MEMORANDUM

To: Rodger Lawson, Chairman of the BOD

From: Weiyu Hu
Date: March 6, 2016
Subject: Corporate Governance Assessment Report in E*TRADE Financial
Executive Summary
This paper assesses the corporate governance performance in E*TRADE
Financial (Ticker symbol: ETFC), a financial services company focusing on online
brokerage business listed on S&P 500 Index.
We adopt a 5 dimension scoring system to implement the evaluation, which are:
the rights of shareholders and key ownership functions, the equal treatment of
shareholders, the role of stakeholders, disclosure and transparency and the
responsibilities of BOD. E*TRADE got a total of 78 out of 100 scores. If we transfer
to a 1-5 scale, E*TRADE got a rank of 4 in its corporate governance.
From the survey, we found that although basic rights of shareholders are
honored, minority shareholders are not fully respected in terms of director nomination
and proposal raising on big issues. Comparatively speaking, equal treatment of
shareholders from different class is highly complied with and stakeholder rights are
well protected. When it comes to disclosure and transparency, we found that although
disclosures are stated in company laws and guidelines, E*TRADE doesnt fulfill some
responsibilities on disclosures in practice. Finally, the BOD in some extent completes
their responsibilities well but they can do better on company performance evaluation
and conference recording work.
In the next part, we analyzed the internal and external advantages and weakness
of E*TRADEs business and corporate governance using SWOT model. Based on the
analysis, we give some strategies in each of the situation combination.
Finally, we proposed some advices based on the shortcoming of E*TRADEs
corporate governance. First, we suggested that the company implement written policy
to further guarantee the rights of shareholders. Second, we recommend that explicit
requirements for external auditor should be set. In the last, Board of Directors should
do better in evaluating both the companys performance and the management teams
performance.

Company Background
E*TRADE Financial (Ticker symbol: ETFC) is a leading financial services
company featured by online brokerage for individual retail investors. The company
has had over 30 year experience in providing user-friendly electronic trading system
online. The companys products cover a hybrid model for investing, trading and
pension management as well as professional finance-related guidance, both in person
and via telephone, provided by their customer service representatives and consultants.
E*TRADE views innovation as their core value. The company delivers their products
through most cutting-edged channels, like E*TRADE Mobile (trading application for
smartphones and Apple Watch) and E*TRADE Pro (an advanced trading platform).
E*TRADEs mission is 1) accelerate the development of their primary brokerage
business and 2) generate sustainable growth of earning and healthy returns on capital.
The companys vision is: empower self-directed investors to make informed
investment decisions and to take control of their financial future with anytime,
anywhere access to the worlds major investment markets.1
Led by Paul Idzik, who is the CEO of E*TRADE Financial, the 8-people
leadership team manages the day-to-day operation of the whole company. 2The Board
of Directors (BOD), with Rodger Lawson as the chairman, consists of an Audit
Committee, a Compensation Committee, a Governance Committee and a Risk
Oversight Committee. They together serve the best interests of the Company and its
stockholders.3
In 2004, the company realized a sales revenue of 1.814 billion. Up to now, its
stock price is $25.32 and it has a market capitalization of 7.28 billion. At the end of
2014, the companys ROE is 5.45%, ROI is 2.07%, P/E Ratio is 23.19 and Price to
Book Ratio is 1.27.4
Corporate Governance Survey Results
Based on OECD principals and corporate governance conventions, we
categorize the corporate governance performance of E*TRADE into five dimensions
and evaluate from each of the dimension. The score of each five categories are listed
below and the company got a total score of 78 for its corporate governance. If we
apply a 1-5 scale to rank the companys corporate governance, E*TRADE got a rank
of 4.

Categories
The rights of shareholders and key
ownership functions
The equal treatment of shareholders
The role of stakeholders
Disclosure and transparency
The responsibilities of BOD
Overall outcome

Target Outcome

Actual Weighed avg

outcome

Difference

20%

13%

-7%

10%
10%
20%
40%
100%

9%
8%
15%
33%
78%

-1%
-2%
-5%
-7%
-22%

Explanation of Survey Scores

The first category is the rights of shareholders and key ownership functions. The
company only got 13out of a total score of 20. To prevent a third party from acquiring
control of the firm in a merger, acquisition or similar transaction that a stockholder
may consider favorable, the company prohibits cumulative voting in the election of
directors.5 The company doesnt have a written policy to extend pre-emptive rights to
current shareholders when offering shares to new investors. As of General
Shareholders Meeting (GSM) governance, agenda of the meeting did be posted
online in advance of the meeting, but no prohibition on topics that not in the agenda
exists. In E*TRADE, the holding of GSM are determined by Board of Directors
instead of a minimum 10% of shareholders. And only stockholder who is not a
competitor of the company with more than 5% of our voting securities for at least one
year has the right to request replacing members of BOD.6 Since the IPO date, which is
August 16, 1996, the company has never paid dividends to its shareholders, so we
assume that shareholders do not enjoy full rights to share the companys profits.
The second part is the equal treatment of shareholders, E*TRADE does pretty
well by getting 9 points out of 10. The loss of 1 point is due to the companys
thoughtlessness for not allowing long notice periods for international investors.
For the role of stakeholders, E*TRADE also does relatively well by obtaining 8
scores out of 10. The company laws and regulations dont mention that stakeholders
have the opportunity to obtain sufficient redress for any issues. The documents also
dont mention how stakeholders other than shareholders can raise their concerns of
the company freely.
Full disclosures related to all matters of company should be guaranteed.
E*TRADE got 16 out of 20 with regards to transparency issues. In the annual report,
we didnt find any details of transactions to related party. The company performs

weakly when it comes to external auditors. It neither implements literal policy of

international external auditor selection and rotation, nor has the mechanisms to
evaluate the performance of external auditor services.
The board of directors plays an extremely important role in corporate governance
since they make strategies for the companys future development; they monitor
executive managers to ensure proper company operations; and they do their best to
protect the interest of shareholders. For the last category of BOD responsibilities,
E*TRADE scored 33 out of 40 points. The BOD members can stay on the board for
several years. Their tenure doesnt end at the time of next years GSM. The candidates
of director positions are chosen by the BOD, so the company doesnt have a separate
Nomination committee. The BOD of E*TRADE judges the performance of Chief
Executive Officer each year. However, on the companys website, we didnt find any
comments about other employees in the senior executive management team. In the
corporate governance guidelines, BOD is assigned the responsibility to measure
company performance every year, but no policy illustrates what method should the
BOD use to conduct performance measurement systematically. In the annual report,
we didnt see any records of the board meeting attendance. Although each BOD
member are very professional, we are disappointed to find that no training program
are provided to BOD members and secretary. Finally, among 11 members of BOD, no
one is corporate secretary who can assist the BOD work.
Corporate Governance Scoring Findings
From the survey, we found that the rights of shareholders are not fully respected,
especially minority shareholders. Although having the right to vote for director
election and decision making related important company issues, shareholders with
less than 5% of shares dont have the right to nominate candidates on BOD. In
contrast, equal treatment of shareholders is highly complied with and stakeholder
rights are well guaranteed. In terms of disclosure and transparency, we found that
although disclosures are required in various company regulations, we still cannot find
some required information in practice. Finally, the BOD did complete their
responsibilities well in some extent, but company performance evaluation and
meeting recording work can still be improved.
Findings and Conclusions

SWOT Analysis
Strength
1. E*TRADE is experienced in providing easy-to-use electronic brokerage
services.
2. All eleven directors on the board are financial specialists with decades of
working experience in financial world. Eight of them are independent directors and
the CEO of the company is separate from the chairman of board. Without conflicts of
interests, the BOD can fully bear the responsibilities to monitor managers and make
strategic decisions that are good for the whole company.
3. Shareholders from different classes are equally traded and all stakeholders
interest are protected under various requirements in company laws and regulations.
Weakness
1. The company had no history of paying dividends, which may cause them
losing attractiveness for new investors. Also, no special treatments are designed for
international investors who are in different time blocks.
2. Minority shareholders rights are limited concerning director nomination and
major events proposal.
3. Disclosure can help firm build trust and confidence. It also enables
stakeholders to make good business investment decisions and to exercise their
ownership rights. Although requirements for transparency are written in different
kinds of companys documents, E*TRADE dont perform well on information
disclosure in practice.
Opportunity
1. In the fast-paced society, more and more people turn to manage their wealth
on portable devices like smartphones and even smartwatches.
2. The company operas in a fast-developing industry, large amounts of graduates
with professional skills are available on the labor market.
3. With aging demographics, demand for retirement saving management is
increasing.
Threat
1. General market condition may result in the company not achieving their
expected performance. Fluctuation in capital market could decrease trading volume
and the demand to open new trading accounts, which would reduce E*TRADEs
revenue form brokerage service.

2. The company relies on a third party to provide information technology service.

If the third party suffered from operational or technological failure, or the third party
leak our customer information out, the company would lose customers trust and face
a great credit crisis.
3. E*TRADE operate in a booming industry in which they have many highly
competitive competitors.
Given both the internal and external advantages and disadvantages, we will make
strategies for each situation in the following part:
Strength
1.E*TRADE should keeping
developing user-friendly trading
system both online and on
portable devices to attract more
newly-entered investors to adopt
their brokerage services.
Opportunity
2. The company should
employ more financial experts as
well as make use of its
professional BOD members to
realize growth of returns on
capital.

Threat

1. The company could set

their own IT department to
prevent default risk of the third
technical party. At the same time,
E*TRADE should improve the
oversight capability on the third
party and perform timely
evaluation on their services.
2.The company could use
add some derivatives products in
their portfolio to reduce
systematic risk.

Weakness
1. E*TRADE could further
improve their electronic services
to provide convenience for
international investors. The could
also use their electronic product
terminals for disclosure to make
information more easily available
for stakeholders.
2. More advertisement of
E*TRADE traditional business
and portfolio management
performance should be
published.
1. Proposal of amending
regulations on director
nomination proceeds and raising
big proposals can be discussed on
next GSM.
2. Standard approaches for
evaluating company performance
and manager team performance
should be written down and
adopted by BOD to enhance their
effectiveness in monitoring.

Recommendations
1. To improve the quality of shareholders rights protection, E*TRADE draft
written policy to allow minority shareholders to call a GSM if they request to replace
members on BOD. Before the GSM, all topics that will be discussed on GSM should
be posted cause shareholders have the right to be informed. Also, dissenters opinions
must be included in the agenda as a discussion item.

2.Shareholders have the right to share profits of the corporation in the form of
dividends. Timely information about dividend paying policy should be announced.
E*TRADE should put hands on paying dividend to attract investors since the
company still has no history on paying dividend.
3. Its extremely important for a financial company to disclosure its related party
transactions. Therefore, beyond basic legal requirements, E*TRADE should
implement written policy in its corporate governance guidelines to disclose material
transactions to stakeholders and related parties both in the companys Annual Report
and through social media like newspapers and news websites. Role of monitor for
independent directors in related party transactions should also be clearly stated.
4. E*TRADE has explicit requirements for internal auditor, but the companys
regulation for external auditor is quietly weak. I suggest that the company implement
a separate policy on external auditor, stating the following (but not limited to) 4
issues: 1) qualification and selection standard of external auditor, 2) the rotation
policy to change external auditor (at least once every four years), 3) the regulations on
external auditor working scale, and 4) the performance evaluation system of external
auditor services. When conducting auditing services, external auditors are easily to get
insider information about the company, so their services should be limited exclusively
to auditing and accounting issues. Services related to administrative work should be
strictly prohibited.
5. BOD bears the responsibility to do their best to monitor management team
performance on behalf of shareholders. ETRADEs BOD didnt fully fulfill their
responsibilities in the past. Every fiscal year, the BOD should evaluate every member
holding at least a senior executive management position and disclose their evaluation
timely on the companys website. This practice enables the public to supervise the
performance of executive managers. Also, a standard evaluation system should exist
there for BOD members to use.

Reference
E*TRADE official website. 2015 Corporate Report. Retrieved March 4, 2016, from
https://about.etrade.com/corporate-reports.cfm#
E*TRADE official website. Leadership Team. Retrieved March 4, 2016, from
https://about.etrade.com/leadership-governance.cfm
E*TRADE official website. Board of Directors. Retrieved March 4, 2016, from
https://about.etrade.com/directors.cfm
CSI Market. E Trade Financial Valuation Comparisons. Retrieved March 5, 2016,
from http://csimarket.com/stocks/ETFC-Valuation-Comparisons.html
E*TRADE Financial Corp. (2015). E*TRADE Financial Corporation Form 10-K
Annual Report. New York, NY:.
E*TRADE Financial Corp. (2015). E*TRADE Financial Corporation Form DEF 14A
Proxy Statement (definitive). New York, NY:.
E*TRADE Financial Corp. (2015). Corporate Governance Guidelines. New York,
NY:.
Shanikat, M., & Abbadi, S. S. (2011). Assessment of corporate governance in Jordan:
An empirical study. Australasian Accounting Business & Finance Journal, 5(3),
93.
E*TRADE official website. Committee Charters. Retrieved March 5, 2016, from
https://about.etrade.com/charters.cfm

Exhibit 1
Table of Contents

E*TRADE FINANCIAL CORPORATION

E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES

BALANCE
SHEET
CONSOLIDATED BALANCE SHEET
(In millions, except sharedata)

(In millions, except share data)

December 31,
2015

2014

ASSETS
Cash and equivalents

Cash required to be segregated under federal or other regulations

2,233

1,783

1,057

555

Available-for-sale securities

12,589

12,388

Held-to-maturity securities (fair value of $13,123 and $12,476 at December 31, 2015 and December 31, 2014,
respectively)

13,013

12,248

Receivables from brokers, dealers and clearing organizations

520

884

Margin receivables

7,398

7,675

Loans receivable, net (net of allowance for loan losses of $353 and $404 at December 31, 2015 and December 31,
2014, respectively)

4,613

5,979

Property and equipment, net

Goodwill
Other intangibles, net
Deferred tax assets, net
Other assets

236

245

1,792

1,792

174

194

1,033

951

769

Total assets

836

45,427

45,530

29,445

24,890

LIABILITIES AND SHAREHOLDERS EQUITY

Liabilities:
Deposits
Payables to brokers, dealers and clearing organizations

1,576

1,699

Customer payables

6,544

6,455

Other borrowings

491

4,971

Corporate debt

997

1,366

Other liabilities

575

774

39,628

40,155

Total liabilities
Commitments and contingencies (see Note 19)
Shareholders equity:
Common stock, $0.01 par value, shares authorized: 400,000,000 at December 31, 2015 and 2014; shares issued and
outstanding: 291,335,241 and 289,272,576 at December 31, 2015 and 2014, respectively
Additional paid-in-capital
Accumulated deficit
Accumulated other comprehensive loss

7,356

7,350

(1,461)

(1,729)

(99)

Total shareholders equity

(249)

5,799
$

Total liabilities and shareholders equity

See accompanying notes to the consolidated financial statements

95

45,427

5,375
$

45,530

Exhibit 2
Table of Contents

E*TRADE FINANCIAL CORPORATION

E*TRADE FINANCIAL OF
CORPORATION
AND SUBSIDIARIES
STATEMENT
INCOME
CONSOLIDATED STATEMENT OF INCOME

(In millions
, excedata
pt shareand
data and
shareamamounts)
ounts)
(In millions, except
share
perpershare
Year Ended December 31,
2015

2014

2013

Revenue:
Operating interest income

Operating interest expense

1,215

(129)

Net operating interest income

1,279

(205)

1,207
(238)

1,086

1,074

969

Commissions

424

456

420

Fees and service charges

210

200

168

10

73

(331)

36

61

Other-than-temporary impairment ("OTTI")

(1)

Less: noncredit portion of OTTI recognized into (out of) other comprehensive income (loss) (before tax)

(2)

(3)

39

38

35

Principal transactions
Gains (losses) on securities and other

Net impairment
Other revenues
Total non-interest income (loss)

342

740

754

1,428

1,814

1,723

(40)

36

143

Compensation and benefits

466

412

363

Advertising and market development

124

120

108

Clearing and servicing

95

94

124

FDIC insurance premiums

41

79

104

103

112

85

Occupancy and equipment

88

79

73

Communications

90

71

69

Depreciation and amortization

81

78

89

Amortization of other intangibles

20

22

24

Impairment of goodwill

142

Restructuring and other exit activities

17

28

Other operating expenses

82

70

66

1,207

1,145

1,275

261

633

305

(65)

(113)

(114)

(112)

(71)

Total net revenue

Provision (benefit) for loan losses
Operating expense:

Professional services

Total operating expense

Income before other income (expense) and income tax expense (benefit)
Other income (expense):
Corporate interest expense
Losses on early extinguishment of debt
Other

Total other income (expense)

Income before income tax expense (benefit)
Income tax expense (benefit)

(170)

(181)

(110)

91

452

195

(177)

159

109

Net income

268

293

86

Basic earnings per share

0.92

1.02

0.30

Diluted earnings per share

0.91

1.00

0.29

Shares used in computation of per share data:

Basic (in thousands)

290,762

288,705

286,991

Diluted (in thousands)

295,011

294,103

292,589

See accompanying notes to consolidated financial statements

93

Exhibit 3
Table of Contents

E*TRADE FINANCIAL CORPORATION

E*TRADE FINANCIAL
CORPORATION
AND SUBSIDIARIES
STATEMENT
OF CASH
FLOWS
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)

(In millions)

Year Ended December 31,

2015

2014

2013

Cash flows from operatingactivities:

Net income

268

293

86

Adjustments to reconcile net income to net cash provided by operating activities:

Provision (benefit) for loan losses

(40)

36

143

Depreciation and amortization (including discount amortization and accretion)

325

331

395

Losses (gains) on securities and other

331

(36)

(61)

Impairment of goodwill

142

Losses on early extinguishment of debt

37

Share-based compensation

34

24

20

(176)

155

107

Deferred taxes expense (benefit)

Other

(6)

(2)

(1)

Net effect of changes in assets and liabilities:

Decrease (increase) in cash required to be segregated under federal or other regulations

(502)

511

(689)

Decrease (increase) in receivables from brokers, dealers and clearing organizations

364

(24)

(182)

Decrease (increase) in margin receivables

277

(1,322)

(549)

Increase (decrease) in payables to brokers, dealers and clearing organizations

Increase in customer payables
Proceeds from sales and repayments of loans held-for-sale
Decrease (increase) in other assets
Increase (decrease) in other liabilities
Net cash provided by operating activities

(123)

593

227

89

145

1,345

11

15

(22)

(132)

215

(24)

112

832

701

(96)
1,117

Cash flows from investingactivities:

Purchases of available-for-sale securities

(6,150)

(1,564)

(7,042)

Proceeds from sales of available-for-sale securities

3,905

1,855

3,856

Proceeds from maturities of and principal payments on available-for-sale securities

1,667

1,468

2,407

(2,614)

(3,209)

(2,527)

1,788

1,144

1,828

40

813

1,337

1,273

1,724

Purchases of held-to-maturity securities

Proceeds from maturities of and principal payments on held-to-maturity securities
Proceeds from sale of loans
Net decrease in loans receivable
Capital expenditures for property and equipment

(70)

(87)

(47)

Proceeds and cash transferred from sale of G1 Execution Services, LLC

67

Proceeds from sale of real estate owned and repossessed assets

28

37

62

Net cash flow from derivatives hedging assets

(2)

(15)

19

97

Categories
Category I. The rights of
shareholders and key
ownership functions
CategoryII. The equal
treatment of shareholders
Category III. The role of
stakeholders
Category IV. Disclosure and
transparency
Category V. The
responsibilities of BOD
OVERALL OUTCOME

Category
Label

Target
Outcome

Actual
Weighed
avg
outcome

Difference

Shareholder
Rights

20%

13%

-7%

10%

9%

-1%

10%

8%

-2%

Disclosure

20%

15%

-5%

Board of
Directors

40%

33%

-7%

100%

78%

-22%

Equitable
Treatment
Stakeholder
Rights

Exhibit 4
Corporate Governance Scoring Results

Shareholder Rights
40%

Board of Directors

20%
33%

Target

13%
9%
0%
15%

Disclosure

Equitable Treatment
Actual

8%

Stakeholder Rights