A return of volatility to the stock market, executive misconduct, cyber-breaches, global trade concerns, demands for transparency, and historic changes brought about by the new tax law are just a few of the topics being discussed in corporate board rooms around the country, according to a new report by BDO USA, a leading accounting and advisory firms.
It has compiled the following list of topics that corporate management and boards of directors should be prepared to address in connection with 2018 annual shareholder meetings.
The new tax law is having far-reaching impact on tax reporting/planning and financial statement reporting, the report says. The lower corporate tax rate increases the competitiveness of doing business in the U.S., which may encourage corporations to reconsider a U.S. domicile for their business activities.
Corporate cash flow is expected to increase, which may impact decisions related to capital investment and employee wages. “Shareholders will be eager to hear how the new law has and will impact company strategy,” BDA USA says.
The reduced corporate tax rate and lowered tax on repatriation of foreign earnings are expected to provide businesses with more funds to pursue mergers and acquisitions in 2018.
Shareholders, the report says, will want to know if management is seeking out both sell side opportunities to dispose of assets that no longer align with corporate goals but can yield favorable returns; and buy side opportunities that can enhance strategic growth.
“Boards should ensure that potential acquisitions are properly vetted, and that management has sound integration policies in place to assimilate target businesses into a corporate culture supported by strong governance,” the report says.
Global economic concerns
President Trump’s plan to impose high tariffs on imported steel and aluminum has prompted angry responses from U.S. allies around the globe and generated warnings of an international trade war that could harm U.S. exports. “Investors are concerned how the movements by the U.S. and other countries towards national protectionism will impact U.S. businesses in foreign markets,” the report says. “Shareholders will want to know how the company is proactively addressing operational decisions in this area.”
Equifax, Uber and even the SEC are just a few of the high-profile institutions to fall victim to cyber-attacks in recent months.
These incidents damage company reputations and lead to tens of millions in remediation and legal costs. Given the prominence of this topic, shareholders may want to know whether the company is: critically assessing cyber-breach response plans to mitigate damage from attacks; and emphasizing the need to report breaches in a timely fashion. The Equifax breach has led to lawsuits in more than 100 courts across the country, many citing the company’s slow response in reporting the breach.
In May, the European Union’s General Data Protection Regulation is slated to take effect and companies that fail to report breaches that involve personal data will face a fine of up to 2 percent of global annual revenue or €10 million ($11.77 million), whichever is higher.
Last month, the SEC released interpretive guidance to assist public companies in preparing timely and transparent disclosures to investors about cyber-security incidents.
Important topics include establishing cyber-risk management requirements for third-party vendors, a major source of cyber-attacks, and sharing information from cyber-breaches with external entitie,” the report says.
Steve Wynn, Harvey Weinstein and Roger Ailes are just a few of the executives taken down in recent months following allegations of sexual harassment in the workplace. “Although the damage to victims may never be able to be fully calculated, for businesses, it can cost millions, from settling with victims to lasting damage to the company brand,” the BDO USA report says. “Given the prominence of the #MeToo movement in the media, shareholders may want to know that the board and management are setting the correct tone at top and creating a culture where all reports of harassment are taken seriously.”
A year ago, the SEC began to look into company disclosures of the ethnic, racial and gender composition of public company boards and whether it should make such disclosures a mandatory requirement in the future. Under new Chairman Jay Clayton, the SEC is continuing to monitor the issue.
More recently, BlackRock, the world’s largest money manager, stated that companies in which it invests should have at least two women on their boards.
As this issue is likely to become increasingly prominent, shareholders may push companies to be proactive in addressing the issue of board diversity. As there is always resistance to change, companies should consider using the following tools to encourage board refreshment: tenure limits; skill set reviews; limits on board seats; and timely reviews as to the adequacy of board composition through the lens of diversification and independence;
Public companies are currently dealing with the most historic accounting changes in decades. New accounting standards for revenue recognition (ASC 606/IFRS 15), effective for 2018 reporting cycles, followed by lease accounting (ASC 842) and credit losses (ASC 326) will each have a major impact on financial statements and profitability. “Management, with board oversight, needs to communicate transparently with shareholders and other stakeholders on how these changes will impact financial statements,” the report says.
Shareholder proposals on environmental and social issues have taken on new significance and boards should be prepared to listen. Last year, close to two-thirds of Exxon Mobil shareholders approved a proposal to require the company to measure and disclose how regulations to reduce greenhouse gases and new energy technologies could impact the value of its oil assets.
Other shareholder groups have expressed similar interest in increased disclosures on sustainability matters (climate change, corporate social responsibility, etc.) and corporate directors have become increasingly receptive to the issue of providing sustainability metrics in financial statements.
In the 2017 BDO Board Survey, a majority (54 percent) of directors believed that disclosures regarding sustainability matters are important to understanding a company’s business and helping investors make informed investment and voting decisions.
The Trump administration has made deregulation one of the pillars of its agenda.
According to the Unified Regulatory and Deregulatory Agenda published by the White House Office of Management and Budget (OMB), the administration withdrew or delayed 1,579 planned regulatory actions in 2017. Shareholders will want to know that management is closely monitoring this changing regulatory landscape in order to plan effectively.
CEO/median employee pay ratio
The new SEC rule requiring public companies to disclose the ratio of the CEO’s compensation to that of the median employee becomes effective in 2018.
“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,” BDO USA says.