M&A, Currency Risk, Cybersecurity, Board Composition and Executive Compensation Among Top Issues at 2016 Shareholder Meetings

March 2016

Jerry Walsh

A highly volatile stock market, stagnant wages, global economic challenges, a strong U.S. dollar and a presidential election like no other are just a few of the factors contributing to a growing feeling of uncertainty in corporate board rooms around the country.  This unsettled climate should make for an interesting annual meeting season this Spring. 

BDO USA, one of the nation’s leading accounting and consulting firms, has compiled the following list of topics that corporate management and boards of directors should be prepared to address in connection with 2016 annual meetings:
  • M&A Opportunities. Dell and EMC, Dow and DuPont. Heinz and Kraft Foods, Pfizer and Allergan, and Charter and Time Warner Cable are just a few of the deals that made 2015 a record year for mergers and acquisitions. With continued low interest rates, reduced organic growth 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.  Board should ensure their companies are equipped with sound integration policies for assimilating target businesses into a corporate culture supported by strong governance. 
  • Cybersecurity. As cyber-attacks and data breaches at major businesses have become commonplace in the news, investors are now well aware of the damage these events can have on a business’s brand and market value.  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
    • 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. Investors have become well educated on how inter-related the world's economies have become and are concerned how slow growth in China, the UK’s potential exit from the European Union, and unstable economic conditions in Greece, Venezuela and other markets impact U.S. businesses.  Shareholders will want to know whether companies with exposure in these countries (e.g., facilities, sales operations) are prepared for worst case scenarios. 
  • Political Contributions. The 2016 presidential election has dominated the news and brought increased attention to the political spending of corporations.  Boards should be prepared for increased shareholder scrutiny of political donations, lobbying activities, and contributions to industry associations that lobby on their behalf. 
  • Board Diversity. The SEC has begun to look into existing company disclosures on board diversity and may consider a mandatory requirement for businesses to 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.  
  • Director Expertise. Boards and, more specifically, audit committees now grapple with issues ranging from cybersecurity to foreign corrupt practices to whistleblower claims.  Shareholders may inquire whether the current audit committee has the appropriate experience to address these increased responsibilities.  They may also inquire whether the company should have a separate risk committee composed of the proper expertise to provide oversight of these varied areas. 
  • Overboarding. 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 – a jump of 46 percent from just ten years ago (191 hours).  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. 
  • 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 January 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. 
  • Pay for Performance.  The SEC has a pending proposal that will require U.S. public 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 the average compensation “actually paid” to 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 the TSR of its 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.
  • Leveraging Data.  The data revolution has provided companies with a wealth of information to draw on when making business decisions and interacting with customers.  Moving forward, insights derived from sophisticated analysis of high-volume data will increasingly be a key component to identifying opportunities and avoiding risks.  Investors may be interested to learn what the company is doing to leverage data in strategic planning.
  • Proxy Access.  General Electric, Apple, Citigroup and McDonald’s were just a few of the companies that changed their corporate bylaws in 2015 to allow large stockholders (typically 3% 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% of S&P 500 companies have now adopted new proxy access rules, up from just 1% in 2014. Given the rapid spread 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.  2015 saw 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.  A strong majority of comments from audit committee and auditor respondents to the proposal advocated a voluntary approach to additional disclosures versus a mandate.  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. 

For additional information on these topics and other issues shareholders may raise at 2016 annual meetings go to the BDO Shareholder Alert.  If you would like to discuss this topic further with a BDO USA partner, please call Jerry Walsh at 631-419-9008 or e-mail jerry@prwalsh.com

BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals.  The firm serves clients through more than 60 offices and more than 400 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multi-national clients through a global network of more than 1,300 offices in over 150 countries. 

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