2017 BDO Board Survey
2017 BDO Board Survey
Explore the 2017 BDO Board Survey:
- Tax Reform
- Financial Reporting Changes
- Sustainability Matters
- Whistleblower/Compliance Programs
- Activist Investors
- Board Composition
The responsibilities of corporate directors at publicly traded companies continue to change and grow every year. Responding to recent regulatory changes, dealing with activist shareholders, assessing the impact of new financial reporting requirements and contingency planning for long-anticipated tax reform are just a few of the issues that boards need to manage in 2017.
The BDO Board Survey, conducted annually by the Corporate Governance Practice of BDO USA, was created to act as a barometer to measure the attitudes of public company directors on these and other governance issues. The 2017 BDO Board Survey, conducted in August of 2017, examines the opinions of 130 corporate directors of public company boards.
“The 2017 BDO Board Survey shows corporate directors are eagerly awaiting the tax reform promised by President Trump, but they seem resigned to the fact that it may not happen in 2017. They also have a high degree of confidence in their internal compliance programs, despite some widely publicized examples of businesses failing to respond to whistleblowers,” said Amy Rojik, BDO USA’s National Partner for Communications and Governance.
“Directors are also focusing more fully on engaging with management in addressing major accounting changes that will be implemented over the next several years and are much more favorable towards disclosures of sustainability matters than they were a year ago.”
It has been more than 30 years since the United States signed major tax reform into law. Although there has yet to be a bill introduced providing specifics on how exactly the White House and the Republican-controlled Congress intend to achieve it, President Trump has continued to indicate tax reform is a priority in 2017.
Public company board members are clearly rooting for such reform.
More than three-quarters (78%) of public company board members anticipate tax reform will be achieved during President Trump’s current four-year term, but just 22 percent believe it will occur in 2017. Of those predicting tax reform, an overwhelming majority (94%) anticipate that it will have a favorable impact on their business, with 20% believing the impact will be highly favorable.
When asked the most important goal for tax reform legislation, sizable proportions of board members cite reduction of the current corporate tax rate (45%) and simplification of the tax code (37%). Smaller numbers communicated the need for tax incentives to repatriate foreign earnings (12%) or lowering the capital gains tax rate (5%).
BDO Food for Thought
BDO explores these and other tax reform issues in a series of thought pieces and educational events designed to keep you informed as to developments that may impact your businesses. To learn more, review BDO’s 2017 BDO Tax Outlook Survey and our archived webinars: Trump, Legislation and Taxes: How the Expected Tax Reform May Impact Global Organizations and How Tax Reform Proposal Could Impact Executive Compensation. Evolving issues are further discussed in recent International Tax Alerts available here and here.
“Corporate board members are correct in believing that tax reform, with a goal of simplicity and fairness, is achievable and, in theory, in the interests of both political parties. Unfortunately, the need to pass the 2018 budget, deal with the deadline on raising the debt ceiling and overcoming the divisions that defeated healthcare legislation will make tax reform a tall order for 2017,” said Matthew Becker, Leader of BDO USA’s National Tax Office. “If Democrats and Republicans can push aside special interests and focus on helping their constituents - not opposing each other’s ideas – tax reform can be achieved. It just may take additional time.”
The Public Company Accounting Oversight Board (PCAOB) recently approved changes to the annual auditor’s report that accompanies a business’s financial statements. One of the major changes is a requirement for the auditor’s report to discuss “critical audit matters” (CAMs) – elements of the audit, discussed with the audit committee, where the auditor had to make the most challenging, subjective or complex judgments on material matters.
When asked their opinion of this change, close to half (48%) of corporate board members do not feel the discussion of CAMs is an improvement to the transparency and usefulness of the auditor’s report for investors. Just over one-third (36%) of the directors believe it is an improvement and 16 percent were not sure.
Directors were evenly split (50%) on whether the discussion of CAMs in sensitive areas could make their job as a board member more difficult.
BDO Food for Thought
Changes to U.S. auditor reporting enacted under PCAOB Audit Standard (AS) 3101 have been on the radar for quite some time and follow significant similar changes previously enacted by auditing standard-setters in the UK; Australia; and the Netherlands and now to be implemented more broadly under the International Auditing and Assurance Standards Board (IAASB) International Standards on Auditing (ISA) 701, effective for audits performed in 2017. Refer here for a comparison of the IAASB and PCAOB rule.
While PCAOB AS 3101 has staggered effective dates beginning in FY2018 and extended through FY20211, companies are strongly advised to use the current period audit cycles to dialogue with their auditors early as to what significant changes to their financial reporting may look like. The Financial Reporting Commission in the UK has recently released a report that examines the evolution of the enacted auditor reporting over the past two years that U.S. companies may reference as they prepare for the adoption of AS 3101.
“While Board members are not enamored with the additional disclosure and discussion of critical audit matters in the new auditor’s report, this change has been coming for a few years and we anticipate they will make this adjustment and it could lead to better auditor – client communications,” said Phillip Austin, BDO USA’s National Managing Partner for Auditing. “We are working closely with our clients and engagement teams to educate and drive development of meaningful CAMs to be shared publicly should the SEC approve the PCAOB’s changes to the auditor’s report.”
With a continued drum beat of reminders by regulators as to implementation-readiness, better than three-quarters (82%) of directors indicate that their board or audit committee is actively working with management to meet historic accounting changes to revenue recognition, lease accounting and credit loss standards that are going into effect over the next few years.
Almost as many (74%) say they are engaged with management on the need to communicate with shareholders, regulators and other stakeholders on the potential impact of these accounting changes in order to avoid potential surprises when they appear on the financial statements.
“Implementation efforts have started to accelerate lately, which may reflect board member focus on the way these new standards will impact financial statements. Communicating these changes to investors will be a key focus area moving forward,” said Adam Brown, BDO USA’s National Partner for Accounting.
BDO Food for Thought
A recent BDO alert focuses on SEC staff reminders issued to public companies with respect to SAB 74 disclosures and controls related to new accounting standards. Further, in public statements made by SEC Chief Accountant Wes Bricker,2 companies are urged to move quickly toward implementation and are reminded about the importance of disclosing the anticipated impact of adopting new accounting standards and plans for transition. Bricker, while acknowledging progress, indicated that both investors and the SEC staff “will be looking for increased disclosures throughout 2017 about the significance of the impact – whether quantitative or qualitative – of revenue recognition, among other new standards… Particularly for companies where implementation is lagging, preparers, their audit committees and auditors should discuss the reasons why and provide informative disclosures to investors about the status so that investors can assess the implications of the information.”
To aid in this effort, BDO encourages boards and their audit committees to review the Center for Audit Quality’s (CAQ) Preparing for the New Revenue Recognition Standard: A Tool for Audit Committees along with CAQ Alert No. 2017-03: SAB Topic 11.M – A Focus on Disclosures for New Accounting Standards.
Earlier this year, President Trump withdrew the United States from the Paris Climate Accord, the global coalition meant to curb emissions that may be a causal factor of climate change. Numerous multinationals – including General Electric, Dow Chemical, Royal Dutch Shell, Exxon Mobil and Apple – were critical of the decision for numerous reasons.
Some are trying to be responsive to shareholder demands to curb greenhouse-gas emissions, while others operate in states and countries that are putting in place climate rules and thus face pressures beyond the U.S. government. Moreover, many companies didn’t want the U.S. to cede leadership on renewable energy.
When asked about President Trump’s decision to withdraw the United States from the Paris Climate Accord, corporate directors were split, with a narrow majority (54%) indicating they were against the decision.
On a related matter, shareholders are increasingly calling for more disclosure on businesses' sustainability efforts. In May, 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 (e.g. climate change, corporate social responsibility, etc.) and corporate directors have become increasingly receptive to the issue of providing sustainability metrics in financial statements.
In a major reversal from a year ago, a majority (54%) of board members believe that disclosures regarding sustainability matters are important to understanding a company’s business and helping investors make informed investment and voting decisions. Last year, just one-quarter (24%) of directors maintained this stance.
“President Trump’s decision to pull the U.S. out of the Paris Climate Accord put climate change and sustainability matters in the spotlight earlier this year. Regardless of where you stand on that decision, businesses are becoming increasingly focused on sustainability and how to incorporate it into their financial reporting,” said Christopher Tower, BDO USA’s National Managing Partner for Audit Quality and Professional Practice. “When you consider that intangible assets can account for a majority of the market value of a company, shareholders, analysts and other stakeholders need to understand ‘non-financial factors’ that are impacting a business’s value.”
BDO Food for Thought
Voluntary organizational sustainability reports continue to grow in interest and popularity globally, particularly as Directive 2014/95/EU becomes the law of the land as mandatory reporting for certain companies in Europe. Such reporting is designed to disclose information about the non-financial economic, environmental and social impacts resulting from the organization’s everyday activities. Such reports communicate the specific values and principles the organization adheres to along with its framework for governance in linking corporate strategy and commitment to a sustainable global economy and can serve as a differentiator in the marketplace.
Sustainability has also been on the SEC’s radar. In 2016, the SEC included questions regarding sustainability and public policy issues within its Concept Release related to business and financial disclosure required by Regulation S-K. With the onboarding of new SEC Chairman Jay Clayton and two new SEC commissioners still to be appointed, it remains to be seen whether sustainability will be on the new regime’s agenda aimed at protecting main street investors.
The Wells Fargo fake accounts scandal and reports of widespread employee harassment at Uber and Fox News have been major news stories in 2017. In each instance, employees alleged that they communicated concerns about the problems, but their concerns were ignored.
Despite these reports of corporations failing to act when whistleblowers communicated concerns through internal compliance programs, the vast majority (93%) of board members say they receive regular reports from management, or an internal compliance executive, on whistleblower complaints and how they are being addressed.
An almost identical percentage (92%) indicate they ask management what they are doing to communicate with employees throughout the organization about the importance of adherence to ethical standards.
The number of whistleblower tips received by the SEC in FY2016 was over 4,200 – up 40% from the FY2012 inception of the Dodd-Frank SEC Whistleblower Rules.3 The SEC logged 868 enforcement actions in FY2016 with penalties and disgorgements recorded at approximately $4 billion. Additionally since the inception of the SEC’s program, over $158 million has been awarded to whistleblowers. According to the SEC, almost 65% of award recipients were insiders of the entity on which they reported information of wrongdoing to the SEC.
When corporate directors were asked whether the SEC’s widely publicized whistleblower bounties – enacted in 2011 – have undermined their internal whistleblower/compliance program, only a third (32%) agreed. This is a major shift from 2012 when a slight majority (51%) of the directors believed the SEC’s newly enacted bounties could undermine internal anti-fraud and compliance programs.
“When the SEC’s whistleblower program was first introduced in 2011, there was great concern among corporate boards and compliance officers that the bounties could undermine the internal compliance programs that they had recently put in place. This year’s Board Survey demonstrates that the attitudes of corporate directors on this topic have changed considerably,” said Glenn Pomerantz, Leader of BDO USA’s Global Forensics Practice. “Board members have clearly become more comfortable with and confident in the compliance programs that they have implemented in recent years. They view the news reports of compliance failures as exceptions to the rule that can be used to educate and reinforce the benefits of strict adherence to their programs.”
“Organizations and underlying capital markets are best served by directors who reinforce their corporate cultures by setting no tolerance expectations for ethical breaches and who demonstrate commitment to such through continual engagement with management and communication to all levels of employees,” said Jeff Jaramillo, BDO USA’s National Partner for SEC Services. “The SEC has commented extensively on this and we are heartened that directors are clearly invested in anti-fraud and compliance oversight.”
BDO Food for Thought
Even organizations with the most robust anti-fraud compliance policies and procedures are still susceptible to fraud. The SEC has encouraged directors to not only support internal whistleblowers and take all claims seriously but also to consider the favorability that could result from a company’s self-reporting of suspected fraud that is brought to its attention.4
Shareholder activism – whether through formal proxy voting or informal requests to dialogue with management - remains an emerging area of corporate governance focus.
When asked about the rise of “activist investors” seeking to control board seats and impact corporate strategy, directors are clearly unified in their opposition to such efforts. The vast majority (95%) feel activist investors are too focused on short-term returns to secure their investments. Only five percent of board members believe that these activists are trying to unlock long-term shareholder value.
BDO Food for Thought
Activism affects companies of all sizes and industries and is particularly relevant for small- and mid-cap companies where companies $100M-$1B (44% of total companies) accounted for approximately 60% of all activist targets in FY2016.5 Activism can help focus on and drive enhanced corporate governance. However, many worry that activist proposals may be too short-term in thought and undermine the more strategic thinking that will sustain a company and create value in the long term. At a minimum, boards need to be well-versed in shareholder perceptions of their organizations and be prepared respond to activist challenges.
The SEC has begun to look into existing company disclosures of the ethnic, racial and gender composition of public company boards and could make such disclosures a mandatory requirement in the future.
Although two-thirds (66%) of directors believe their board is already proactively addressing the issue of board diversity, one-third (34%) of board members admit they are falling short in this area.
BDO Food for Thought
Succession planning for boards should examine the evolving needs of an organization and incorporate a review of the board’s mix of skill sets, diversity of thought, and ability to act independently in the best interest of the organization. The National Association of Corporate Directors' (NACD) 2016 Blue Ribbon Commission Report Building the Strategic-Asset Board covers some key considerations in this area. BDO has further examined sound governance practices in this area during our Director Diversity – Striking the Right Balance in the Boardroom webinar.
“Activist proposals, particularly those suggesting changes in board composition to achieve specific desired outcomes, should be viewed as an opportunity for the board to self-reflect and consider thoughtfully the needs and concerns of its shareholders while assessing how those concerns tie into the underlying objectives of the organization’s goals and strategies,” said Amy Rojik. “This, combined with timely reviews as to the adequacy of board composition through the lens of diversification and independence, can be a powerful tool for a board in carrying out its oversight responsibilities.”
BDO Board Survey
These are just a few of the findings of the 2017 BDO Board Survey, conducted by the Corporate Governance Practice of BDO USA in August 2017. The annual survey examines the opinions of 130 corporate directors of public company boards regarding corporate governance and financial reporting issues.
BDO USA’s Corporate Governance Practice is a valued business advisor to corporate boards. The firm works with a wide variety of clients, ranging from entrepreneurial businesses to multinational Fortune 500 corporations, on myriad of accounting, tax, risk management and forensic investigation issues.
1 Certain provisions – report format, auditor tenure, and other information – are effective for audits for fiscal years ending on or after 12/15/2017; while communication of CAMs for audits of large accelerated filers are effective for audits of fiscal years ending on or after 12/15/2019 and all other public companies for audits of fiscal years ending on or after 12/15/2020.
2 Refer to SEC Chief Accountant Wes Bricker’s remarks before the May 2017 Baruch College Financial Reporting Conference and additional remarks made during the December 2016 AICPA National Conference on Current SEC and PCAOB Developments.
3 Refer to the SEC’s 2016 Annual Report to Congress on the Dodd-Frank Whistleblower Program.
4 Refer to former SEC Chair Mary Jo White speech at Stanford University Rock Center for Corporate Governance 20th Annual Standard Directors’ College.
5 Refer to Sullivan & Cromwell’s 2016 U.S. Shareholder Activism Review and Analysis that compiled proxy contests and other activist campaign data in 2016 based on an analysis of U.S. companies with a market capitalization of over $100 million.