Annual Shareholder Meetings May Include Auditor Tenure and COSO Questions
Shareholders at annual general meetings are expected to question management and board members about a number of hot topics this year, included audit firm tenure, COSO’s new internal control framework, mergers, spinoffs, cybersecurity, disaster planning and executive pay, according to BDO USA.
The accounting and consulting firm’s annual list of the top issues at annual shareholder meetings includes M&A opportunities and takeover defenses. Shareholders will want to know if management is seeking M&A opportunities and if potential targets have been properly vetted to avoid buyer’s remorse. BDO warns that boards should have contingency takeover defenses in place in case they need to fend off attacks.
In the area of audit firm tenure, BDO noted that 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, the last time the audit engagement was put out for bid and how the audit committee ensures that the audit firm performs quality work.
Questions about possible spinoffs may also arise, and management should be prepared to respond to investors who argue that businesses perform better when they aren’t part of a large conglomerate.
Highly publicized data breaches at Target, Neiman Marcus, Barclays and JP Morgan Chase have also put cybersecurity on the agenda. Weaknesses in networks and data security can expose businesses to significant losses in brand and market value. Shareholders may want to know if the company is taking a proactive approach to improve data security.
In the area of 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 of the main reasons that 90 percent of public companies are receiving favorable shareholder votes on their executive pay programs. However, shareholders are still likely to raise some questions on executive pay at this year's annual meetings, including about pay for performance, the SEC’s proposed regulations on disclosure of the ratio of the CEO’s pay to the median pay of employees of the company, and voluntary disclosure of realizable pay.
Succession planning may also come up in the annual meetings. As the economy continues to improve, executive movement should start to increase, including CEO turnover. 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.
Disaster planning may be another topic of discussion. Typhoons, hurricanes, earthquakes, tornadoes and other natural disasters seem to be on the rise in recent years. Any single failure in a business’s supply chain can cause problems throughout the company. Boards should be prepared to describe what they have done to prepare for natural disasters.
Boards should also be prepared to discuss the new COSO framework for internal control. Shareholders may ask whether the company in compliance with the new framework, and if not, why not? Will major changes be necessary to comply? What is the timeframe and what are the costs
Disclosures about conflict minerals may also arise. The SEC has released 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 sources 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 the company is conducting country-of-origin inquiries to ensure that their supply chains are conflict free.