[March 07, 2018] |
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Tax Reform, Cybersecurity, Board Refreshment and Executive Misconduct among Top Issues at 2018 Shareholder Meetings According To BDO USA, LLP
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:
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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 a U.S.
domicile for their business activities. Corporate 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.
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M&A Opportunities. The reduced corporate tax rate and
lowered 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:
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sell side opportunities to dispose of assets that no longer
align with corporate goals but can yield favorable returns.
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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
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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 the company is proactively
addressing operational decisions in this area.
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Cybersecurity. Equifax, Uber and even the SEC (News - Alert) 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:
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critically assessing cyber-breach response plans to mitigate
damage from attacks.
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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.
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vetting management reports on any cyber-breaches with external
experts to ensure the company is getting the best advice.
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establishing cyber-risk management requirements for third-party
vendors - a major source of cyber-attacks.
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sharing information from cyber-breaches with externalentities.
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.
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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 actions to charges of misconduct in a
timely fashion.
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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:
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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.
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Skill Set 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.
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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.
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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.
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New GAAP. Public companies are currently dealing with the most
historic accounting changes in decades. New accounting standards for
revenue recognition (ASC (News - Alert) 606/IFRS 15), effective for 2018 reporting
cycles, followed by lease accounting (ASC 842) and credit losses (ASC
326) will each have a major impact on financial statements and
profitability. Management, with board oversight, needs to communicate
transparently with shareholders and other stakeholders on how these
changes will impact financial statements.
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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.
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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.
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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 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.
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