Volatility and risk around the globe is fostering uncertainty in corporate board rooms around the country and the “unsettled climate should make for an interesting annual meeting season,” says a new report by BDO USA, an accounting and consulting firms.
The firm has compiled a list of topics that corporate management and boards of directors should be prepared to address in connection with 2016 annual meetings.
Board diversity, director assessments
The SEC has begun to look into existing company disclosures on board diversity and may consider a mandatory requirement provide more specific information about the racial and gender composition of their boards. “Investors may push management to be proactive in addressing this issue before it becomes a requirement,” the report says.
Shareholders can also be expected to inquire whether the current audit committee has the appropriate experience to address its increasing responsibilities and whether the company should have a separate risk committee composed of the proper expertise to provide oversight of specialized areas, such as cyber-security.
As responsibilities of corporate directors continue to grow, so does the time commitment necessary to serve on a public company board. According to the National Association of Corporate Directors, public company directors spend an average of 278 hours a year for each board served, an increase of 46 percent from ten years ago. Given this trend, beginning in 2017, proxy advisory firms ISS and Glass Lewis have each indicated they will oppose non-executive directors with more than five board seats. Some businesses have already adopted more stringent rules, limiting their directors to no more than four board seats. Companies should consider addressing this issue proactively or risk raising the ire of shareholders, BDO USA says.
CEO/median employee pay ratio
In August 2015, the SEC issued the final rule to implement the Dodd-Frank mandate that will require public companies to disclose the ratio of the CEO’s compensation to that of the median employee in all annual reports or proxies beginning in Jan. 1, 2017. Media reports of high ratios are sure to garner attention, so companies would be wise to mitigate any negative press by proactively communicating the benefits of their performance focused executive compensation models to shareholders ahead of time, the report advises.
Pay for performance
The SEC has a pending proposal that will require companies to disclose the relationship between executive compensation paid and the company’s financial performance. The proposal will require a new proxy table that shows (over a multi-year period) compensation “actually paid” to the CEO and other named executive officers compared to the company’s total shareholder return (“TSR”) during that time. An additional table will require a comparison of the business’s overall TSR relative to a peer group. Although an effective date for this new disclosure has yet to be determined, management should be monitoring TSR relative to those of its peers and be prepared to respond to any shareholder inquiries on the topic.
General Electric, Apple, Citigroup and McDonald’s were among the companies that changed their corporate bylaws in 2015 to allow large stockholders (typically 3 percent of shares) who have held shares for a minimum of three years to put forth nominees to the company’s board. According to proxy advisory firm ISS, approximately 21 percent of S&P 500 companies have now adopted new proxy access rules, up from just 1 percent in 2014. Given the rapid adoption of proxy access, shareholders are likely to ask whether the company will be adopting similar proxy access plans. Boards that are slow to comply may risk the ire of proxy advisers that often oppose the re-election of board members who ignore measures with popular support.
Transparency of audit committee oversight
There has been an increased interest in enhancing transparency of governance practices through disclosure. The SEC issued a concept release aimed at considering enhancements to currently required audit committee disclosures related to the oversight of the external auditor. While many companies already go beyond what is publicly required to be disclosed, boards should discuss what type of additional information shareholders may value and consider whether the company wants to make any voluntary disclosures in those areas.
Last year was a record one for mergers and acquisitions. With continued low interest rates and volatile capital markets, businesses are likely to continue to pursue inorganic growth via acquisitions in 2016. “Shareholders will want to know if management is seeking out opportunities and that potential targets are properly vetted to avoid any surprises,” the report says. “Boards should ensure their companies are equipped with sound integration policies for assimilating target businesses into a corporate culture supported by strong governance.”
Shareholders may want to know whether the company is being proactive in: documenting the business’s critical digital assets and developing solutions to protect them; putting cyber-breach response plans in place to mitigate damage from successful attacks; and establishing cyber-risk management requirements for third-party vendors and other external relationships
Foreign currency risk
Apple, Kellogg and Avon are among several businesses that have recently reported on the adverse impact that foreign exchange swings have had on their bottom line. Shareholders will be interested to learn whether management has hedging strategies in place to protect against currency exposures.
Global economic concerns
Slow growth in China, the UK’s potential exit from the European Union, and unstable economic conditions in Greece, Venezuela, and other markets all affect U.S. businesses. Shareholders will want to know whether companies with exposure in these countries (including facilities and sales operations) are prepared for worst case scenarios.
Especially in an election year, boards should be prepared for increased shareholder scrutiny of political donations, lobbying activities, and contributions to industry associations that lobby on their behalf.