Chicago, IL – According to a new study by BDO USA, LLP, one of the nation’s leading accounting and consulting organizations, almost four-fifths (79%) of public company board members believe the increased use of corporate tax inversions is an expected outcome given the U.S. high corporate tax rate and a majority (56%) are in favor of Congress addressing the issue through legislation. Of those in favor of legislative action, the vast majority (85%) believe any remedy must be part of broad-based tax reform on both the corporate and personal level. Directors were evenly divided (40% for, 40% against, 20% unsure) when asked if they were in favor of replacing the corporate and personal income tax with a tax on consumption.
"After a wave of tax motivated mergers and acquisitions, the U.S. government has begun to crack down on the practice of tax inversions, but a majority of corporate board members believe Congress should address this issue further and they believe the solution should be part of broad-based tax reform legislation," said Wendy Hambleton, a Partner in the Corporate Governance Practice of BDO USA. "From a risk management perspective, this year's board survey clearly shows that boards are becoming more involved in their businesses' cyber-security programs and are increasing resources to defend against attacks. Directors also report some frustration with the move to uniformity in executive pay practices and an inclination to use more discretion in determining appropriate compensation."
A majority (59%) of directors report that their board is more involved in cyber-security today than it was 12 months ago. More than two-thirds (71%) indicate that they are briefed on cyber security at least once a year - this includes 25 percent who are briefed on a quarterly basis - and a majority (55%) say they have increased company investments in cyber-security during the past year. Among those reporting growth in their information security budgets, the average increase was 19 percent.
"There has been a plethora of well publicized data breaches in the media over the past year and boards of directors are becoming more proactive on this topic. It is certainly a positive that a majority of boards are becoming more involved and are increasing resources to combat this problem, however it is troubling that more than a quarter of the board members report they are not briefed on information security at all," said Karen Schuler, a Managing Director of Forensic Technology Services at BDO Consulting. "Although certain sectors of the economy are more likely to be the target of cyber-attacks than others, all boards should be engaged in cyber-security regardless of the company's industry."
Despite the increased emphasis on cyber-security, only 39 percent of the directors indicate their businesses have a Chief of Cyber Security in place. Of the majority without a C-level officer for IT security, most (61%) rely on their Chief Financial Officer for oversight of this function, while just over a third (35%) identified their Chief Information Officer or Chief Technology Officer for this responsibility.
When asked about internal and external disclosures of data breaches, almost three-quarters (72%) of board members believe their management is completely forthcoming with them on any breaches and approximately two-thirds (65%) feel businesses should always notify customers, vendors and authorities of cyber breaches, regardless of any negative publicity.
As businesses seek shareholder approval of compensation practices through "Say-on-Pay" votes mandated under Dodd-Frank, many believe executive pay practices have become much more uniform in order to achieve "yes" recommendations from firms that advise institutional shareholders on proxy issues. When asked their opinion on this trend, more than two-thirds (71%) of directors believe this is a negative development, believing boards should be open to the use of a reasonable degree of discretion in determining appropriate compensation for executives. A minority (29%) take a contrary view, believing the uniformity of compensation practices sets the standard for shareholder-friendly pay practices and makes peer comparisons easier.
"The advent of 'say-on-pay votes' has led to a homogenization of executive compensation in order to elicit favorable recommendations from proxy advisory firms. But boards are starting to push back against this trend as they feel they have abdicated their responsibilities and need to exercise more discretion in structuring senior compensation," said Andrew Gibson, a Partner on Compensation in the Corporate Governance Practice of BDO USA.
Although final rules have yet to be issued, beginning in 2016 companies will be required to disclose the ratio of median employee pay to CEO compensation. As this new requirement will apply to 2015 compensation, one-third (33%) of directors report that their boards have already taken steps to comply with this calculation. More than a quarter (28%) of board members say they have yet to take any action to comply with the rule, while sizable proportions were either unfamiliar with the pending requirement (23%) or unsure (16%) about any actions taken.
When asked their main concern with the pending CEO/median employee disclosure requirement, directors cited unfair comparisons to other companies due to vague guidance (38%), internal and external reaction to perceived high ratios (29%) and a feeling that the ratio doesn't take into account contributing factors such as location and cost of living (25%). Only 8 percent of board members cited the difficulty of identifying median employee pay as their main concern.
Only one-quarter of board members have been briefed on the Public Company Accounting Oversight Board's new rule (Auditing Standard 18) focused on related parties and unusual transactions. Scheduled to take effect in 2015, the new standard, in part, requires auditors to more closely scrutinize executive pay and identify inherent risks, such as incentives that have the potential to reward management for decisions that could prove detrimental to shareholders interests. Of those familiar with the new rule, just one-third believe it will impact their governance of compensation programs moving forward. Companies have already had to disclose risk associated with their compensation programs, this new standard simply takes these disclosures to a new level.
Other major findings from the 2014 BDO Board Survey:
Time Management. When asked what topics they would like their board to spend more or less time on, a majority of the directors cite succession planning (52%) as a topic they wish to devote more time to. Sizable minorities expressed an interest in spending more time on risk management (49%), industry competitors (40%) and evaluating management (37%).
Revenue Recognition. More than half (52%) of board members say they have been briefed by management on how their companies will adopt the Financial Accounting Standards Board's new revenue recognition standard that can significantly impact contracts, policies, systems and disclosures. When asked to identify the most challenging aspect of the new revenue recognition standard, the most commonly cited were updating systems and policies (28%), revising existing revenue contracts with customers (25%) and revising debt covenant agreements with banks/financial institutions (17%).
Board Compensation. Most board members (69%) say their compensation is commensurate with their workload. However, when you consider this is a group that votes on its own compensation, it is somewhat surprising that almost one-third (31%) of directors were dissatisfied with their compensation.
These are the findings of The 2014 BDO Board Survey, conducted by the Corporate Governance Practice of BDO USA, which examined the opinions of 75 corporate directors of public company boards, with revenues ranging from $250 million to $1 billion, regarding financial reporting and corporate governance issues. The survey was conducted in September of 2014 by Market Measurement, an independent market research firm, on behalf of BDO.
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 a myriad of accounting, tax, risk management and forensic investigation issues.
About BDO USA
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