Tax Reform, Cybersecurity, Board Refreshment and Executive Misconduct among Top Issues at 2018 Shareholder Meetings

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

A return of volatility to the stock market, executive misconduct, seemingly endless reports of cyber breaches, global economic 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.  These issues and many more will make for an intriguing annual meeting season this Spring. 

BDO USA, LLP, one of the nation’s leading accounting and advisory firms, 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:

• Tax Reform.  The new tax law is having far-reaching impact on tax reporting/planning and financial statement reporting. The lower corporate tax rate increases the competitiveness of doing business in the U.S., which may encourage corporations to reconsider the U.S. as a focal point for their business activities. Corporate “after tax” 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.

 

• M&A Opportunities.  The reductions to the corporate tax rate and tax on repatriation of foreign earnings are expected to provide businesses with more funds to pursue mergers and acquisitions in 2018.  Shareholders 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 could yield favorable returns.

  • 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.

5. Global Economic Concerns. Last week, President Trump’s plan to impose high tariffs on imported steel and aluminum 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.  Shareholders will want to know how boards are proactively addressing management’s operational decisions in this area.

• Cybersecurity.  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.

  • Emphasizing the need to report breaches in a timely fashion.  Companies are taking too long to report incidents.  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% of global annual revenue or €10 million ($11.77 million), whichever is higher. Just last month, the SEC released interpretive guidance to assist public companies in preparing timely and transparent disclosures to investors about cybersecurity incidents.

  • Vetting management reports on any cyber-breaches with external experts to ensure the company is getting the best advice.

  • Establishing cyber-risk management requirements for third-party vendors – a major source of cyber-attacks.

  • Sharing information from cyber-breaches with external entities. The 2017 BDO Cyber Governance Survey found that just one-quarter (25%) of directors say their companies are sharing information gleaned from cyber-attacks with external entities – a practice that needs to become more prevalent for the safety of national security.

• Executive Misconduct.  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.  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.  In many cases, the slow response to allegations highlight the need for businesses to document their reactions to charges of misconduct in a timely fashion.

 

• Board Refreshment/Diversity.  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.  Continuity is a valuable asset to any board, but it can also be a clear detriment to independence.  Moreover, when you have directors serving for 20 odd years, it is difficult to refresh and tackle challenges like diversity in a timely fashion.  Tenure limits and mandatory retirement ages can be useful tools to gracefully move directors out the door.

  • Skill Sets Reviews.  Defining a matrix of notable gaps in skills required in the coming years can sometimes help boards focus on which directors may have overstayed their welcome.

  • Limits on Board Seats.   According to the National Association of Corporate Directors, public company directors spend an average of 245 hours a year on their board duties and the time commitment continues to grow.  Given this trend, companies should consider limiting the number of boards on which their directors may serve. 

  • Composition Reviews.  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.  Good business sense encourages boards to bring in new members to better reflect the gender, age and racial mix of their customers.

 

• New GAAP.  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/ IFRS 16), and credit loss and financial instrument standards (ASC 326 & 825 / IFRS 9 ), will each have a major impact on financial statements and profitability.  Management, with board oversight, needs to communicate transparently with shareholders and other stakeholders at to how these changes will impact financial statements.

 

• Sustainability.  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 (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 the 2017 BDO Board Survey, a majority (54%) 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.

 

• Deregulation.  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 in all annual reports or proxies 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.

If you would like to discuss these topics further with a BDO USA partner, please call Jerry Walsh at 631-419-9008 or e-mail [email protected].  For the complete report go to 2018 BDO Annual Shareholder Meeting Alert.

About BDO USA
BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, and advisory 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 over 500 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 73,000 people working out of 1,500 offices across 162 countries.

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. For more information please visit: www.bdo.com.