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Top Shareholder Issues for 2012 Proxy Season

Jaclyn Jaeger | March 8, 2012

The advent of “say-on-pay” votes on executive compensation programs, uncertain compliance and reporting obligations to arise from Dodd-Frank, and the European economic crisis will be only a few top concerns for shareholders as the 2012 annual proxy season approaches.

Such an uncertain economic and political climate will make for an especially challenging proxy season for companies of every industry. Accounting and consulting firm BDO USA compiled the following list of topics that corporate management and boards of directors should be prepared to address in connection with 2012 annual meetings:

Dodd-Frank: Regulations established under the Dodd-Frank Act no doubt will bring executive compensation to the forefront for shareholders, who will be asking companies numerous questions about their positions on several key elements of the Act. These questions include:  

  • Has the company implemented “clawback” provisions that would allow it to recover compensation that was erroneously awarded in the three years prior to an accounting misstatement?
  • Has the company adopted a policy prohibiting an employee or outside director from hedging or pledging equity held directly or indirectly including compensatory equity grants?
  • Has the company assured itself that the members of the board's compensation committee are independent?
  • Does the compensation committee of the board engage the services of outside advisors including compensation consultants and legal counsel? If so, by what process does it determine their independence?

Executive Compensation: Few companies failed to receive shareholder endorsement of their executive compensation programs in 2011—and that's only expected to continue into 2012. Companies that failed to receive a “yes” vote, or had programs pass by a slim majority, should be sure to address any pay issues that were the focus of shareholder concerns.  Additionally, compensation committee members who appear to be unresponsive to these concerns may find themselves the target of shareholder “vote no” campaigns when they are up for re-election.

Possible Auditor Rotation:  Given recent proposals by U.S. and European regulators to require mandatory audit firm rotation, management and audit committees should be prepared to discuss with shareholders questions regarding lengthy auditor tenures. Some topics of discussion may include what process the company uses to select an audit firm; how long the current firm has been in place; how long ago the audit engagement was put out for bid; and how the audit committee ensures that the audit firm performs quality work.

European Debt Crisis: Sovereign debt holders or any companies with facilities or sales operations in Greece, Italy or other Mediterranean countries need to be prepared for worst case scenarios. Shareholders will ask about contingency plans the company has in place should a major collapse occur.

Political Contributions: With SEC Commissioner Luis Aguilar calling for greater disclosure of corporate political spending, and the 2012 presidential election sure to bring even more attention to the issue, boards should be prepared for increased scrutiny. This means being prepared to explain oversight of political donations, lobbying activities, and contributions to industry associations that lobby on the company's behalf.

M&A/Takeover Defenses: Given the decline in mergers and acquisitions in recent years, senior management should be ready to take advantage of value buys as the economy emerges from the recession.  By the same token, these same factors likely will fuel hostile deal activity as companies seek to deploy cash reserves.  Boards should have contingency takeover defenses in place to enable them to respond quickly to fend off attacks or maximize shareholder value should a transaction be accepted.

Cyber Attacks: The proliferation of cyber attacks on corporations suggest that many companies are less adept at managing cyber threats as they are at handling risk in other areas. Weaknesses in networks and data security can expose businesses to significant losses in brand and market value. Shareholders may want to know how the company is taking a proactive and preemptive approach to cyber security. 

CEO Succession: As businesses begin to rebound from the recession, executive movement should pick-up - including CEO turnover. Be prepared to both explain to shareholders the succession plan that the board has in place, and to identify CEO candidates, if needed.

China: Numerous accounting scandals that took place at Chinese companies made headlines in 2011. Companies that operate in China, or partner with Chinese suppliers, will be best prepared if they are able to explain to shareholders what type of due diligence or risk management the company has conducted on China-based partners and suppliers to mitigate any exposure to poor financial reporting.