will continue to attract attention, with many of the headlines centered on proposals intended to pressure banks to embrace pro- or anti-ESG policies ⎯ or at least generate publicity for the filers’ causes. 

“My general observation is that those who are left-of-center don’t want banks financing industries and causes they don’t like, and those to the right-of-center are concerned about banks financing industries and causes they don’t like,” says Harris Simmons, chairman and CEO of $87.2 billion Zions Bancorp. in Salt Lake City.

For smaller banks, performance is in the spotlight. After two years of tight margins and poor returns, the promise of rate cuts has shareholders focused on profitability and the future. More than a few banks are feeling shareholder pressure to sell or pursue strategy changes.

“It’s becoming more and more evident that there’s a large chasm between the large banks and smaller banks in terms of the activity we’re seeing,” says Robert Fleetwood, Chicago-based co-chair of the financial institutions group at Barack Ferrazzano Kirschbaum & Nagelberg. 

Fleetwood’s law practice, which specializes in banks smaller than $20 billion, has more than a dozen Nasdaq-listed clients, none of which has had any proposals filed. “Our banks are not seeing the kind of the direct pressure the big banks are seeing,” he says.

“Politicized Debanking”
Proposals around ESG initiatives have been prominent on big bank proxy statements in recent years and will continue to be in 2024. One example: A proposal on PNC Financial Services Group’s proxy from Maryknoll Sisters of St. Dominic requesting a report that explains how the company’s “risk management systems ensure effective implementation of its Human Rights Statement” when financing corporate projects.

Last year’s most common proposal called for banks to adopt a “time-bound policy” to phase out underwriting and lending for new fossil fuel development. Shareholder support for those climate-related proposals was “exceedingly low,” capturing a median of about 8.3% of votes cast, according to Stephanie Hollinger, an ISS-Corporate vice president. 

Even so, they’re not going away. Capital One Financial Corp. is among the banking companies facing demands this year to align its lending and investment activities with the goals of the Paris Agreement to limit global warming.

While some large institutional shareholders like BlackRock have dialed down their ESG efforts, H. Rodgin Cohen, senior chair at law firm Sullivan & Cromwell, expects to see backing for those initiatives increase. “We’ll probably see some uptick in support for proposals related to E&S, but I’m not sure it will be a landslide,” he says.

We’ll also see more ESG pushback. Conservative groups have unleashed a new breed of proposals targeting alleged lending discrimination against companies and religious groups. 

Such “politicized debanking” proposals ⎯ most filed by Inspire Investing, a group that espouses a “biblically responsible investing” approach ⎯ appeared on a handful of bank proxy statements last year, including those of JPMorgan Chase & Co. and Capital One. 

This year, the movement is targeting some regional banks as well, with Birmingham, Alabama-based Regions Financial Corp., Phoenix-based Western Alliance Bancorp., Raleigh, North Carolina-based First Citizens BancShares and Zions all facing essentially the same proposal. It calls for the banks to evaluate and report on how they monitor and oversee risks related to discrimination based on a variety of factors, including religious and political views. 

The effort has been supported by the Alliance Defending Freedom, an advocacy group that charges banks use “problematic ‘reputational risk’ and ‘hate speech’ policies … to punish ordinary Americans for their views or political beliefs.” The group has been labeled a hate group by the Southern Poverty Law Center for its anti-LGBTQ stances.

Those proposals, uniformly opposed by boards, fared even worse last year than the pro-ESG efforts, garnering support from an average of 1.7% of shareholders last year, says Courteney Keatinge, senior director of ESG research at Glass Lewis & Co., a proxy advisor. 

Simmons doesn’t like the idea of anyone trying to exert political influence on Zions’ lending decisions. “We operate in counties in Nevada where prostitution is legal,” he says. “I really don’t want anyone telling me I have to finance bordellos, and I don’t want them telling me I can’t finance oil and gas either.”

Resurgent Activism
While big banks are dealing with E&S issues, smaller banks are seeing increased attention around performance and shareholder returns. Fleetwood expects shareholders at annual meetings to ask about the condition of commercial real estate loan portfolios and preparedness to strike quickly if the M&A market takes off.

“There will be a push to show you’ve strengthened the balance sheet and performance,” Fleetwood says. “And [shareholders] will want to see that you have a plan in place to move quickly when the M&A market opens up.”

Scott Brown, a partner at law firm Luse Gorman, says he knows of about 10 community banks that are involved in behind-the-scenes discussions with shareholders about hiring investment banks to explore “strategic alternatives.”

At $723 million Carver Bancorp in Harlem, activist Dream Chasers Capital Group has been pursuing board seats, management positions and a merger. AmeriServ Financial, a $1.4 billion bank holding company in Johnstown, Pennsylvania, is engaged in a similar battle with activist Driver Management Co., which has said it intends to nominate three director candidates at the 2024 annual meeting.

Most interactions with activists “occur through behind-the-scenes dialogue,” says Brown, who represents both banks but declined to comment on them specifically. “The public only sees it when it burbles to the surface and becomes a proxy contest for a board seat.”

If there’s a silver lining in such challenges, it’s that they signal a return to normalcy after the pandemic. The last two years have been rough ones for industry performance, leaving activists stuck on the sidelines, unable to make tough demands.

“Now the tide is turning. Bond portfolios are improving, market prices are getting better, liquidity has become less of an issue for community banks,” Brown says. “We’re moving back to where things were historically, where [activist investors] will be expecting improved performance and be more aggressive with their demands.”