Paragon’s business is managed under the direction of the Board of Directors. The Board delegates the conduct of business to Paragon’s executive management team. The following corporate governance guidelines have been adopted by the Board of Directors to provide a framework within which directors and management can effectively pursue Paragon’s objectives for the benefit of its stockholders. The Board annually reviews and updates these corporate governance guidelines.
Role of the Board of Directors
1. Effective Governance. The Board believes that its primary responsibility is to provide effective governance over Paragon’s affairs for the benefit of its stockholders. The Board is the ultimate decision-making body of Paragon, except with respect to those matters reserved to the stockholders. It selects the Chairman of the Board and the Chief Executive Officer, acts as an advisor and counselor to the Chief Executive Officer and monitors the performance of executive management.
2. Management Succession. The Board plans for succession to the position of Chief Executive Officer, as well as overseeing management succession for other senior management positions. The Chief Executive Officer works with the Governance Committee to develop management succession plans, which are discussed with and reviewed by the Board. The Board works with the Governance Committee to nominate and evaluate potential successors to the Chief Executive Officer. The Chief Executive Officer should at all times make available his or her recommendations and evaluations of potential successors, along with a review of any development plans recommended for such individuals.
3. Evaluation of the Chief Executive Officer. The Human Resources Committee annually evaluates the performance of the Chief Executive Officer. As part of this evaluation, the independent directors complete a written evaluation of the Chief Executive Officer’s performance. Results of this evaluation are communicated to the Chief Executive Officer by the chair of the Human Resources Committee.
4. Separation of Chairman and Chief Executive Officer. The Board has no policy with respect to the separation of the offices of Chairman and Chief Executive Officer. The Board believes that this issue is part of the succession planning process, which is overseen by the Governance Committee, and that it is in the best interests of Paragon for the Board to make a determination when it elects a new chief executive officer.
Composition of the Board of Directors
1. Size of the Board. The Governance Committee, in consultation with the Chairman and the Chief Executive Officer, makes recommendations to the Board concerning the appropriate size and needs of the Board. While the number of directors should not exceed a number that can function efficiently as a body, the Board believes that the quality of the individuals serving and the overall balance of the Board are more important than the precise number of members.
2. Independence of the Board. A clear majority of the Board of Directors will be independent, as that term is defined in any applicable laws andregulations and inthe listing standards of the New York Stock Exchange. A Director will be considered independent only if the Board has affirmatively determined that the Director has no material relationship with the Company that would impair his or her independent judgment. The Board will review factors affecting independence at the time a Director is proposed for election or re-election. In the process of making such determinations, the Board will consider the nature, extent and materiality of the Director's relationships with the Company and the Board will apply the following guidelines:
A Director will be deemed not to be independent by the Board of Directors if the Board finds that
(a) a Director (or a Director’s immediate family member in a professional capacity), is affiliated with or employed byone the Company's current or previous outside auditors;
(b) a Director (or a Director’s immediate family member) is employed as an executive officer by another entity whose compensation committee includes an executive of the Company;
(c) a Director (or a Director’s immediate family member) receives more than $100,000 in any year in compensation from the Company in addition to Director’s fees and pension or other forms of deferred compensation not contingent upon continued service;
(d) any of the situations described in (a), (b), or (c) above existed within the past five years; provided, however, that these standards shall not be applied to periods prior to the effective date of the applicable New York Stock Exchange Listing Standard.
A Director will be deemed not to be independent by the Board of Directors if the Board finds that a Director has material business arrangements with the Company which would jeopardize the Director's judgment. The Board will review for materiality all business arrangements between the Company and the Director and all business arrangements between the Company and an entity for which the Director serves as an officer or general partner or of which the Director is the owner of more than five percent. Arrangements are not material and not likely to jeopardize the Director's judgment, and thereby his/her independence, if
(a) the arrangements are usually and customarily offered to customers by the Company;
(b) the arrangements are offered on substantially similar terms as those prevailing at the time for comparable transactions with other customers under similar circumstances;
(c) in the event that (i) a proposed arrangement were not made or (ii) an existing arrangement were terminated in the normal course of business, that action would not reasonably be expected to have a material and adverse effect on the financial condition, results of operations, or business of the recipient;
(d) in the case of extensions of credit, the credit extended is not more than five percent of the assets of the borrower or in the case of credit extensions to a family of entities, the aggregate credit extended is not more than five percent of the total assets of the combined entities;
(e) in the case of extensions of credit, the credits are not recorded as non-accrual or past due;
(f) a Director (or a Director’s immediate family member) is an executive officer of an entity
(g) in the case of charitable contributions made by the Company to a charitable organization of which the Director (or the Director's immediate family member) serves as an officer, director, or trustee, such contributions were less than five percent of the charitable organization's total annual charitable receipts in its most recent year; and
In applying the aforementioned guidelines, the Board will consider such other factors as it may deem necessary to arrive at sound determinations as to the independence of each Director, and such factors may override the conclusions of independence or non-independence that would be reached simply by applying the guidelines. In such cases, the overriding factors should be documented in the Minutes of the Board Meeting at which determinations were made.
Directors who are deemed not independent also make valuable contributions to the Board and to the Company by reason of their experience and wisdom.
3. Director Selection and Qualification Standards. Directors should possess the highest personal and professional ethics, integrity and values, and be committed to representing the long-term interests of the shareholders. In selecting candidates for nomination as a director of Paragon, the Governance Committee will consider criteria including current or recent experience as a senior executive officer; business expertise currently desired on the Board (with specific attention to requirements for Audit Committee membership); geography; banking industry experience; gender and ethnic diversity on the Board; and general criteria such as ethical standards, independent thought, practical wisdom and mature judgment.
The selection process for director candidates will include identification of director candidates by Governance Committee based upon suggestions from current directors and executives and nominations received by shareholders; possible engagement of a director search firm; interviews of candidates by the Chair of the Governance Committee and two other Committee members; Committee reports to the Board on the selection process; recommendation by the Governance Committee; and formal nomination by Board for inclusion in the slate of directors at annual meeting.
Directors must be willing to devote sufficient time to carrying out their duties and responsibilities effectively, and should be committed to serving on the Board for an extended period of time. Directors should serve on no more than three other boards of companies in addition to the Paragon Board, unless the Board determines that so serving will not impair the director’s service on the Paragon Board.
4. Director Retirement and Tenure Policy. The Board does not believe that is should establish age limits. While such limits could help insure that there are fresh ideas and viewpoints available to the Board, they hold the disadvantage of losing the contribution of directors who have been able to develop, over a period of time, increasing insight into the Company and its operations and, therefore, provide an increasing contribution to the Board as a whole. As an alternative to age limits, the Governance Committee will review each director’s continuation on the Board every year. This will allow each board member the opportunity to confirm his or her desire to continue as a member of the Board.
It is the sense of the Board that individual directors who make a significant change in responsibility they held when they were elected to the Board should volunteer to resign from the Board. It is not the sense of the Board that in every instance the directors who retire or make a significant change in the position they held when they came on the Board should necessarily leave the Board. There should, however, be an opportunity for the Board through the Governance Committee to review the continued appropriateness of Board membership under the circumstances.
No employee director shall continue to serve as a director after ceasing to be an employee, unless requested to do so by the Governance Committee.
Directors should advise the Chairman of the Board and the Chair of the Governance Committee in advance of accepting an invitation to serve on another company board. There should be an opportunity for the Board, through the Governance Committee, to review the director’s availability to fulfill his or her responsibilities as a director if he or she serves on more than three other company boards.
5. Term Limits. The Board does not believe it appropriate or necessary to limit the number of terms a director may serve. However, the Governance Committee will apply its director candidate selection criteria, including a director’s past contributions to the Board, prior to recommending a director for reelection to another term.
6. Director Compensation. Director compensation will reflect Paragon’s intention to attract and retain outstanding individuals to serve on the Board. Annual retainers, meeting and committee fees, equity-based awards and other forms of compensation, as appropriate, will be used in the furtherance of this objective. The Human Resources Committee will review director compensation on an annual basis.
7. Share Ownership of Directors and Executive Officers. Directors and executive officers are encouraged to own Paragon stock to further align director and stockholder interests. Paragon’s guidelines for stock ownership of directors and executive officers are set by the Human Resources Committee. The sale of Paragon stock while serving on the Board is discouraged and, in any case, permissible only with the prior approval of Paragon’s General Counsel, in light of applicable legal and regulatory constraints.
Functioning of the Board of Directors
1. Board Meetings. Board meetings typically are scheduled in advance and are held at least twelve times per year. However, the number of scheduled Board meetings will vary with the circumstances. Meetings generally are held at Paragon’s offices in Memphis, Tennessee, but may be held elsewhere. It is the responsibility of the directors to attend meetings of the Board.
2. Executive Sessions. The non-employee directors meet at least quarterly in executive session at regular meetings of the Board without the Chief Executive Officer or any other member of management. The Chair of the Governance Committee will initially preside at such sessions, and the presiding director may be rotated among the Chairs of other committees as determined by the Board.
3. Board Committees. The Board is organized so that a significant portion of its business is conducted by its committees. The present committee structure consists of the Governance, Loan, Audit and Compliance, Asset/Liability, and Human Resources committees. In general, committees of the Board focus on issues that may require in-depth scrutiny. All committees report to the Board, and all significant findings of a committee are presented to the Board for discussion and review. The Board may, from time to time, establish or maintain additional committees as necessary or appropriate.
Policy Adoption and Review. It is the responsibility of each committee to underscore the need for compliance in each of its areas of board policy and to review compliance in the normal course of business and in internal or external reports. Each committee will call the full board’s attention to matters of significant noncompliance. Continued exceptions to policy may suggest the need for policy and/or procedure revision.
Each committee will annually review the policy for which it is responsible for accuracy and to ensure that all elements are addressed and appropriately updated. Each committee will also annually review procedures used to implement the policy and determine whether actual practices adhere to written and approved policy and procedures.
It is the responsibility of the chief executive officer to help the board in communicating its policies to all employees. It is also the CEO’s responsibility to bring the need for new policies to the board’s attention.
Each committee will review whether the audit coverage addressed adheres to policy. Committees may call for specific review by either internal or external auditors, legal counsel, or outside consultants.
Exception to Policy. Periodically, there will be situations where exception to policy may seem appropriate. The board of directors recognizes that such situations will arise, and corporate governance policies require flexibility for management to address these situations as they occur. Policy guidelines, standards, and specific elements are created to address the majority of daily business operations.
Sample policy exceptions which are deemed permissible include rescheduling an event, waiving a fee for a group of transactions, not requiring a specific set of extensive support documentation, or extending a loan for one more time, which are outside of policy guidelines. Given the number of policies and significant detail within each corporate policy, exceptions may occur.
Exceptions to underwriting standards which may be justified by compensating factors are deemed a separate issue and covered by specific policy and procedures, including a supporting review checklist. Specifically, exceptions to lending policy shall not occur on a disparate basis.
Exception to policy should be documented by the officer recommending an exception; the senior officer for that functional area or department must initial off as accepting the proposed exception. At the next monthly meeting of the board of directors, any policy exceptions shall be reported. At no time may an exception be approved which is in violation of any law, regulation, or regulatory guidelines.
Exceptions to policy will be reviewed as part of the annual internal audit as well as periodic compliance and loan review functions.
4. Committee Charters. The Board approves a charter for each committee. The duties of each committee are annually reviewed by the committee and by the Governance Committee, and any recommended changes are presented to the Board for consideration. Committees are empowered to act on behalf of the Board for those areas which the Board has prescribed.
5. Committee Composition. The Audit, Governance and Human Resources Committees are comprised entirely of non-employee directors who meet the independence requirements of the New York Stock Exchange. The Governance Committee, in consultation with the Chief Executive Officer, will recommend to the Board appointment of committee members and chairs.
6. Meeting Agendas and Conduct. Board agendas are set by the Chairman, the Chief Executive Officer and the Corporate Secretary, with input from the directors. Committee agendas are set by the committee chairs, in consultation with committee members and appropriate members of management. Each Board and committee member is free to suggest the inclusion of items on the agenda and to raise at any Board or committee meeting subjects that are not on the agenda for that meeting. The Board believes it is appropriate that Board and committee meetings be conducted in a manner that ensures open communication, objective and constructive participation and timely resolution of issues. The Board will review the company’s long-term strategic plans and the principal issues that the company will face in the future during at least one Board meeting each year.
At a minimum, the following schedules will be included in monthly board reports:
- A monthly balance sheet and income statement
- Explanation of material income and expense variances
- Securities purchased and sold
- Listing of all new loans over $50,000
- Reconciliation of allowance for loan and lease losses
- Recap and trend analysis of all past due loans
- List of problem loans
- Committee minutes and reports
- Audit report
The following schedules will be included in board reports at least quarterly:
- Insider borrowings report
- Concentrations of credit
- Interest rate and gap analysis
- Summary of off-balance sheet accounts
7. Interplay with Bank Board Committees. Certain committees may meet simultaneously as committees of Paragon National Bank (the “Bank”), though they should hold separate sessions if necessary to address issues that are relevant to one entity but not the other or to consider transactions between the two entities or other matters where the company and the Bank may have different interests. In addition, any such committee should consult with counsel if, in the opinion of the committee, any matter under consideration by the committee has the potential for any conflict between the interests of the company and those of the Bank or the company’s other subsidiaries in order to ensure that appropriate procedures are established for addressing any such potential conflict and for ensuring the compliance with Sections 23A and 23B of the Federal Reserve Act.
8. Advance Availability of Materials. Directors have available regular and timely information that is important to their understanding of Paragon’s business and their consideration of matters to be addressed by the Board. Directors are responsible for reviewing and considering these materials in advance of all Board and committee meetings.
9. Board Access to Management. Directors have complete access to Paragon’s executive management and management information. Management will be responsive to requests for information from directors. The Board encourages the Chief Executive Officer, from time to time, to bring to Board meetings managers who can provide additional insight into the items being discussed. Any other meetings or contacts with officers or employees that a director wishes to initiate may be arranged through the Chief Executive Officer or the Corporate Secretary or directly by the director. The directors will use their judgment to ensure that any such contact is not disruptive to the business operations of the company, and will, to the extent not inappropriate, copy the Chief Executive Officer on any written communications between a director and an officer or employee of the company.
10. Board Access to Independent Advisors. The Board has complete access to outside counsel and other outside advisors of its choice with respect to any issues relating to its activities.
11. Ethics and Conflicts of Interest. The Board expects directors, as well as officers and employees, to act ethically at all times and to acknowledge their adherence to the policies described in Paragon’s Code of Ethics. If an actual or potential conflict of interest exists for a director, the director should promptly inform the CEO. If a significant conflict exists and cannot be resolved, the director should submit his or her resignation to the Board. All directors must recuse themselves from any discussion or decision affecting their personal or professional interests.
12. Director Orientation and Continuing Education. New directors will participate in an orientation program including comprehensive background briefings by the Chief Executive Officer, other members of senior management and the Corporate Secretary. The orientation program is the responsibility of the Chairman and is administered by the Corporate Secretary. The Company will provide the directors with opportunities to attend appropriate continuing director education programs consistent with New York Stock Exchange Requirements.
13. Communications with Stakeholders. The Board believes that management speaks for the company. Individual Board members may, from time to time, meet or otherwise communicate with various constituencies that are involved with the company. However, it is expected that Board members will do this only with the knowledge of management and, absent unusual circumstances or as contemplated by the committee charters, only at the request of management.
14. Annual Performance Evaluations. The Governance Committee conducts an annual assessment of the Board’s performance to determine whether it and its committees are functioning effectively. The Governance Committee is responsible for developing evaluation tools and procedures. Each committee will conduct an annual assessment of its own performance.