Commerce Bancshares DEF 14A 2009
Documents found in this filing:
Proxy Statement Pursuant to Section 14(a) of the Securities
Commerce Bancshares, Inc.
Commerce Bancshares, Inc.
Payment of Filing Fee (Check the appropriate box):
March 12, 2009
You are cordially invited to attend the Annual Meeting of the Shareholders of Commerce Bancshares, Inc. The meeting will be held at 9:30 a.m. on April 15, 2009, in the Auditorium on the 15th Floor of the Commerce Trust Building at 922 Walnut Street, Kansas City, Missouri.
The accompanying Notice of Annual Meeting of Shareholders and Proxy Statement describe the items to be considered and acted upon by the shareholders.
If you own shares of record, you will find enclosed a proxy card or cards and an envelope in which to return the card(s). Whether or not you plan to attend this meeting please sign, date and return your enclosed proxy card(s) or vote over the phone or Internet, as soon as possible so that your shares can be voted at the meeting in accordance with your instructions. You can revoke your proxy anytime before the Annual Meeting and issue a new proxy as you deem appropriate. You will find the procedures to follow if you wish to revoke your proxy on page 3 of this Proxy Statement. Your vote is very important. I look forward to seeing you at the meeting.
David W. Kemper
Chairman of the Board, President and
Chief Executive Officer
Notice of Annual Meeting of Shareholders of
By Authorization of the Board of Directors,
J. Daniel Stinnett
March 12, 2009
TABLE OF CONTENTS
COMMERCE BANCSHARES, INC.
Annual Meeting April 15, 2009
This Proxy Statement, the accompanying proxy card and the Annual Report to Shareholders of Commerce Bancshares, Inc. (the Company or Commerce), are being mailed on or about March 12, 2009. The Board of Directors (the Board) of the Company is soliciting your proxy to vote your shares at the Annual Meeting of Shareholders (the Meeting) on April 15, 2009. The Board is soliciting your proxy to give all Shareholders of record the opportunity to vote on matters that will be presented at the Meeting. This Proxy Statement provides you with information on these matters to assist you in voting your shares.
A proxy is your legal designation of another person (the proxy) to vote on your behalf. By completing and returning the enclosed proxy card, you are giving David W. Kemper and Jonathan M. Kemper, who were appointed by the Board, the authority to vote your shares in the manner you indicate on your proxy card.
You will receive multiple proxy cards if you hold your shares in different ways (e.g., joint tenancy, trusts, custodial accounts) or in multiple accounts. If your shares are held by a broker, banker, trustee or nominee (i.e., in street name), you will receive your proxy card or other voting information from your brokerage firm or bank, and you will return your proxy card or cards to your broker, banker, trustee or nominee. You should vote on and sign each proxy card you receive.
You are qualified to receive notice of and to vote at the Meeting if you owned shares of Common Stock of the Company at the close of business on our record date of Tuesday, February 17, 2009.
As of February 17, 2009, there were 76,003,299 shares of Common Stock outstanding and entitled to vote. Each share of Common Stock is entitled to one vote on each matter presented.
These terms describe how your shares are held. If your shares are registered directly in your name with Computershare, the Companys transfer agent, you are a shareholder of record. If your shares are held in the name of a brokerage, bank, trust or other nominee as a custodian, you are a street name holder.
If you are a shareholder of record, you have several choices. You can vote your proxy:
Please refer to the specific instructions set forth on the enclosed proxy card. For security reasons, our electronic voting system has been designed to authenticate your identity as a Shareholder.
If you hold your shares in street name, your broker/bank/trustee/nominee will provide you with materials and instructions for voting your shares.
If you are a shareholder of record, you may vote your shares in person at the Meeting. If you hold your shares in street name, you must obtain a proxy from your broker, banker, trustee or nominee, giving you the right to vote the shares at the Meeting.
The Board recommends that you vote your shares as follows:
If you sign and return your proxy card without indicating how you want your shares to be voted, the proxies will vote your shares as follows:
In the election of directors, abstentions and broker non-votes will be considered solely for quorum purposes and are not counted for the election of directors. On all other matters presented for shareholder vote, abstentions will be treated as votes against such matters and broker non-votes will be treated as not entitled to vote and have no effect on the outcome.
You may revoke your proxy by doing one of the following:
Proposal One requires a plurality of the votes cast to elect a director.
Proposal Two requires the affirmative vote of a majority of those shares present in person or represented by proxy and entitled to vote thereon at the Meeting.
Proposal Three requires the affirmative vote of a majority of those shares present in person or represented by proxy and entitled to vote thereon at the Meeting.
Representatives from Computershare Trust Company, N.A., our transfer agent, will count the votes and provide the results to the Inspectors of Election who will then tabulate the votes at the meeting.
The cost of solicitation of proxies will be borne by the Company. In addition to solicitation by mail, proxies may be solicited personally or by telephone, facsimile transmission or via email by regular employees of the Company. Morrow & Co., LLC, 470 West Avenue, Stamford, Connecticut 06902, has been retained by the Company, at an estimated cost of $7,500 plus reasonable out-of-pocket expenses, to aid in the solicitation of proxies. Brokerage houses and other custodians, nominees and fiduciaries may be requested to forward soliciting material to their principals and the Company will reimburse them for the expense of doing so. This proxy statement and proxy will be first sent to security holders on or about March 12, 2009.
No. As stated above, the Company has retained Morrow & Co., LLC to aid in the solicitation of proxy materials. In addition to mailing these proxy materials, certain Directors, officers or employees of the Company may solicit proxies by telephone, facsimile transmission, e-mail or personal contact. They will not be specifically compensated for doing so.
If you have any further questions about voting your shares or attending the Meeting, please call the Companys Secretary, J. Daniel Stinnett, at 816-234-2350.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This table includes each person known to be the beneficial owner of 5% or more of the Companys outstanding common stock as of December 31, 2008. Under applicable Securities and Exchange Commission Rules, beneficial ownership of shares includes shares as to which a person has or shares voting power and/or investment power.
Security ownership of management:
The following information pertains to the common stock of the Company beneficially owned, directly or indirectly, by all directors and nominees for director, the executive officers named in the Summary Compensation Table, and by all directors, nominees and executive officers of the Company as a group as of December 31, 2008.
ELECTION OF THE 2012 CLASS OF DIRECTORS
Composition of the Board
The full Board consists of twelve Directors. The Board is divided into three classes consisting of four Directors per class. The Directors in each class serve a three-year term. The term of each class expires at successive annual meetings so that the shareholders elect one class of Directors at each annual meeting.
The election of four Directors to the 2012 Class will take place at the Meeting. At its meeting of February 6, 2009, the Board approved the recommendation of the Committee on Governance/Directors that four 2012 Class Directors be elected for a three-year term.
If elected, the four 2012 Class Director nominees will serve on the Board until the Annual Meeting in 2012, or until their successors are duly elected and qualified in accordance with the Companys By-Laws. If any of the four nominees should become unable to accept election, the persons named on the proxy card as proxies may vote for such other person(s) recommended by the Companys Board of Directors. Management has no reason to believe that any of the four nominees for election named below will be unable to serve.
The following information is provided with respect to the directors who are continuing in office for the respective periods and until their successors are elected and qualified:
The Board of Directors has adopted guidelines on significant corporate governance matters that, together with the Companys Code of Ethics and other policies, creates the corporate governance standards for the Company. You may view the Guidelines on the Companys website at www.commercebank.com/governance. At the same location on the website, you will find the Code of Ethics, the Code of Ethics for Senior Financial Officers, the Related Party Transaction Policy and the charters of the Audit Committee, Committee on Governance/Directors and the Compensation and Human Resources Committee.
Each Director and all executive officers are required to complete annually a Director and Executive Officer Questionnaire (Questionnaire). The information contained in the responses to the Questionnaire is used, in part, to determine director independence and identify material transactions with the Company in which a Director or executive officer may have a direct or indirect material interest.
The Board has not adopted a formal policy for shareholder communications. However, the Company has a longstanding practice that shareholders may communicate to the Board or any individual director through the Secretary of the Company. The Secretary will forward all such communications to the Board or any individual
director. The Secretary will not forward any communications that: (i) constitute commercial advertising of products; (ii) contain offensive language or material; (iii) are not legible or coherent; or (iv) are in the nature of customer complaints that can be handled by Company management.
In accordance with the rules of the NASDAQ Stock Market LLC (NASDAQ), the Board, on the recommendation of the Committee on Governance/Directors, determines the independence of each Director and nominee for election as a Director. The Committee on Governance/Directors applies the definition of independent director adopted by NASDAQ to information derived from responses to the Questionnaire and from research of the Companys records provided by the General Counsel, Controller and Auditor of the Company. The Board, on the basis of the recommendation of the Committee on Governance/Directors, determined that the following non-employee Directors of the Company are independent:
Based on the NASDAQ definition of independent director, the Board determined that David W. Kemper and Jonathan M. Kemper as employed executive officers of the Company are not independent.
The Board held four scheduled meetings and one special meeting in 2008. In conjunction with scheduled meetings, the Board regularly meets in Executive Session without the presence of any non-independent employee directors. All Directors except Thomas A. McDonnell and Andrew C. Taylor attended at least 75% of the Board and Committee meetings on which they served in 2008. It is the policy of the Company that Directors attend the annual meeting of shareholders. All the Directors attended the 2008 Annual Meeting of Shareholders on April 16, 2008.
The Board has four committees, three of which are standing committees and meet at least once per year. The Audit Committee, the Compensation and Human Resources Committee and the Committee on Governance/Directors are comprised solely of non-employee independent directors in accordance with NASDAQ listing standards. The charters for each committee are available online as noted above under Corporate Governance Guidelines. The charters are also available in print to any shareholder who makes a request of the Secretary of the Company. Pursuant to the Companys By-Laws, the Board has established an Executive Committee to meet as necessary. The Executive Committee does not have a charter and consists of both non-employee independent directors and employee directors. The Executive Committee is comprised of the Chairman and Vice Chairman of the Board and the Chairmen of the Audit Committee, the Compensation and Human Resources Committee and the Committee on Governance/Directors. The Executive Committee did not meet in 2008. The table below shows the current membership of the standing committees of the Board:
In 2008, the Audit Committee had six members and met four times. The Audit Committee is comprised solely of independent, non-employee directors. The Board has determined that Mr. West, Chairman of the Audit Committee, is a Financial Expert as required by the Securities and Exchange Commission. The charter of the Audit Committee may be found on the Companys website at www.commercebank.com/governance.
The Audit Committees responsibilities, discussed in detail in the charter, include:
Complete information on the activity of the Audit Committee is provided in the Audit Committee Report on page 35.
Compensation and Human Resources Committee
The Compensation and Human Resources Committee met once in 2008. The Compensation and Human Resources Committee is comprised solely of independent, non-employee directors. The charter of the Compensation and Human Resources Committee may be found on the Companys website at www.commercebank.com/governance.
The Compensation and Human Resources Committees responsibilities, discussed in detail in the charter, include the following:
The Compensation and Human Resources Committees processes for considering and determining executive compensation are described under the heading Compensation and Human Resources Committee Processes in the Compensation Discussion and Analysis.
Committee on Governance/Directors
The Committee on Governance/Directors met once in 2008. The Committee on Governance/Directors is comprised solely of independent, non-employee directors. The charter of the Committee on Governance/Directors may be found on the Companys website at www.commercebank.com/governance.
The Committee on Governance/Directors responsibilities, discussed in detail in the charter, include the following:
The Chairman of the Committee on Governance/Directors serves as the Lead Director of the Board and chairs the Boards Executive Sessions.
With respect to its recommendations of prospective candidates to the Board, the Committee may establish the criteria for director service and will consider, among other things, the independence of the candidates under NASDAQ standards and such experience and moral character as to create value to the Board, the Company and its shareholders. With respect to incumbent candidates, the Committee will also consider meeting attendance, meeting participation and ownership of Company stock. The criteria and selection process are not standardized and may vary from time to time. Relevant experience in business, government, the financial industry, education and other areas are prime measures for any nominee. The Committee will consider individuals for Board membership that are proposed by shareholders in accordance with the provisions of the Companys By-laws. A description of those provisions can be found under Shareholder Proposals and Nominations below. The Committee will consider individuals proposed by shareholders under the same criteria as all other individuals.
By the end of February of each year, the Committee meets and makes its recommendations to the Board of its proposed slate of directors for the class of directors to be elected at the next annual meeting; the date, time and place of the annual meeting; and the matters to be placed on the agenda for the annual meeting. At its meeting on January 26, 2009, the Committee on Governance/Directors determined its nominees for the Class of 2012.
If a shareholder intends to present a proposal for consideration at the Companys annual meeting to be held on April 21, 2010, the proposal must be in proper form pursuant to SEC Rule 14a-8 and must be received by the Secretary of the Company at its principal offices no later than November 11, 2009.
Shareholder nominations for directors and shareholder proposals that are not presented pursuant to SEC Rule 14a-8 must comply with the Companys By-laws. In order to be considered, shareholders must provide timely notice to the Secretary. To be timely, the notices for the April 21, 2010 annual meeting must be received by the Secretary no later than February 20, 2010 nor before January 21, 2010. The notices must contain the name and record address of the shareholder, and the class or series and the number of shares of Company capital stock owned beneficially or of record by the shareholder.
The notice must also provide a description of all arrangements or understandings between such shareholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) or shareholder proposal is made; and a representation that such shareholder intends to appear in person or by proxy at the meeting to nominate the person or bring the business proposal before the meeting. The notice must also set forth as to each person the shareholder proposes to nominate for election as a director the name, age, business and residence address of the person; the principal occupation or employment of the person; the class or series and number of shares of capital stock of the Company which are owned beneficially or of record by the person; and any other information relating to the person nominated or the nominating shareholder that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Securities and Exchange Act of 1934. Lastly, the notice must also be accompanied by a written consent of each proposed nominee to be named a nominee and to serve as a director if elected.
If the notice is for shareholder proposals, the notice must also set forth a brief description of the business to be brought before the meeting, and the reasons for conducting such business at the meeting, and any material interest of such shareholder in such business.
The Board of Directors has adopted a Related Party Transaction Policy (Policy). The purpose of the Policy is to establish procedures for the identification and approval, if necessary, of transactions between the Company and any director, nominee for director, beneficial owner of more than 5% of the Companys securities, executive officer or any person or entity deemed related to any of the foregoing (Related Party) that are material or not in the ordinary course of business.
The Policy may be found on the Companys website at www.commercebank.com/governance. The Policy is intended to identify all transactions with Related Parties where payments are made by the Company to or for the direct or indirect benefit of a Related Party. The procedures, discussed in detail in the Policy, include the following:
The Policy provides guidance for determination of materiality. The amount of the transaction, the application of any exemption or exclusion, the provisions of the Companys Code of Ethics, and general principles of corporate transparency may be considered. The Policy deems certain transactions exempt and pre-approved, including, compensation paid for service as a director or executive officer, transactions involving depositary or similar payment services, transactions that are the result of a competitive bidding process, and transactions arising solely from the ownership of the Companys equity securities. The Policy provides further guidance to the Board or Audit Committee in regard to the approval or ratification of the transaction and prohibits the participation by a Related Party in the discussion, approval or ratification of a transaction.
Pursuant to the application of the Policy, it was determined that Messrs. David W. Kemper and Jonathan M. Kemper are directors of Tower Properties Company (Tower), and Mr. Jonathan M. Kemper is the non-compensated Chairman of the Board of Tower. Tower is primarily engaged in the business of owning, developing, leasing and managing real property.
At December 31, 2008, Messrs. David W. Kemper and Jonathan M. Kemper together with members of their immediate families beneficially own approximately 76% of Tower. During 2008, the Company, or its subsidiaries, paid Tower $501,000 for rent on leased properties, $19,000 for leasing fees, $114,000 for operation of parking garages, $118,000 for property construction management fees and $1,525,000 for building management fees.
During 2008, Commerce Bank, N.A., a subsidiary of the Company, paid a salary of $142,943 to Michael Fields, the brother-in-law of Messrs. David W. Kemper and Jonathan M. Kemper. During 2008, the Company paid a salary of $122,000 to John W. Kemper, the son of David W. Kemper.
Various Related Parties have deposit accounts with the subsidiary banks of the Company, and some Related Parties also have other transactions with the subsidiary banks, including loans in the ordinary course of business, all of which were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than normal risk of collectibility or present other unfavorable features.
Pursuant to Section 16 of the Securities Exchange Act of 1934, the Companys Directors and certain executive officers are required to report, within specified due dates, their initial ownership of the Companys common stocks and all subsequent acquisitions, dispositions or other transfers of interest in such securities, if and to the extent reportable events occur which require reporting by such due dates. The Company is required to identify in its proxy statement whether it has knowledge that any person required to file such a report may have failed to do so in a timely manner. Based on that review, all of the Companys directors and all executive officers subject to the reporting requirements satisfied such requirements in full, except for the following delinquencies which were filed on either Form 4 or Form 5: for Sara E. Foster two delinquent Form 4s were filed to report the acquisition of stock through an exempt grant of stock; for W. Thomas Grant, II a delinquent Form 4 was filed to report the disposition of stock through an open market transaction; for Charles G. Kim a delinquent Form 4 was filed to report the exercise of stock options and the subsequent sale of the shares received; and for Jeffery D. Aberdeen a delinquent Form 4 was filed to report the exercise of stock options and the subsequent sale of the shares received.
An employee of the Company or a subsidiary of the Company receives no additional compensation for serving as a director. Non-employee directors of the Company are required to participate in the Stock Purchase Plan for Non-Employee Directors (the Director Plan). Under the Director Plan, all compensation payable to a non-employee director is credited to an account in the name of such director as earned and the Company contributes to the account of such director an additional amount equal to 25% of the compensation credited to the directors account. As of the last business day of each month, the cash balance payable to a director is credited to the directors account and converted to whole shares of common stock of the Company based on the last sale price of the Companys common stock as reported by the National Market System of NASDAQ on such date, or if no sale price is reported on such date, the next preceding day for which a sale price is reported. Any balance remaining in a participants account is carried forward for investment in the next month.
As soon as practicable after the end of each year, the Company issues each non-employee director the number of shares of Company common stock credited to the directors account and any cash balance in the account is carried forward for investment in the next year. If a director dies or ceases to be a non-employee director during the year, the Company will distribute to the director (or his or her beneficiary), as soon as reasonably practicable, a certificate for the number of shares of Company common stock credited to the directors account, along with any cash credited to the account. A participant in the Director Plan has no right to vote or receive dividends or any other rights as a shareholder with respect to shares credited to the participants account until a certificate for such shares is issued.
Each non-employee director of the Company is paid the following amounts (each adjusted to include the additional 25% contribution by the Company): an annual retainer of $15,000 (paid on a quarterly basis); a fee of $3,000 for attendance (in person or by phone) at each meeting of the Board of Directors; a fee of $750 for attendance (in person or by phone) at each meeting of a committee of which the director is a member; and an annual fee of $5,000 for service as a committee chair. Changes to directors compensation is initiated by our chief executive officer (CEO) and presented to the Committee on Governance/Directors. The Chairman of the Committee on Governance/Directors then presents any changes to the full Board of Directors for its approval.
Compensation earned during 2008 by the non-employee directors of the Company for their service as directors is listed in the table below.
COMPENSATION DISCUSSION AND ANALYSIS
This section provides information regarding the compensation programs for our CEO, chief financial officer (CFO), and four other most highly compensated executives (collectively, our NEOs), including the overall objectives of our compensation program and what it is designed to reward, each element of compensation that we provide, and an explanation of the reasons for the compensation decisions we have made regarding these individuals with respect to 2008. Our NEOs for 2008 were as follows:
The Companys compensation program has the following objectives:
The Compensation and Human Resources Committee (the Committee) is responsible for establishing the Companys compensation philosophy and ensuring that the objectives of the Companys compensation program are satisfied.
For all NEOs, the Committee reviewed compensation data from the Towers Perrin 2008 US Commercial Banks Survey (the Towers Perrin Survey). Participants included in this survey had median assets of $21.6B to $179.6B depending on the specific position that was analyzed. All position data was regressed, when possible, for assets of $20B. Each NEO was individually compared to descriptions in the Towers Perrin Survey in order to best match overall compensation levels of our NEOs with comparable executive officer positions for the companies included in the Towers Perrin Survey. The input of Towers Perrin was limited to supplying the survey data and performing the regression analysis for each NEO position where possible. The Committee did not use any other outside compensation consultants in determining or recommending any amount or form of compensation for our NEOs.
In addition to considering the Towers Perrin Survey to review compensation levels for our CEO for 2008, the Committee considered publicly available compensation data from a comparison group of nine publicly traded financial services companies (the Comparison Group) approved by the Committee with total assets that are comparable to the Company. Those companies were:
References in this compensation discussion and analysis to the Benchmarks refer to the Towers Perrin Survey and the Comparison Group to the extent the Benchmarks relate to our CEO, and refer to only the Towers Perrin Survey to the extent the Benchmarks relate to our other NEOs.
Each of our executive officers performs an annual self-evaluation of previous year performance and goals for the upcoming year. Our CEO conducts performance evaluations of each of our other executive officers, presents the evaluations to the Committee, and makes recommendations to the Committee as to their compensation. The Committee conducts an annual performance evaluation of our CEO and evaluates the recommendations of our CEO as to other executive officers. The performance review of our CEO is based on the financial performance of the Company, the increase in the franchise value of the Company, growth in the human capital of the organization, the continued reinvestment and improvement of the Companys product offerings, and the Companys overall management of risk.
The CEO and all NEOs are evaluated against four key measurements used throughout the company: revenue growth, pre-tax profit growth, customer satisfaction and employee engagement. The targets and results of these
measurements are based on corporate-wide results. The CEO and all other NEOs have the same target and all share the final results. The two financial measures (in addition to earnings per share targets) are also used in the formula for our annual cash incentive plan. In addition to the system-wide measures, each executive is evaluated on their individual areas of responsibility and against the objectives outlined in their performance review. The individual performance and contribution criteria may include:
The Committee discusses the CEO evaluation without our CEO being present and a Committee member presents the Committees recommendations for executive officer compensation to the full Board of Directors.
Based on the performance evaluations, an analysis of the Benchmarks, and a review of the Companys goals and objectives, the Committee approves, and submits to the Board of Directors for approval, base salary (effective April 1), annual incentive compensation targets and amounts, and long-term equity awards for our executive officers for the current year, as well as incentive compensation earned for the prior year. The Committees approval generally occurs during January and the Committee makes its presentation to the Board of Directors at the next regularly scheduled meeting, which generally occurs in late January or early February. All equity awards are granted on the date the Board approves the awards using the fair market value of the Companys stock at the close of that business day.
The process includes a review by the CEO of outside benchmarks for the other NEOs prior to the committee meeting. The outside benchmarks for the other NEOs are reviewed for current market data on base salary, annual cash incentives and long-term equity awards. The benchmark information is compared to each of the other NEOs current compensation as detailed on the tally sheets. The CEO details the compensation data and discusses the reasons for his recommendations for the other NEOs during the committee meeting.
The timing of compensation decisions is driven by a variety of tax considerations. To the extent the Committee determines that an award is intended to satisfy the deductibility requirements under Section 162(m) of the Internal Revenue Code, performance objectives must be established in the first 90 days of the performance period. For annual incentive awards, this means performance objectives must be established no later than the end of March. In addition, in order to avoid being considered deferred compensation under Section 409A of the Internal Revenue Code and to be deductible for the prior tax year, our annual incentive awards with respect to the prior year must be paid out by March 15.
There is no policy for the allocation between cash and non-cash or annual and long-term compensation. Instead, the Committee determines the allocation of each component of compensation based on the role of each executive officer in the Company, performance evaluations, the Benchmarks, and knowledge of our local markets. Generally, the percentage of compensation consisting of the annual cash incentive and long-term equity awards increases as the responsibilities of the executive officer and the executive officers ability to affect Company performance increase. These compensation elements for our CEO for 2008 were allocated as follows: 37.0% base
salary, 16.8% annual cash incentive, and 46.2% long-term equity awards. The Committee feels that a greater percentage of the CEOs compensation should be based on the long term performance of the company than the percentage used for the other NEOs, but has not identified a specific target. On average, these compensation elements for our other NEOs for 2008 were allocated as follows: 48.9% base salary, 14.8% annual cash incentive, and 36.3% long-term equity awards. For purposes of the above calculations, the long-term equity awards were valued as of the grant date using the Black Scholes valuation model. Other benefits, including Company allocations and contributions to benefit plans and perquisites, while not considered in determining these allocations, are provided to our executive officers in order to offer a total compensation package that is competitive in the marketplace.
The amount of salary, annual cash incentive and long-term equity awards is considered individually and in combination so that the total of such compensation is targeted at approximately the 50th percentile of the applicable Benchmarks. The total compensation data for 2008 of our NEOs did not exceed the outlined parameter. Realized and unrealized equity compensation gains and vesting of prior equity grants are not considered by the Committee when establishing compensation. The factors used to determine base salary, annual cash incentives, and long-term equity awards are discussed in more detail under the heading Elements of Compensation below. The Committee used tally sheets to set compensation for our executive officers for 2008. The tally sheets were included in the packet of data that was sent to the Committee for review prior to the meeting and used during the meeting for discussion purposes. The tally sheets were used as tools for review of total compensation comparison of the NEOs and included information such as:
If our financial statements were to be restated or adjusted in a manner that would have reduced the size of a prior incentive award, the Committee will consider that information when determining future compensation.
Elements of Compensation
Base salary is a guaranteed element of annual compensation on which our executive officers may rely, regardless of performance. Base salary reflects the external market value of a particular position based on the experiences and qualifications that an individual brings to the position. Base salary levels for our NEOs were reviewed against the Benchmarks to determine whether salary levels are appropriate. Factors included in the comparison of base salaries of our NEOs to those in the Benchmarks included the relative size of companies, financial performance (both currently and over a period of time), and the experience and responsibility of the individuals. The Committee does not assign a weight to any particular factor. While the committee did review external data this year, the CEO made the recommendation to freeze all NEOs base salaries due to the current economic conditions, and the Committee approved this action.
Annual Cash Incentive Compensation
In furtherance of the Companys pay for performance philosophy, the Companys Executive Incentive Compensation Plan (EICP) is a short-term cash incentive plan to reward our executive officers for the achievement of Company annual performance goals. In awarding annual cash incentives, the factors considered by the Committee are the Companys financial performance (the Company Performance Factor) compared to the annual target for the following categories earnings per share (EPS), revenue growth, and pre-tax net income growth.
Our NEOs are eligible to receive an annual cash incentive equal to a percentage of their base salary. During the Compensation and Human Resources Committee meeting in January 2008 it was determined that there would be no adjustments to the target percent for the annual cash incentive component for the CEO and the other NEOs for performance year 2008.
The target annual cash incentives as percentages of base salary for our NEOs in 2008 were as follows:
In determining the amount of annual cash incentives to be paid under the EICP in 2009 for 2008 performance, the Committee weighted the components of the Company Performance Factor as follows:
For every 1% above/below target for a particular component of the Company Performance Factor, the eligible incentive tied to the factor increases/decreases by 5%.
For purposes of the EICP:
For example: Assume for 2008 that an NEOs base salary was $200,000; target annual cash incentive percentage was 50%; actual EPS was 2% below target; actual revenue growth was three percentage points below target; and actual pre-tax net income growth was one percentage point below target. After applying the five-for-one formula described above to these assumptions in comparing actual performance as a percentage of targets, the Company achieved 90% of its EPS target, 85% of the revenue growth target and 95% of its pre-tax net income target, resulting in a Company Performance Factor of 90%. Therefore, the annual incentive compensation for the officer would be:
$100,000 * [(80% * 90%) + (10% * 85%) + (10% * 95%)] = $90,000
For 2008, the calculated payout was 30.8% for all NEOs. In addition, the Committee has reserved discretion to declare additional compensation to the NEOs that does not qualify as performance based under Internal Revenue Code Section 162(m). The Committee determined to award additional bonuses outside the EICP in the following
amounts in recognition of the Company outperforming its peers and other banks as a whole during 2008. These additional bonuses combined with the calculated bonuses total 50% of the eligible target for each NEO.
For 2008, the total cash incentive awards pursuant to the EICP and the additional awards for Messrs. D. Kemper, Clark, J. Kemper, Leadbeater, Barth, and Kim were approximately 45%, 25%, 32.5%, 30%, 30% and 30% of base salary, respectively.
Long-Term Equity Awards
Stock option and restricted stock grants have historically been awarded to provide our executive officers with long-term equity awards for profitable growth, to more closely align their interests with the interests of our shareholders, and for retention purposes. The 2005 Equity Incentive Plan, which was approved at the 2005 Annual Meeting of Shareholders, provides for the issuance of equity-based awards, including stock options, stock appreciation rights (SARs), restricted stock and restricted stock units, and performance shares and performance units. Commencing in 2006, the Company began issuing SARs in lieu of nonqualified stock options.
In determining the level and type of equity awards for the NEOs in 2008, the Committee considered the restricted stock awards for each NEO, so that the aggregate value of the restricted stock equals a targeted percentage of each NEOs base salary consistent with the applicable Benchmarks. The Committee also considered stock option/SAR grant practices of the Benchmarks, the level of FAS 123R expense that the Company will incur, and expected long-term Company performance and individual contributions over time.
The second component of our long-term equity awards for our executive officers is an annual award of restricted stock, the value of which is determined by a formula. Each NEO was awarded restricted stock during 2008 with a value equal to 35% of the average annual cash incentive target for the officer for the three prior years, multiplied by the average Company Performance Factor for the three prior years. The restricted stock awards vest at the end of five years. However, holders of restricted stock will receive cash and stock dividends declared by the Company prior to the vesting date.
For example: If the Company Performance Factor for 2007, 2006 and 2005 was 95%, 90% and 100%, respectively, the three-year average Company Performance Factor would be 95%. If the NEO has a three-year average annual cash incentive target of $100,000, the officer would receive restricted stock in 2008 equal to $33,250 ($100,000 * 35% * 95% = $33,250).
The Company maintains the Commerce Bancshares Restated Retirement Plan (the Retirement Plan). The Retirement Plan provides benefits based upon earnings, age and years of participation. Our NEOs were participants in the Retirement Plan during 2008. See Executive Compensation Pension Benefits Narrative of this Proxy Statement for a description of the Retirement Plan and our NEOs benefits under the plan.
Effective January 1, 1995, the Company maintains the Commerce Executive Retirement Plan (CERP), a nonqualified plan established to provide benefits to a select group of executives on compensation in excess of the allowable amount under the Companys pension and 401(k) plans. See Executive Compensation Pension Benefits Narrative of this Proxy Statement for a description of the CERP.
The Pre-2005 Benefit is paid in the same form as payments are made from the Retirement Plan and shall commence within one year following commencement of distributions from the Retirement Plan. This may be amended after the regulations under Internal Revenue Code Section 409A are finalized. The Post-2004 Benefit is payable as a lump sum within one year following commencement of distributions from the Retirement Plan. This may be amended after the regulations under Internal Revenue Code Section 409A are finalized.
The CERP is intended to be a part of participating executive officers total compensation. The CERP also provides equitable treatment to participants because it provides retirement benefits which are, as a percentage of total compensation, commensurate with the benefits provided to other employees of the Company.
Our NEOs are eligible to participate in a nonqualified deferred compensation plan that is a part of the EICP. The EICP allows the officers to contribute a percentage of their annual cash incentive award under this plan and, therefore, defer income tax on these amounts. See Executive Compensation Nonqualified Deferred Compensation Narrative of this Proxy Statement for a description of the deferred compensation plan. This benefit is not considered by the Committee in setting other compensation for our NEOs.
Our NEOs are eligible for personal use of the Company airplane (in accordance with our corporate airplane policy) and long-term care insurance, the premiums for which are paid by the Company. Our NEOs are also reimbursed for club dues as necessary for business purposes. All employees, including the NEOs, are covered under our health and welfare plans and the Company pays the premiums for basic coverage life and long-term disability and subsidizes the cost of other coverages. The value of all perquisites is determined and included as additional compensation to the NEOs without any gross up to compensate for accompanying taxes. Our use of perquisites as an element of compensation is limited and is largely based on our historical practices and policies. We do not view perquisites as a significant element of our comprehensive compensation structure, but do believe that they can be used in conjunction with base salary to attract, motivate and retain individuals in a competitive environment.
We have entered into severance agreements with each of our NEOs. These agreements provide payments or benefits following the occurrence of both a change in control and a qualifying termination. The Committee believes these agreements serve the best interests of the Company and its shareholders by ensuring that, if a change in control were ever under consideration, the NEOs would be able to advise the Board of Directors dispassionately about the potential transaction and implement the decision of the Board without being unduly influenced by personal concerns such as the economic consequences of possibly losing their jobs following a change in control. These agreements also provide an incentive for our NEOs not to seek other employment due to concern over losing their positions if a change in control were ever under consideration. Additional information regarding these severance agreements is found under the heading Employment Agreements and Elements of Post-Termination Compensation of this Proxy Statement.
In order to continue to be eligible to receive long-term equity awards, our executive officers must meet stock ownership requirements as follows:
Generally, an executive officer must achieve the applicable targeted ownership level within three years of being named an executive officer. As of December 31, 2008, each NEO exceeded his required share ownership level. Stock that will be considered in order to meet ownership guidelines includes all shares with respect to which the executive officer has direct or indirect ownership or control, including restricted stock (regardless of whether
vested), and shares held in the executive officers 401(k) plan account, but does not include unexercised stock options or SARs.
Section 162(m) of the Internal Revenue Code limits our ability to deduct annual compensation in excess of $1 million paid to our NEOs. This limitation generally does not apply to compensation based on performance goals if certain requirements are met. It is the Committees position that in administering the performance-based portion of the Companys executive compensation program, it will attempt to satisfy the requirements for deductibility under Section 162(m). However, the Committee believes that it needs to retain the flexibility to exercise its judgment in assessing an executives performance and that the total compensation system for executives should be managed in accordance with the objectives outlined in this discussion and in the overall best interests of the Companys shareholders. Should the requirements for deductibility under Section 162(m) conflict with our executive compensation philosophy and objectives or with what the Committee believes to be in the best interests of the shareholders, the Committee may authorize compensation which is not fully deductible for any given year.
The Company adopted FAS 123 in 2003 and has been expensing equity-based awards since that time. In 2006, the Company also adopted provisions of FAS 123R when this new standard became effective. The changes in the accounting for these kinds of equity awards did not have a material impact on the financial statements of the Company.
The Compensation and Human Resources Committee reviewed and discussed the Compensation Discussion and Analysis included in this Proxy Statement with management. Based on such review and discussion, the Compensation and Human Resources Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement for filing with the Securities and Exchange Commission.
Submitted by the Compensation and Human Resources Committee of Commerce Bancshares, Inc. Board of Directors
Andrew C. Taylor, Chairman
W. Thomas Grant, II
Terry O. Meek
The following table summarizes the total compensation paid or earned by each of our NEOs for the fiscal year ended December 31, 2008.
Summary Compensation Table
Grants of Plan-Based Awards in 2008
Outstanding Equity Awards at Fiscal Year-End
The Company maintains the Retirement Plan, which is a tax-qualified defined benefit plan that provides retirement benefits to all employees who completed one year of service and attained age 21 prior to July 1, 2004. Participation in the Retirement Plan was frozen on December 31, 2004, as described below.
The Retirement Plan provides benefits based upon compensation, age and years of participation. Effective January 1, 1995, benefits were provided under a cash balance formula. Under this formula, a retirement account balance is maintained for each participant. At the end of each plan year beginning after December 31, 1994 and ending December 31, 2004, the participants account was credited with a cash balance amount equal to a percentage of compensation for the year plus the same percentage of compensation in excess of 50% of the Social Security taxable wage base for the year.
Compensation for this purpose is limited by Section 401(a)(17) of the Internal Revenue Code ($225,000 in 2007). The applicable percentage is determined by the sum of the participants age and years of participation in the Retirement Plan at the beginning of the plan year, and ranged from 1% for a sum of less than 30 to 4% for a sum of 75 or more. Interest is credited to the participants account at the end of each plan year beginning after 1995 at a rate not less than 5% of the account balance at the end of the prior plan year. For 2007, the rate of interest was 5%. Beginning January 1, 2005, no additional cash balance credits will be applied to participants accounts. However, interest will continue to be credited to each participants account until retirement. At retirement, a participant may select from various annual benefit options based on actuarial factors defined in the Retirement Plan.
In addition, the participant will receive an annual benefit equal to his annual benefit accrued through December 31, 1994 under the Retirement Plans prior formula, adjusted for increases in the cost of living (but not in excess of 4% per year) for each year of participation after December 31, 1994. Certain participants of the Retirement Plan, including NEOs, will receive a special minimum benefit based on the final five-year average compensation and years of service, subject to IRS approval, which has been requested.
This Retirement Plan is fully funded by the Company and participants become fully vested after five years of service. All of the NEOs are fully vested. The normal retirement age under the Retirement Plan is 65. Reduced benefits are available as early as age 55 with 10 years of service. Benefits are reduced based on the length of time prior to age 65 that retirement occurs. The reduction is 6.67% per year for each of the first five years of early retirement (age 60-64) plus an additional 3.33% per year for each of the next five years (ages 55-59). Of the NEOs, Messrs. D. Kemper, Clark, J. Kemper, and Leadbeater are currently eligible for early retirement.
The estimated annual accrued benefit under the Retirement Plan for Messrs. D. Kemper, Clark, J. Kemper, Leadbeater, Barth and Kim is $85,701, $55,348, $68,534, $40,054, $36,530 and $38,721 respectively. These benefits assume the election of benefits payable as a straight life annuity to the participant.
Effective January 1, 1995, the Company also maintains the CERP to provide a non-tax-qualified deferred compensation plan to a select group of executives whose benefits under the Retirement Plan are limited by the Internal Revenue Code. The CERP is unfunded and benefits are payable from the assets of the Company. The Board of Directors has designated the CEO as a participant and the CEO has designated other executives, including the NEOs, as participants. The present value of the benefits shown in the table is based on a 6.00% interest rate and the RP2000 white collar employee mortality table projected to 2010, assuming benefits commence at normal retirement age.
A participants benefit under the CERP is the sum of the Pre-2005 Benefit and the Post-2004 Benefit. A participants benefit under the Pre-2005 Benefit is the amount by which (1) exceeds (2), where (1) is the benefit that would be payable under the Retirement Plan if that benefit were calculated using the participants compensation including any incentive compensation deferred under a nonqualified deferred compensation plan maintained by the Company and without regard to the compensation limit of Section 401(a)(17) of the Internal Revenue Code; and (2) is the benefit actually payable under the Retirement Plan. Consistent with the Retirement Plan, cash balance formula additions under the CERP were frozen effective January 1, 2005.
The estimated annual accrued benefit under the Pre-2005 Benefit for Messrs. D. Kemper, Clark, J. Kemper, Leadbeater, Barth and Kim is $137,295, $2,200, $29,746, $0, $0 and $0, respectively. These benefits assume the election of benefits payable as a straight life annuity to the participant. The Pre-2005 Benefit is subject to the same retirement eligibility requirements and early retirement reductions as the Retirement Plan.
Benefits under the Post-2004 Benefit are in the form of a defined contribution plan, and are described in the narrative accompanying the Nonqualified Deferred Compensation table.
Nonqualified Deferred Compensation in 2008
Our NEOs are eligible to participate in a deferred compensation plan that is a part of the EICP. The EICP allows the officers to contribute up to 100% of their annual cash incentive award to this plan and, therefore, defer income tax on these amounts. Participants can select from a number of investment options, which are generally available to other employees in the Companys 401(k) plan, including a Company stock alternative, to which their deferrals will be credited. Each participants account is credited with earnings based on performance of those investment options. Benefits are payable in a lump sum or up to ten annual installments. Participants may not make withdrawals during employment, except in the event of hardship approved by the director of the Human Resources Department of the Company.
The Post-2004 Benefit portion of the CERP provides for a Company contribution credit on the last day of each plan year beginning on and after January 1, 2005 equal to 7% of the participants eligible compensation above the pay limit imposed under the Internal Revenue Code for purposes of the Companys qualified 401(k) retirement plan (the Participating Investment Plan) for the year ($230,000 in 2008). The Company may make additional contribution credits to the extent that limitations were imposed on contributions by CERP participants to the Participating Investment Plan due to the nondiscrimination test of Internal Revenue Code Section 401(m). Additional contributions made in 2008 were as follows: Mr. D. Kemper $605; Mr. Clark $608; Mr. J. Kemper $567; Mr. Leadbeater $569; Mr. Barth $565; and Mr. Kim $562.
Eligible compensation for the Post-2004 Benefit portion of the CERP generally includes W-2 earnings. Eligible compensation for 2008 in excess of the pay limit imposed under the Internal Revenue Code was as follows: Mr. D. Kemper $1,136,595; Mr. Clark $125,526; Mr. J. Kemper $398,701; Mr. Leadbeater $257,657; Mr. Barth $250,701; and Mr. Kim $250,298.
Each year the Company will credit or debit the participants CERP account to reflect deemed earnings. The current rate of earnings credit is fixed at 5%, which corresponds to the rate of interest earned on the cash balance accounts of participants in the Retirement Plan. The Retirement Committee, which is an internal committee of employees, reviews this rate of interest annually. The account balance is payable as a lump sum upon the participants retirement.
Employment Agreements and Elements of Post-Termination Compensation
We do not have employment agreements with our NEOs. However, there are several arrangements that provide post-termination benefits.
Change of Control Severance Agreements
The Company has in place a severance agreement with each NEO (Severance Agreement) which provides for payments and certain benefits (which payments and benefits shall be referred to as the Severance Benefits) in the event of a Qualifying Termination in connection with a Change of Control.
For purposes of the Severance Agreement, Change of Control means:
Qualifying Termination means:
Cause means willful misconduct or conduct by the NEO that was knowingly fraudulent or deliberately dishonest.
Good Reason means (i) the NEO , in his reasonable judgment, determines that his duties have been materially reduced in terms of authority and responsibility from those existing immediately prior to the Change of Control; or (ii) the NEO is required to be based at a location that is thirty-five or more miles from his primary residence at the time of the requirement than it was prior thereto; or (iii) there is a reduction in the NEOs base salary to an amount that is less than the base salary in effect twelve months prior to the Change of Control; or (iv) there is a material reduction in the NEOs level of participation in any of the Companys incentive compensation plans, benefit plans, policies, practices or arrangements in which the NEO participated immediately prior to the Change of Control and such reduction is not consistent with the average level of participation by other executives who have a similar position.
In the event that an NEO becomes entitled to Severance Benefits, the Company shall pay to or provide the NEO with the following:
Severance Period means a number of whole and fractional years equal to the lesser of: (a) three or (b) the quotient of the number of months following termination until the NEO attains age 65, divided by twelve.
In the event that any payments are subject to the application of any tax pursuant to Section 4999 the Tax Code (an Excise Tax), the Company shall also pay to the NEO an additional amount sufficient to make the net amount payable to the NEO the same as the NEO would have received had the Excise Tax not been imposed. The Company will reimburse the NEO for all fees, expenses and costs incurred in connection with any Excise Tax.
The Severance Benefits are reduced by any other severance benefits or damages for termination paid or owed to the NEO.
The Company is obligated to pay any attorneys fees and costs incurred in connection with any dispute concerning the Severance Agreement unless the dispute by the NEO is frivolous.
Restricted Stock, Stock Options and Stock Appreciation Rights
Our outstanding unvested restricted stock grants are normally forfeited upon termination of employment. However, there are special vesting rules in the case of death, disability or retirement. In the case of death or disability, outstanding unvested restricted stock immediately vests in the same proportion that the number of full and partial months from the date of grant to the date of death or disability bears to the total restriction period applicable to the award. In the case of retirement, the same pro-rata vesting provision applies, except the vesting is not effective until the last day of the restriction period applicable to the award. For grants issued before 2007, retirement means termination of employment after attaining age 60 and agreeing to certain non-competition
provisions. In the case of restricted stock issued after 2005, retirement means termination of employment after attaining age 60 and having at least ten years of service, and agreeing to certain non-competition provisions. In addition, otherwise unvested outstanding restricted stock, stock appreciation rights and options immediately vest upon the occurrence of a change of control. For this purpose change of control has the same meaning as applies for purposes of the Change of Control Severance Agreements (see Change of Control Severance Agreements under Employment Agreements and Elements of Post-Termination Compensation), except different dates are used for determining the incumbent board of directors.
The CERP and EICP provide for payments of nonqualified deferred compensation after termination of employment. See Pension Benefits Narrative and Nonqualified Deferred Compensation Narrative for a description of those arrangements.
The NEOs generally have the same long-term disability benefit as all salaried employees, except that the definition of disability for the NEOs is more favorable because the benefit after the first 36 months of disability for salaried employees who are not vice presidents or above is based on a more restrictive definition of disability than the one that applies to vice presidents and above.
Commerce Retirement Plan
This qualified defined benefit pension plan was frozen and closed to new participants January 1, 2004, so not all salaried employees participate. The named executives participate in this plan and receive earnings credits to their cash balance accounts. See Pension Benefits Narrative for a description of this arrangement.
Potential Payments upon Termination or Change in Control
The following table provides information as of December 31, 2008, with respect to compensation plans under which common shares of Commerce Bancshares, Inc. are authorized for issuance to certain officers in exchange for services provided. These compensation plans include: (1) the Commerce Bancshares, Inc. 2005 Equity Incentive Plan, (2) the Commerce Bancshares, Inc. 1996 Incentive Stock Option Plan, (3) the Commerce Bancshares, Inc. Restricted Stock Plan, (4) the Commerce Bancshares, Inc. Stock Purchase Plan for Non-Employee Directors (Director Plan) and (5) the Commerce Bancshares, Inc. Executive Incentive Compensation Plan (EICP). As of January 1, 2006, all equity based awards were granted pursuant to the 2005 Equity Incentive Plan. All of these compensation plans were approved by the Companys shareholders.
During 2008, the Compensation and Human Resources Committee consisted of Messrs. Andrew C. Taylor (Chairman), Terry O. Meek and W. Thomas Grant, II. All members of the Committee were independent members of the Board of Directors of the Company.
The role of the Audit Committee is to assist the Board of Directors in its oversight of the Companys accounting, auditing and financial reporting processes. As noted under the Corporate Governance and Director Independence section of this report, the Board of Directors has determined that all members of the Audit Committee are independent. The Audit Committee operates pursuant to a charter that was last amended and restated by the Board on January 30, 2004. As set forth in the Charter, management of the Company is responsible for establishing and maintaining the Companys internal control over financial reporting and for preparing the Companys financial statements in accordance with generally accepted accounting principles and applicable laws and regulations. Management is also responsible for conducting an evaluation of the effectiveness of the internal control over financial reporting based on the framework in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Audit Committee is directly responsible for the compensation, appointment and oversight of KPMG LLP, the independent auditor for the Company. KPMG LLP is responsible for performing an independent audit of the Companys financial statements and expressing an opinion as to their conformity with generally accepted accounting principles. KPMG LLP is also responsible for auditing managements assessment of the effectiveness of the internal control over financial reporting and expressing an opinion as to its overall effectiveness and managements assessment of those controls.
Members of the Audit Committee include Robert H. West (Chairman), James B. Hebenstreit, Benjamin F. Rassieur, III, Thomas A. McDonnell, John R. Capps and Kimberly G. Walker. Mr. West is designated as an audit committee financial expert within the meaning of that term as defined by the Securities and Exchange Commission pursuant to Section 407 of the Sarbanes-Oxley Act of 2002. The Audit Committees responsibility is one of oversight. Members of the Audit Committee rely on the information provided and the representations made to them by: (i) management, which has primary responsibility for establishing and maintaining appropriate internal financial controls over financial reporting, and for Commerce Bancshares, Inc. financial statements and reports and (ii) the external auditor, which is responsible for expressing an opinion that the financial statements have been prepared in accordance with generally accepted accounting principles, that managements assessment that the Company maintained effective internal control over financial reporting is fairly stated, and that the audit of the Companys financial statements by the external auditor has been carried out in accordance with Standards of the Public Company Accounting Oversight Board (PCAOB).
In this context the Audit Committee has considered and discussed the audited financial statements and managements assessment on internal control over financial reporting with management and the independent auditors as of December 31, 2008. The Audit Committee has also discussed with the independent auditors the matters required to be discussed by Statement on Auditing Standard No. 114, Communication with Audit Committees, as currently in effect. Finally, the Audit Committee has received the written communication and confirmation of independence from KPMG LLP as required by PCAOB Rule 3526, Communications with Audit Committees Concerning Independence. The Audit Committee has considered the compatibility of non-audit services with the auditors independence and has discussed with the external auditors their independence.
Based on the reviews and discussions described in this report, and exercising the Audit Committees business judgment, the Audit Committee recommends to the Board of Directors that the audited financial statements referred to above be included in the Companys Annual Report on Form 10-K for the year ended December 31, 2008 to be filed with the Securities and Exchange Commission.
The Audit Committee has selected KPMG LLP as the Companys external auditors for fiscal 2009 and has approved submitting the selection of the independent external auditors for ratification by the shareholders. Audit, audit-related and any permitted non-audit services provided to Commerce Bancshares, Inc. by KPMG LLP are subject to pre-approval by the Audit Committee. All fees paid in 2008 were pre-approved by the Audit Committee.
Submitted by the Audit Committee of the Companys Board of Directors:
The Audit Committee has adopted a policy for pre-approval of audit and permitted non-audit services provided by the Companys external auditor. Annually the Audit Committee will review and approve the audit services to be performed along with other permitted services including audit-related and tax services to be provided by its external auditor. The Audit Committee may pre-approve certain recurring designated services where appropriate and services for individual projects that do not exceed $25,000.
Proposed engagements that do not meet these criteria may be presented to the Audit Committee at its next regular meeting or, if earlier consideration is required, to one or more of its members. The member or members to whom such authority is delegated shall report any specific approval of services at the next regular Audit Committee meeting. The Audit Committee will regularly review summary reports detailing all services provided to the Company by its external auditor.
The following is a summary of fees billed by KPMG LLP for professional services rendered during the fiscal years ended December 31, 2008 and 2007:
The audit fees billed by KPMG LLP are for professional services rendered for the audits of the Companys annual consolidated financial statements and the audit of managements assessment of the effectiveness of internal controls for the fiscal year ended December 31, 2008 and for the reviews of the financial statements included in the Companys Quarterly Reports on Form 10-Q for that fiscal year. Audit fees also include audits of several venture capital subsidiaries, a brokerage subsidiary and a mortgage-banking subsidiary and for miscellaneous accounting research and advice provided.
Audit related fees are mainly for services rendered for agreed upon examination procedures relating to the Companys trust operations. Tax fees are for services including both review and preparation of corporate income tax returns and tax consulting services.
RATIFICATION OF THE SELECTION OF KPMG LLP
Pursuant to the Sarbanes-Oxley Act of 2002, the Audit Committee of the Company is responsible for the selection and approval of the Companys independent registered public accountants for the purpose of the examination and audit of the Companys financial statements for 2009. The Audit Committee has also adopted a procedure for the pre-approval of non-audit services. The Audit Committee has selected and the Board of Directors has ratified the selection of KPMG LLP as the firm to conduct the audit of the financial statements of the Company and its subsidiaries for 2009. This selection is presented to the shareholders for ratification; however, the failure of the shareholders to ratify the selection will not change the engagement of KPMG LLP for 2009. The Audit Committee will consider the vote of the shareholders for future engagements. Representatives of KPMG LLP are
expected to be present at the Annual Meeting and will be available to respond to appropriate questions. The representatives will also be provided an opportunity to make a statement.
SHAREHOLDER PROPOSAL REQUESTING NECESSARY STEPS TO CAUSE THE
The following proposal has been validly submitted by Mr. Gerald R. Armstrong, a shareholder of the Company. As of the record date, Mr. Armstrong owned 289 shares of Company stock. Mr. Armstrongs mailing address is 910 Sixteenth Street, No. 412, Denver, Colorado 80202-2917. His telephone number is 303-355-1199.
That the shareholders of COMMERCE BANCSHARES, INC. request its Board of Directors to take the steps necessary to eliminate classification of terms of the Board of Directors to require that all Directors stand for election annually. The Board declassification shall be completed in a manner that does not affect the unexpired terms of the previously-elected Directors.
This proposal was presented in last years annual meeting and received 23,407,490 votes of shares worth $997,159,074 on the date of the meeting. Because of this support, it is presented again.
The proponent believes the election of directors is the strongest way that shareholders influence the directors of any corporation. Currently, our board of directors is divided into three classes with each class serving three-year terms. Because of this structure, shareholders may only vote for one-third of the directors each year. This is not in the best interest of shareholders because it reduces accountability.
Xcel Energy Inc., Devon Energy Corporation, ConocoPhillips, ONEOK, Inc. CenterPoint Energy, Inc., Hess Corporation have adopted this practice and it has been approved by shareholders at C H Energy Group, Inc., Central Vermont Public Service Corporation, Black Hills Corporation, Spectra Energy Corp., Chesapeake Energy Corp. upon presentation of a similar resolution by the proponent during 2008. The proponent is a professional investor who has studied this issue carefully.
The performance of our management and our Board of Directors is now being more strongly tested due to economic conditions and the accountability for performance must be given to the shareholders whose capital has been entrusted in the form of share investments.
A study by researchers at Harvard Business School and the University of Pennsylvanias Wharton School titled Corporate Governance and Equity Prices (Quarterly Journal of Economics, February, 2003), looked at the relationship between corporate governance practices (including classified boards) and firm performance. The study found a significant positive link between governance practices favoring shareholders (such as annual directors election) and firm value.
While management may argue that directors need and deserve continuity, management should become aware that continuity and tenure may be best assured when their performance as directors is exemplary and is deemed beneficial to the best interests of the corporation and its shareholders.
The proponent regards as unfounded the concern expressed by some that annual election of all directors could leave companies without experienced directors in the event that all incumbents are voted out by shareholders. In the
unlikely event that shareholders do vote to replace all directors, such a decision would express dissatisfaction with the incumbent directors and reflect the need for change.
If you agree that shareholders may benefit from greater accountability afforded by annual election of all directors, please vote FOR this proposal.
The Board of Directors recommends a vote AGAINST this proposal that asks the Board to take the steps necessary to declassify the Board of Directors and require that all Directors stand for election annually. An identical proposal was submitted last year and the shareholders defeated the proposal by a vote of 23,407,490 (43.24%) for the proposal and 30,109,725 (55.62%) against the proposal, with 615.553 (1.14%) abstaining. The Companys Board currently consists of twelve Directors divided into three classes consisting of four Directors per class. One class is elected at each annual meeting of the shareholders for a three year term. The classified Board provision is found in the Articles of Incorporation that were adopted in 1966. In support of its opposition, the Board offers the following reasons to vote AGAINST the proposal:
The incorporators of the Company recognized the value of providing for the continuity of leadership. As important as that principle was last year, it is even more significant today with the multiple challenges and opportunities that confront financial institutions. Good corporate planning and initiatives are strategic in nature and often require several years to implement and realize results. The proponent would have you believe that it is in the best interests of shareholders to be able to elect or replace the entire Board each year, including those Directors who also serve as executives of the Company. Such an outcome would be disruptive, if not disastrous, to corporate planning and the long term stability of the Company. A classified Board insures that there is some continuity of leadership. Even with a classified Board, shareholders have the ability to elect a majority of the Board within two consecutive annual meetings. Two annual meetings could occur within as little as a twelve month period. That ability provides shareholders with considerable influence over the affairs of the Company and holds the Directors accountable for their actions. We have seen unprecedented disruptions in credit markets and government injection of capital into the countrys largest financial institutions, as well as a large number of smaller financial institutions, in recent months. The possibility of the Companys shareholders being represented by an entirely new board of directors without the experience and institutional knowledge that have given you the results the Company has achieved over the long term is not a thought that offers comfort in times that demand wisdom, experience and tested leadership.
A classified Board also protects the Company and you its shareholders from the coercive tactics employed by those that seek hostile takeovers. Without classification, those with hostile intent and no concern for current shareholders could obtain control of the Board at one annual meeting. A classified Board prevents such action and enables the Board, if so desired and in the best interests of shareholders, to negotiate at arms length the most favorable terms for the Companys shareholders. The Board feels that this protection and the leverage it provides are necessary to protect the shareholders and create real shareholder value.
The proponents statement lists corporations that proponent maintains de-classified their Boards because of proponents efforts. The Board has not verified that statement to be true. However, the Board feels strongly that what may be appropriate for one company is not appropriate for all. This one size fits all view does not take into account the differences among companies and their management, or the industries in which they compete. Shareholders must look at the history and performance of a company and its record of providing shareholder value. Commerce Bancshares has an excellent record of providing shareholder value. For example, the Board has increased cash dividends each year for 40 consecutive years and has declared 5% stock dividends for fifteen straight years. Those actions and the share repurchase plan adopted by the Board provide real value for shareholders.
The proponent also suggests that there is a positive link between governance practices and firm value. The Board does not disagree with that suggestion. As of February 2, 2009, the Company has a Corporate Governance Quotient (CGQ®), as measured by Institutional Shareholder Services, better than 90% of all banking companies.
This positive CGQ® score, as measured by one of the leading companies in the field, and the past performance of the Company, reflect the attention the Board gives to corporate governance and the creation of shareholder value.
Lastly, the Board wants to assure shareholders that it is well aware of the fiduciary duties of care and loyalty owed to the Company and its shareholders. Those duties exist regardless of the Directors term or election. Recognition and adherence to those duties provide the highest form of accountability of the Directors to the Company and its shareholders.
Approval of this shareholder proposal requires the affirmative vote of a majority of all the votes cast on the matter at the Annual Meeting. Abstentions will be treated as votes against this proposal and broker non-votes will be treated as not entitled to vote and have no effect on the outcome.
The management does not know of any matter or business to come before the meeting other than that referred to in the notice of meeting but it is intended that, as to any such other matter or business, the person named in the accompanying proxy will vote said proxy in accordance with the judgment of the person or persons voting the same.
This proxy statement and the 2008 annual report are available on the Companys Internet site at www.commercebank.com/ir. Most Shareholders can elect to view future proxy statements and annual reports over the Internet instead of receiving paper copies in the mail.
Shareholders of record can choose this option and save the Company the cost of producing and mailing these documents by logging on to the sign-up website at www.Computershare.com/us/ecomms and filling out the online consent form. Employees holding shares through the Companys Participating Investment Plan may sign-up by logging on to the sign-up website www.computershare.com/econsent and filling out the online consent form. Shareholders who choose to view future proxy statements and annual reports over the Internet will receive an e-mail message next year from the Company with instructions containing the Internet address of those materials. The election may be withdrawn at any time by accessing your account on the website and changing the election. Shareholders do not have to elect Internet access each year.
Shareholders who hold their Company stock through a bank, broker or other holder of record, should refer to the information provided by that entity for instructions on how to elect to view future proxy statements and annual reports over the Internet.
By Order of the Board of Directors
J. Daniel Stinnett,
March 12, 2009
Annual Meeting Proxy Card C0123456789 12345
6IF YOU HAVE NOT VOTED VIA THE INTERNET OR TELEPHONE, FOLD ALONG THE PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE 6
Please sign exactly as name(s) appears hereon. When shares are held by joint tenants, both should sign. When signing as attorney, administrator, trustee or guardian, please give full title as such. The signer hereby revokes all proxies heretofore given by the signer to vote at said meeting or any adjournments thereof.
To our Shareholders:
Commerce Bancshares, Inc. encourages you to vote your shares electronically this year either by telephone or via the Internet. This will eliminate the need to return your proxy card. The Computershare Vote by Telephone and Vote by Internet systems can be accessed 24 hours a day, seven days a week until 11:00 p.m., Central Time, on April 14, 2009. However, if this proxy relates to shares held by you in the Companys Participating Investment Plan, your vote must be received by 11:00 p.m., Central Time, on April 9, 2009, to enable the trustee of the plan to vote your shares in the manner directed by you.
Additionally, you may choose to receive future Annual Meeting materials (annual report, proxy statement and proxy card) on-line. By choosing to receive these materials on-line, you help support Commerce Bancshares, Inc. in its efforts to control printing and postage costs.
If you choose the option of electronic delivery and voting on-line, you will receive an e-mail before all future annual or special meetings of shareholders, notifying you of the website containing the Proxy Statement and other materials to be carefully reviewed before casting your vote. To enroll to receive future proxy materials on-line, please go to www.computershare.com/us/ecomms. Employees who hold shares through the Companys Participating Investment Plan may sign up at www.computershare.com/econsent.
6IF YOU HAVE NOT VOTED VIA THE INTERNET OR TELEPHONE, FOLD ALONG THE PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE.6
Proxy Commerce Bancshares, Inc.
Proxy Solicited on Behalf of the Board of Directors
The undersigned hereby appoints Jonathan M. Kemper and David W. Kemper, or either of them, as agents and proxies with full power of substitution in each, to represent the undersigned at the annual meeting of shareholders to be held on April 15, 2009 at 9:30 a.m. in the Auditorium on the 15th Floor of the Commerce Trust Building at 922 Walnut Street, Kansas City, Missouri, or any adjournment or postponement thereof, on all matters coming before the meeting. In their discretion, the Proxies are authorized to vote upon such other business as may properly come before the meeting and all other matters incident to the conduct of the meeting.
You are encouraged to specify your choices by marking the appropriate boxes. SEE REVERSE SIDE, but you need not mark any boxes if you wish to vote in accordance with the Board of Directors recommendations. Your shares cannot be voted unless you sign and return this card or you elect to vote your shares electronically by telephone or via the Internet.
IMPORTANT: PLEASE VOTE BY SIGNING YOUR PROXY AND RETURNING IT IN THE ENVELOPE PROVIDED OR TAKE ADVANTAGE OF INTERNET OR TELEPHONE VOTING AS DESCRIBED ON THE REVERSE SIDE.
ANY SHAREHOLDER WHO IS RECEIVING MULTIPLE COPIES OF THE ANNUAL REPORT AND ANY OTHER MAILINGS FROM COMMERCE BANCSHARES, INC. IS ENCOURAGED TO CALL COMPUTERSHARE TRUST COMPANY, N.A., OUR TRANSFER AGENT, AT 1-800-317-4445 FOR ASSISTANCE IN CONSOLIDATING COMMON OWNERSHIP POSITIONS. REDUCING MAILINGS WILL IMPROVE THE COMPANYS OPERATING EFFICIENCY. HEARING IMPAIRED #: TDD: 1-800-952-9245.