CORPORATE GOVERNANCE POLICY
The following Corporate Governance Policy (the “Policy”) has been adopted as guidelines and principles for the conduct of the Board of Directors (the “Board”) of Citizens Financial Services, Inc. (the “Company”). The Policy reflects the Board’s commitment to monitoring the effectiveness of decision-making at the Board and management level and ensuring adherence to good corporate governance principles, all with a goal of enhancing shareholder value over the long term. The Policy is subject to periodic review by the Governance and Nominating Committee of the Board.
The Policy should be interpreted in the context of all applicable laws and regulations and the Company’s articles of incorporation and bylaws. The Policy is a statement of policy and is not intended to supersede or interpret any federal or state law, rule or regulation, including the Pennsylvania Business Corporation Law of 1988, or the Company’s articles of incorporation or bylaws.
II. Duties and Responsibilities of the Board of Directors and Each Director
The Board is responsible for promoting and acting in the best interests of all shareholders of the Company. The Board, which is elected by the shareholders, is the ultimate decision-making body of the Company, except with respect to those matters reserved to the shareholders by law or pursuant to the Company’s articles of incorporation and/or bylaws. The business and affairs of the Company are managed by its officers under the direction of the Board. The Board will have the following general responsibilities:
- supervising and directing the business and affairs of the Company in the interest, and for the benefit, of the Company’s shareholders in order to enhance shareholder value over the long term;
- reviewing and, where appropriate, approving the Company’s major strategic, financial and business objectives, plans and actions; and
- establishing policies and principles for the selection, and possible succession planning, of directors, the Company’s Chief Executive Officer and other officers of the Company.
The Board will exercise its business judgment to act in a manner that it reasonably believes to be in the best interests of the Company and its shareholders consistent with its legal duties. Each director of the Company owes fiduciary duties of loyalty and care to the Company. A director is required to discharge his or her duties in good faith, in a manner he or she reasonably believes to be in the best interests of the corporation and with such care, including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar circumstances.
Directors are expected to adhere to a high ethical standard in performing and carrying out their duties and responsibilities for the Company. In particular, directors are expected to comply with this Policy and the Company’s Code of Ethics as in effect from time to time.
III. Composition of the Board; Board Operation
General Qualifications. The Board places a high priority on the vitality and experience of the Board and in the discharge of its responsibilities. The Governance and Nominating Committee will identify and recommend to the Board candidates for director in accordance with the policies, procedures and criteria established by the Governance and Nominating Committee and the Board from time to time. When formulating its recommendations, the Governance and Nominating Committee also will consider advice and recommendations from others as it deems appropriate. The Board will then consider the director candidates that are submitted for election by the shareholders at the annual shareholders’ meeting. At a minimum, director candidates will be selected on the basis of integrity, judgment, ability to make independent analytical inquiries, willingness and ability to devote adequate time and resources to diligently perform Board duties, appropriate and relevant business experience and acumen, and reputation, both personal and professional, consistent with the image and reputation of the Company. The Board is committed to a diversified membership, in terms of both the individuals involved and their various experiences and areas of expertise.
Director Independence. In no event will the Board consist of less than a majority of independent directors. In order to be determined to be an “independent” director, a director must meet the criteria for independence established by The Nasdaq Stock Market LLC, as in effect from time to time and as interpreted by the Board in its business judgment, and in any applicable rules and regulations of the Securities and Exchange Commission. The Board will undertake an annual review of the independence of all nonemployee directors and, in accordance with the independence criteria established by the Board from time to time, will make an affirmative determination that each “independent” director has no direct or indirect material relationship with the Company.
Board Membership Criteria. The Governance and Nominating Committee is responsible for reviewing with the Board, on an annual basis, the requisite skills and characteristics required for new Board members as well as the composition of the Board as a whole. This assessment may include, among other things, the following:
- diversity, age, background, skills and experience;
- personal qualities and characteristics, accomplishments, and reputation in the business community;
- knowledge and contacts in the communities in which the Company conducts business and in the Company’s industry or other industries relevant to the Company’s business;
- ability and willingness to devote sufficient time to serve on the Board and committees of the Board;
- knowledge and expertise in various areas deemed appropriate by the Board; and
- fit of the individual’s skills, experience, and personality with those of the other directors in maintaining an effective, collegial and responsive Board.
Nominations for directors, including nominees to committees of the Board, will be made or recommended by the Governance and Nominating Committee in accordance with the policies and principles in its charter and as determined by the Board. The Governance and Nominating Committee also will consider for Board membership individuals who are nominated by shareholders upon submission of the information required by the Company’s bylaws in writing to the Secretary of the Company at the Company’s principal executive offices. Unless otherwise determined by the Governance and Nominating Committee or the Board, the Governance and Nominating Committee’s process for identifying and evaluating nominees for director will be the same regardless of who makes the recommendation.
Diversity. The Board recognizes the value of appointing individual directors who bring a variety of diverse opinions, perspectives, skills, experiences, backgrounds and orientations to its discussions and its decision-making processes. It believes that debate at board meetings will be more open, balanced and wide ranging if a significant degree of diversity can be achieved amongst its members. Healthy discussions involving a wide range of views will, the Board believes, ultimately bring about better board decision. Creating a Board with diverse memberships is important to the Company and the Board is committed to this objective.
The Board’s policy is to consider candidates from a wide variety of backgrounds, without discrimination based on gender, race, color, age, social class, beliefs, religion, sexual orientation, disability or other factors. An overriding principle is that all appointments to the Board will be based upon merit and suitability of the candidate to the particular role being filled. Subject to this overriding principle, the Board will always have regard to the need to consider candidates from different backgrounds. Taking this into account, it is the Board’s objective to increase the number of [female and minority] members of the Board to a level that measurably improves the Board’s diversity. This will be done over time, taking account of the valuable knowledge and experience of the present board members and the remaining periods of their terms of office, and the value of a more diverse board. The Board will monitor diversity within the Company and also report regularly on its own diversity.
Invitation to Join Board. The invitation to join the Board is extended by the Chair of the Governance and Nominating Committee and/or the Chair of the Board after discussion with and approval by the Governance and Nominating Committee and the full Board of Directors.
Restrictions on Board Service and Actions.
- Mandatory Retirement Age. The Board has determined not to establish a mandatory retirement age. However, the Governance and Nominating Committee will review each director’s continuing Board service.
- Devotion of Adequate Time. The Board recognizes that it is important that each director have the requisite time to devote to the oversight of the Company’s business. The Company does not have a policy limiting the number of other public company boards of directors upon which a director may sit, in general. However, the Governance and Nominating Committee shall consider the number of other public company boards and other boards (or comparable governing bodies) on which a prospective nominee or a director is a member. Each director shall provide notice to, and receive approval from, the Chair of the Governance and Nominating Committee in advance of accepting an invitation to serve on another public company board of directors. However, no such approval shall be necessary for the director’s continued service on any public company board of directors on which such director was serving on the date such director joined the Board.
- Although the Company does not impose a limit on outside directorships, it does recognize the substantial time commitments attendant to Board membership and expects that the members of its Board be fully committed to devoting all such time as is necessary to fulfill their Board responsibilities, both in terms of preparation for, and attendance and participation at, meetings.
- In addition, in recognition of the enhanced time commitments associated with membership on a public company's audit committee, the Board has adopted a policy that no member of the Audit and Examination Committee may serve simultaneously on the audit committees of more than two other public companies.
- Term Limits. The Board does not believe it should establish term limits. While term limits could help ensure 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 based on their understanding of the Company’s history, policies and objectives and, therefore, provide an increasing contribution to the Board as a whole. As an alternative to term limits, the Governance and Nominating Committee will review each director’s continuation on the Board every year. This will allow each director the opportunity to confirm his or her desire to continue as a member of the Board.
- Change in Principal Occupation or Business. When a director’s principal occupation or business association changes, such director will promptly inform the Board of such change.
Functioning of the Board.
- Size. The Board believes that between 10 and 15 is currently an appropriate number of directors, but that a smaller or larger Board may be appropriate at any given time, depending on the circumstances.
- Board Agenda. The Chair of the Board, in consultation with the Chief Executive Officer (if the positions of Chair of the Board and Chief Executive Officer are filled by different people), sets the agenda for Board meetings with the understanding that certain items necessary for appropriate Board oversight, such as annual budgets and long-range plans, must appear periodically on the agenda. Board members may suggest that particular items be placed on the agenda. Agenda items that fall within the scope of responsibilities of a Board committee will be reviewed with chair of that committee.
- Frequency of Meetings. The Chair of the Board, in consultation with other members of the Board, will determine the timing and length of meetings of the Board. There will be at least an annual organization meeting of the Board and four regularly scheduled meetings of the Board in each calendar year. In addition to regularly scheduled meetings, additional unscheduled Board meetings may be called upon appropriate notice at any time to address specific needs of the Company. It is the responsibility of the directors to attend, in person or by conference call, all Board meetings and meetings of committee on which they serve, prepare for meetings, review relevant materials, ask questions and engage in discussion, and spend the time needed to properly discharge their responsibilities. In addition, directors are expected to attend the Company’s annual meetings of shareholders.
- Corporate Strategy. From time to time, the Board devotes an extended meeting to a review of the Company’s long-term strategic and business plans.
- Authority to Engage Advisors. The full Board and each committee has the authority to obtain advice and assistance from internal and external legal, accounting or other advisors, at the Company’s expense, without consulting with or obtaining the prior approval of management of the Company.
IV. Selection of Chair, Vice Chair, Chief Executive Officer and President
The Board is free to elect its Chair or Vice Chair, if applicable, in the manner and upon the criteria that the Board deems appropriate at the time of each selection. The Board has no requirement that the offices, with respect to the separation of the roles of Chair of the Board and of President and Chief Executive Officer, be held by the same person, or that the offices be filled by different people.
It is the general policy of the Company that all major decisions will be considered by the Board as a whole, except to the extent that the Audit and Examination Committee or other committee is required by applicable laws, rules or regulations to act alone. As a consequence, the committee structure of the Board is limited to those committees considered to be basic to or required for the operation of a publicly-owned company.
Number and Structure. The Board will maintain at all times an Executive Committee, an Audit and Examination Committee, a Governance and Nominating Committee, and a Compensation/Human Resources Committee. Each such committee will have a written charter addressing the purpose, goals, duties and responsibilities of the committee. The Audit and Examination Committee, the Compensation Committee and the Governance and Nominating Committee shall each be comprised entirely of independent directors. The Company may also utilize committees consisting of Board members and officers for the purpose of advising the Board on various operational matters.
Assignment of Committee Members. Committee members and chairs will, upon recommendations from time to time of the Governance and Nominating Committee, be appointed by the Board, after consideration of the desires, experience and expertise of individual directors. The Governance and Nominating Committee reviews committee assignments annually and recommends to the Board the assignment of Board members to various committees. With the exception of the assignment of an independent Board member on the Executive Committee, the Board does not have a firm policy mandating rotation of committee assignments since special knowledge or experience may mitigate in favor of a particular director serving for an extended period on one committee.
Frequency and Length of Committee Meetings. The Chair of each committee, in consultation with committee members, will determine the frequency and length of committee meetings. Committee meetings are normally held by conference call, unless the committee meeting falls on the same day as a full Board meeting.
Committee Agenda. The Chair of the committee, in consultation with appropriate members of management and other committee members, will develop the committee’s agenda. The committee Chair, in consultation with the Chair of the Board and/or other committee members, determines whether special committee meetings or longer meetings are advisable. Materials relating to specific agenda items will be provided to committee members sufficiently in advance of the committee meeting where necessary to allow the members to prepare for discussion of such items at the meeting. It is recognized that, in the event of a pressing need for a committee to meet on short notice, materials may not be available in advance of the meeting. In that event, sufficient time for discussion will be allocated to allow the committee to become adequately informed of any issues to be discussed at such meeting. The committee Chair shall report on a committee’s meeting at the next full Board meeting following the committee meeting.
Attendance. Management directors may attend the general session of any regularly scheduled committee meeting at the pleasure of the committee Chair. The Chair of the Board, the Vice Chair of the Board, and the Chief Executive Officer have the option to attend, as non-voting participants, any and all meetings of committees for which they are not members, except the Chief Executive Officer may not attend the Compensation/Human Resources Committee meeting when his or her compensation is being considered. At the invitation of the committee Chair, members of management of the Company that are recommended by such committee Chair, may attend committee meetings for the purpose of participating in discussions.
Self-Assessments. Each of the Audit and Examination Committee, the Compensation/Human Resources Committee and the Governance and Nominating Committee should periodically sponsor self-assessments of the performance of the respective committees, the results of which will be discussed with the full Board. The assessment should include a review of any areas in which the Board or management believes such committees can make a better contribution to the governance of the Company. The purpose of the review will be to improve the performance of the committees as units and not to target individual committee members. The Board will utilize the results of the evaluation process in assessing and determining the characteristics and critical skills required of prospective candidates for committee appointments.
VI. Executive Sessions of Independent Directors
To promote open discussion among non-management directors, the Board will be provided an opportunity at each regularly scheduled meeting to meet in executive session without management participation. If the group of non-management directors includes directors who are not independent, as defined in The Nasdaq Stock Market LLC’s listing standards, it is the Company’s policy that at least two, or more as needed, executive sessions convened per year shall include only independent directors. Any independent director can call an executive session meeting at any time. Issues to be discussed in executive session may include the evaluation of the President and Chief Executive Officer, management succession planning and such other matters as the non-management directors may deem appropriate. The Board will not take formal actions at such sessions, although the participating non-management directors may make recommendations for consideration by the Board. If appropriate, the non-management directors will record minutes of such sessions.
VII. Succession Planning
The Executive Committee, with the full involvement of the Board, plans for the succession to the position of Chief Executive Officer. To assist the Executive Committee and the Board, the Chief Executive Officer and management report to the Executive Committee and the Board at least annually on the succession planning and management development. The Chief Executive Officer and management also provide the Executive Committee and the Board with an assessment of persons considered potential successors to certain senior management positions at least once each year.
VIII. Board Access to Management
General. Board members have complete access to management and employees of the Company. The Chief Executive Officer or Secretary of the Company will, whenever requested, assist in arranging and facilitating such meetings or contacts. Board members will use their judgment to ensure that any such contact is not disruptive to the business operation of the Company, and that such contact, if in writing, be copied to the President and Chief Executive Officer.
Attendance of Non-Directors at Board Meetings. The Board encourages the President and Chief Executive Officer to bring members of management from time to time into Board meetings to:
- provide management insight into items being discussed by the Board which involve the manager;
- make presentations to the Board on matters which involve the manager; and
- bring managers with high potential into contact with the Board. Should the President and Chief Executive Officer desire to add additional members of management as attendees on a regular basis, this should be suggested to the Board for its concurrence.
IX. Board Materials Distributed in Advance
Information and data are important to the Board’s understanding of the business and are essential to prepare Board members for productive meetings. Presentation materials relevant to each meeting will be distributed to the Board in advance of the meeting, unless doing so would compromise the confidentiality of competitive information. Under normal circumstances, materials should be delivered at least three (3) days in advance of the meeting, and it is expected that all directors will review such materials in advance of such meeting. In the event of a pressing need for the Board to meet on short notice, it is recognized that materials may not be available in advance of the meeting. In that event, sufficient time for discussion will be allocated to allow the Board to become adequately informed of any issues to be discussed at such meeting. Management will make every effort to provide presentation materials that are brief and to the point, but yet communicate the essential information.
Annual Evaluation of Board Performance. The Board will conduct an annual review and self-evaluation to determine whether it and its committees are functioning effectively. The review will focus on the Board’s contribution to the Company and will seek to identify specific areas, if any, that need improvement or strengthening. Such review shall include presentations to the Board by each committee chairperson, and may, if deemed necessary or appropriate by the Board, include reviews and/or presentations by the Company’s independent advisors, including its legal counsel and independent auditing firm. The Governance and Nominating Committee shall be responsible for overseeing the Board and committee evaluation process and reporting its assessments to the Board.
Annual Evaluation of Chief Executive Officer. At the direction of the Compensation/Human Resources Committee and in compliance with such committee’s charter, the non-management directors will perform an annual review of the Chief Executive Officer’s performance. The Board will review the Compensation/Human Resource Committee’s report in order to ensure that the Chief Executive Officer is providing the best leadership for the company in the long and short term.
XI. Share Ownership of Directors
Effective July 28, 2012, each Company non-employee director shall beneficially own an amount of Company stock equal to the greater of (i) three times the previous year’s cash retainer, based on the price of the Company’s common stock as of the preceding December 31 or (ii) 1,000 shares, unencumbered. Newly appointed or elected non-employee directors shall have up to 36 months to accumulate the minimum number of qualifying shares. For purposes of this provision, beneficial ownership shall be determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended.
XII. Director Compensation Review
Non-management directors will be compensated for their service to the Company in cash and/or equity of the Company on a basis that is commensurate with the commitment made by such directors to serve the Company, and taking into account the compensation paid to directors by other similarly situated public companies. The Compensation/Human Resources Committee shall review on an annual basis director compensation and recommend any changes to the Board for approval in accordance with such Committee’s charter. Directors who also are employees of the Company will not receive additional compensation in their capacity, or for their service, as directors.
The Board recognizes that directors’ independence may be jeopardized if director compensation and perquisites exceed customary levels, if the Company makes substantial charitable contributions to organizations with which a director is affiliated, or if the Company enters into consulting contracts with (or provides other indirect forms of compensation to) a director or an organization with which the director is affiliated, and therefore such actions will be discouraged. The Board will critically evaluate each of these matters when determining the form and amount of director compensation, and the independence of a director.
XIII. Board Interaction with Third Persons
The Board believes management speaks for the Company. Individual Board members may from time to time communicate with various constituencies that are involved with the Company, such as the press, investors and customers. However, it is expected that this communication would be made with the concurrence of management.
XIV. Periodic Review
The Governance and Nominating Committee is responsible for periodically reviewing this Policy, as well as considering other corporate governance principles that may, from time to time, merit consideration by the Board. If the Governance and Nominating Committee determines that modifications to this Policy are in order, it will make recommendations of changes for the Board to consider.
XV. Orientation of New Directors and Continuing Education
New directors, upon election to the Board, will be provided with a comprehensive set of materials on the operations, finances and business plan of the Company and meet informally with as many members of senior management as practical.
All directors are expected to stay actively informed and up to date on current issues relating to director responsibilities and are encouraged to participate in continuing educational programs. From time to time, the Board may set aside time at its meetings to provide continuing director education for the benefit of the directors. The Company will reimburse the expenses incurred by a director in attending continuing education seminars relevant to his or her duties as a director of the Company.
XVI. Transactions with Directors
It is the policy of the Board that any transaction in which a director (or any member of a director’s immediate family) has a personal or financial interest (direct or indirect) should be scrutinized carefully to ensure that the transaction is in the best interests of the Company and will not otherwise create a conflict of interest. It is incumbent upon each director to promptly notify the Audit and Examination Committee when he or she becomes aware of a matter in which he or she (or any member of a director’s immediate family) has, or may have, a personal or financial interest (whether direct or indirect) or may otherwise have a potential conflict of interest. [Without approval in accordance with the Company’s [Related Party Transaction Policy], the Company will not enter into a transaction or arrangement (including utilizing the services of any director to provide legal, accounting, financial, consulting or other similar services to the Company) in which a director has a material personal or financial interest (direct or indirect).]
Whether a director has a material personal or financial interest in a transaction or arrangement will be determined by the Board on a case-by-case basis, but at a minimum a director will be considered to have a material personal or financial interest in a transaction or arrangement if the Company will be required to disclose the transaction or arrangement in its annual proxy statement to shareholders or the Company’s Annual Report on Form 10-K. The interested director will not participate in any Board discussion regarding the matter in which the director has such an interest. For purposes hereof, “director” will include any entity with which the director is affiliated, any immediate family member of a director and any entity in which a director’s immediate family member has a material interest.
This Policy, as may be amended from time to time, shall be posted on the Company’s website. The Company shall state in its annual proxy statement that this Policy is available on the Company’s website and provide the website address.
Revised and Approved: November 17, 2020