With another proxy season fast-approaching, a backdrop of mixed economic data should give shareholders plenty to discuss, says the accounting and consulting firm BDO USA. It compiled a list of topics that corporate management and boards of directors should be prepared to address at 2014 annual meetings.
Comcast's $45 billion acquisition of Time Warner Cable may signal the start of a merger boom, BDO says. Shareholders will want to know if management is seeking out opportunities and that potential targets are properly vetted to avoid any buyer's remorse, as was the case with the ill-fated Hewlett-Packard/Autonomy deal.
Trian Fund Management's campaign to get Pepsi to spin off its struggling beverage business is just one example of companies coming under fire from activist shareholders wanting to break them apart. “Management should be prepared to respond to these well-funded investors who argue that businesses perform better when they aren't part of a large conglomerate,” BDO says.
Highly publicized data breaches at Target, Neiman Marcus, Barclays, and JP Morgan Chase have put cyber-security on the agenda for shareholders. They may want to know how the company is taking a proactive and preemptive approach to improve data security.
New COSO Framework
Is the company in compliance with the new COSO (Committee of Sponsoring Organizations of the Treadway Commission) framework for internal controls? If not, why not? Will major changes be necessary to comply? What is the timeframe and what are the costs? These are questions BDO expects to be asked by shareholders.
Although efforts to require mandatory audit firm rotation in the U.S. appear to have waned, management and audit committees should be prepared to discuss any questions regarding lengthy auditor tenures. Shareholders may want to know the process the company uses to select an audit firm, how long the current firm has been in place, when was the last time the audit engagement was put out for bid and how the audit committee ensures that the audit firm performs quality work.
Pay for Performance
Media coverage questioning pay practices at Yahoo (paying its departing COO $109 million for just 15 months on job) and JP Morgan Chase (Jamie Dimon's 74 percent raise in the same year the bank paid $20 billion in fines/legal costs) may embolden shareholders to question whether executive pay levels actually reflect performance. “Companies should be aware of these concerns and communicate with shareholders about compensation decisions,” BDO says. “This is particularly important when board decisions are in the company's best long-term interests, but don't fit in the one-size-fits-all pay models that institutional investors may be using.”
CEO-Median Employee Pay Ratio
The Securities and Exchange Commission has issued proposed regulations on disclosure of the ratio of the CEO's pay to the median pay of employees of the company. This complex calculation will likely be a required disclosure for most companies in 2016 proxies, but the question may be asked at 2014 annual meetings, the firm warns.
Voluntary Disclosure of Realizable Pay
In the absence of final regulations from the SEC requiring disclosure of the relationship between pay and company performance, an emerging consensus appears to be that disclosure should track how well the company's total shareholder returns correlate with the CEO's realizable pay (salary, bonus and the value of outstanding equity awards), BDO says, advising companies to develop their own models in anticipation of investor questions.
As the economy continues to improve, executive movement should start to increase, and that includes CEO turnover. Shareholders will want to know that the board has a succession plan in place and candidates identified, if needed, for the CEO and other senior positions.
Boards should be prepared to articulate what they have done to prepare for low probability, but high impact events such as natural disasters. Regulators are also focusing more on contingency plans in the aftermath of Hurricane Sandy.