Mergers, Spinoffs, Cyber Security, Disaster Planning and Executive Pay Among Top Issues at 2014 Shareholder Meetings

Jerry Walsh WalshPR (631) 419-9008 [email protected]

As the 2014 annual meeting season begins, shareholders will be focused on both opportunities and threats. After slumping through January and early February, the stock market has bounced back and is within shouting distance of new highs, but mixed economic data on hiring, exports, housing and manufacturing, coupled with worries about emerging markets are cause for potential concern. 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 2014 annual meetings:

• M&A Opportunities/Takeover Defenses. Comcast's $45 billion acquisition of Time Warner Cable may be the start of a long awaited merger boom as large businesses flush with cash look to buy growth. Shareholders will want to know if management is seeking out opportunities and that potential targets are properly vetted to avoid any buyer's remorse (Hewlett-Packard/Autonomy). By the same token, 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.
• Spinoffs. Trian Fund Management's campaign to get Pepsi to spin off its struggling beverage business is just one example of companies coming under fire from activist shareholders wanting to break them apart. Management should be prepared to respond to these well-funded investors who argue that businesses perform better when they aren’t part of a large conglomerate.
• Global Economic Concerns. Investors have become well educated on how inter-related the world's economies have become and are concerned how the crisis in the Ukraine and slowing growth in China, Brazil, Japan and other markets will impact the global recovery. Sovereign debt holders or any companies with exposure (facilities or sales operations) in these countries should be prepared for worst case scenarios. Shareholders will ask about contingency plans the company has in place should there be a major collapse.
• Cyber Security. Highly publicized data breaches at Target, Neiman Marcus, Barclays and JP Morgan Chase have put cyber security on the agenda for shareholders. 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 improve data security.
• Executive Compensation. Proxy disclosure rules and new avenues for shareholder feedback have encouraged adoption of performance focused compensation models at public companies. This shift is one key reason that 90 percent of public companies are receiving favorable shareholder votes on their executive pay programs, however, there are still several compensation issues that shareholders are likely to raise at this year's annual meetings:
  • Pay for Performance. Media coverage questioning pay practices at Yahoo (paying departing COO $109 million for just 15 months on job) and JP Morgan Chase (Jamie Dimon's 74 percent raise in year bank paid $20 billion in fines/legal costs) is likely to embolden shareholders to question whether executive pay levels actually reflect performance. Companies should be aware of these concerns and communicate with shareholders about compensation decisions. This is particularly important when board decisions are in the company's best long-term interests, but don’t fit in the one-size-fits-all pay models that institutional investors may be using.
  • CEO-Median Employee Pay Ratio. The SEC has issued proposed regulations on disclosure of the ratio of the CEO’s pay to the median pay of employees of the company. This extremely complex calculation will likely be a required disclosure for most companies in 2016 proxies, but the question may be asked at 2014 annual meetings, so companies need to be proactive and begin thinking about how they will comply long before the first required disclosure.
  • Voluntary Disclosure of Realizable Pay. In the absence of regulations requiring disclosure of the relationship between pay and company performance, the emerging consensus appears to be that disclosure should track how well the company’s total shareholder returns correlate with the CEO’s realizable pay (salary, bonus and the value of outstanding equity awards). Most institutional investors are doing their own realizable pay modeling and incorporating it into their say-on-pay decisions. Companies should begin to develop their own models in anticipation of investor questions on the matter.
• Succession Planning. As the economy continues to improve, executive movement should start to increase - including CEO turnover. CEO succession is one of the board’s most important responsibilities. Shareholders will want to know that the board has a succession plan in place and candidates identified, if needed, for the CEO and other senior positions.
• Accessing Public Equity Markets. In 2013, initial public offerings (IPOs) in the U.S. experienced a renaissance with both total offerings and proceeds raised reaching the highest levels since 2000. In 2014, IPO activity has continued to increase with offerings up 85 percent year-over-year through February. Shareholders may want to know if the favorable IPO market will translate to new securities offerings from existing public companies and whether management is considering any such offerings in the foreseeable future.
• Disaster Planning. Typhoons, hurricanes, earthquakes, tornadoes and other natural disasters seem to be on the rise in recent years. Beyond the terrible loss of human life, these events are a powerful demonstration of supply chain risks in a global economy. Any single failure in a business’s supply chain can cause problems throughout the company. Boards should be prepared to articulate what they have done to prepare for low probability, but high impact events such as natural disasters.
• New COSO Framework. Is the company in compliance with the new COSO framework for internal controls? If not, why not? Will major changes be necessary to comply? What is the timeframe and what are the costs?
• Conflict Minerals. The SEC has released its Form SD, a specialized disclosure form for reporting conflict mineral rule compliance. The new rule requires companies to disclose information each calendar year on the source of tantalum, tin, gold, and tungsten, minerals that have funded violent conflict in the Democratic Republic of the Congo and adjoining countries. Shareholders may want to know if companies are conducting country-of-origin inquiries to ensure that there supply chains are conflict free.
• Auditor Tenure. Although efforts to require mandatory audit firm rotation in the U.S. appear to have waned, management and audit committees should be prepared to discuss any questions regarding lengthy auditor tenures. Shareholders may want to know the process the company uses to select an audit firm, how long the current firm has been in place, when was the last time the audit engagement was put out for bid and how the audit committee ensures that the audit firm performs quality work.

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 [email protected].

About BDO USA

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