WASHINGTON, May 7, 2014 – Farmer Mac, the $14 billion Federal Agricultural Mortgage Corporation created by the Agricultural Credit Act of 1987 to provide a secondary market for farm real estate loans, is in the midst of a family feud with one of its major stockholder groups – the Farm Credit System (FCS).
The dispute plays out in comments filed April 28 with the Farm Credit Administration (FCA), which regulates both Farmer Mac and Farm Credit lenders, over an advance notice of proposed rulemaking (ANPRM) by the FCA board about possible new rules on how Farmer Mac governs itself.
The Farm Credit Council (FCC), the trade association for Farm Credit lenders, and two FCS banks urge FCA to enact rules that prohibit Farmer Mac from restricting the ability of FCS and commercial bank shareholders to elect their own directors and “also end the practice of Farmer Mac compensating its directors and employees with stock and stock options.”
FCC General Counsel Charles Dana writes that Farmer Mac is following the business model of government-sponsored enterprises (GSEs) in the home mortgage business, Fannie Mae and Freddie Mac. “As a GSE, the potential for conflict between the entity’s public policy mission and investor goals for stock appreciation are inherent,” he adds. “We believe that Farmer Mac’s ownership model, coupled with its practice of compensating directors and employees with stock and stock options exacerbates that potential conflict.”
In creating Farmer Mac, Congress required a unique board structure, unlike other publicly traded companies, with distinct classes of directors, elected as representatives of their ownership groups – public shareholders, FCS lenders and commercial banks, the FCC comment notes. “FCA should not sanction a governance structure that has the practical effect of negating Farmer Mac’s representational structure and purpose as envisioned by Congress,” Dana says. “We believe that Farmer Mac’s current practice in regard to limiting the ability of Class A and B (FCS and banker) stockholders to elect directors that are representative of their respective stockholders is contrary to the Farm Credit Act,” he says in the commen. “We are also greatly concerned that Farmer Mac’s practice of compensating directors and employees with stock and stock options creates and enhances a potential for both real and apparent conflicts of interest, and should be ended.”
Comments by CEOs of Denver-based CoBank and the Farm Credit Bank of Texas echo the FCC view. “Congress purposefully created Farmer Mac’s unique board structure, in part, to attempt to mitigate the basic conflict that arises between the interests of Farmer Mac as a publicly traded company and its public policy mission as a GSE,” says a letter from CoBank’s Robert Engel and the Texas bank’s Larry Doyle. “Farmer Mac’s Class C (public) shareholders consistently ask for increased leverage, dividend payouts and stock buybacks, all with the aim of boosting their returns,” they say. “And recently, Farmer Mac appears to be heeding these requests, particularly as it relates to increased dividend payouts. This drive to generate returns and assume risk for investors in Farmer Mac’s publicly traded stock can be at odds with its public policy mission as well as safety and soundness considerations.”
They say changes to Farmer Mac’s governance in recent years were designed to shift power from Class A and Class B shareholders to incumbent members of the Farmer Mac board “in an effort to stifle the independent judgment and perspective brought to the board by elected directors.”
Farmer Mac resists the idea of further regulation. It is troubled by FCA even showing interest in its director nomination and election process, “conflicts of interest and other related general corporate governance issues,” writes Stephen P. Mullery, Farmer Mac senior vice president and general counsel. Congress did not intend that FCA, in regulating Farmer Mac, would get into such areas because those topics are subject to the Securities and Exchange Commission and the New York Stock Exchange, where Farmer Mac shares are traded, he adds.
“Farmer Mac believes that additional rulemaking in the areas identified in the ANPRM is unnecessary,” Mullery says. He observes that the FCA notice “points to no specific events or corporate governance breakdowns involving Farmer Mac to justify why the FCA is no longer comfortable deferring to the oversight that the SEC and the NYSE provide over Farmer Mac’s corporate governance.”
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