Disclaimer: I used to spend a lot of time on the golf course trying to get business. I would guess that when I was an investment banker, the most consistently productive use of my time was taking clients (or would be clients) to play golf. Whether that was the most productive use of those clients’ time—and what that says about my skills or value add as an investment banker—is question for another day.
More than just a confession of my questionable investment banking prowess, my point is that I am a big believer in the utility of golf for building business relationships. In any type of sales position (and investment banking is 98% a sales position), it is essential to have some type of hook for connecting and bonding with clients and for me, and a lot of others, it was golf. Right or wrong, I generally view customer golf as an entirely legitimate and worthwhile part of business.
I also generally think that the expenses for customer golf are properly viewed as business expenses and, if someone takes a potential customer to play golf, they should be reimbursed for those expenses in the same way their firm would reimburse them for any other type of client entertainment.
However, what with it being proxy season, the practice of many small banks of paying for country club memberships for their named executive officers really rubs me the wrong way.
Before getting into why this gives me such a rash, let’s look at one bank’s justification for this practice. From Old Second’s (Nasdaq:OSBC) most recent proxy statement:
“We do provide country club memberships to certain executives and managers in the ordinary course of business to give them the opportunity to bring in and recruit new business opportunities. These individuals are eligible to use the club membership for their own personal use.”
“Okay,” you say, “seems reasonable enough—so what is the problem with that?”
Actually, I have a number of problems with that and none of them have to do with the actual expense, which is usually immaterial.
For starters, it just seems pretty bush league. To elaborate a little, it seems completely out of touch with current views on corporate governance and executive compensation. I don’t totally buy into all the various best practices or policies put forth by sundry investor advocacy groups, but this quote from the Council of Institutional Investors’ Policies on Corporate Governance seems like a pretty good articulation of current thinking on this topic:
“Company perquisites blur the line between personal and business expense. Executive, not companies should be responsible for paying personal expenses—particularly those that average employees routinely shoulder, such as family and personal travel, financial planning, club memberships and other dues.”
Like I said, I don’t totally agree with a lot of the current thinking on corporate governance out there, but this just seems like a pretty easy one for banks to adhere to in the spirit of minimizing potential points of contention with investor groups, proxy advisors, etc.
Paying for named executive officers’ country club memberships also seems pretty anachronistic. Like I said above, I am a believer in golf’s utility for business, but the notion that a country club membership should be so important to developing business relationships that it should be specifically paid for by a bank seems dated at best. Not to put too fine a point on it, but if a bank or bank CEO really thinks a country club is the best place to look for (or use to entertain) business prospects, they are probably missing more business than they are getting and might want to start thinking about broadening their horizons just a little.
More than anything, however, paying for country club memberships for named executive officers is, to me, basically rent seeking (consciously or not) by those named executive officers and part of the larger issue of many small bank management teams thinking of themselves (and their boards allowing to think of themselves) as employees rather than owners.
I think that most bank CEOs are paid pretty fairly (if not generously) and banks, like other public companies, take up a lot of space in their proxy statements with an extensive discussion of executive compensation. In particular, there is usually a lot of benchmarking, peer analysis and the like, which I view as primarily intended to make (what I consider) the very subjective decision of what to pay (primarily) the CEO as objective seeming as possible. I generally think that that a lot of the metrics, targets and peers are chosen in order to rationalize paying (primarily) the CEO what he wants to be paid. Nevertheless, it is still a process that has at least the appearance of some rigor and allows the board to colorably claim that they are paying the CEO what he is worth.
I may be a little cynical about the whole process, but I get it. What I don’t get is why, after going through all that analysis and justification, then throw in the costs of a country club membership?
I might be wrong, but I think there is a very significant qualitative difference between (i) a bank paying a CEO’s country club dues and (ii) a bank paying a CEO a little more and letting him (and it is usually him) pick up his own country club dues. In the first instance, the CEO is probably completely indifferent as to cost and where the cost/benefit analysis comes out, while in the second, even though the money is essentially coming from the same place, the CEO is probably significantly more attuned to cost and, in particular, whether the benefits justify the cost. More to the point, I think it is fair to say that people are more likely to pay close attention to such matters when it comes out of their own P&L.
In the case of Old Second, I doubt that their CEO, Jim Eccher, thinks of the bank’s P&L in the same way he thinks of his own. Not to pick on Old Second and Jim Eccher for this (since it is not egregious as far as many small banks go), but I would generally consider Mr. Eccher’s stock ownership as relatively de minimis given that he has been CEO of Old Second’s holding company since 2015 and CEO of Old Second’s bank since 2003. Based on Old Second’s proxy, Mr. Eccher made approximately $1 million in total compensation in 2017, but (using a stock price of $14.50 a share) only owns around $2.2 million in Old Second stock. Again, I don’t think that the numbers in Mr. Eccher’s case are over the top on a relative basis, but definitely reflect a mindset that is all too pervasive among many bank management teams—specifically, that wealth creation comes from job preservation, which may or may not align with, result in or be a function of, maximizing stockholder value.
What is egregious, however, is that while the US Treasury, and by implication, US taxpayers were losing money on their Financial Crisis era investment in Old Second, Old Second maintained its practice of paying for management’s country clubs.
Like many banks during the Financial Crisis, Old Second received a capital infusion from the US Treasury pursuant to TARP. Unlike with most banks that participated in TARP, the US Treasury took a significant loss on its investment in Old Second, primarily due to Old Second’s persistently poor asset quality and financial performance. However, using 2013, the year that the US Treasury sold its Old Second preferred stock at a steep discount, as an example, Old Second paid, per its proxy statement, in excess of $27,000 for country club dues for its named executive officers, even as Old Second continued to lose money, largely due to soured real estate loans.
Old Second (and other small bank) stockholders might want to take a mulligan on allowing this practice continue.