A majority of board members at public companies want Congress to pass broad-based tax reform legislation to address corporate tax inversions, according to a new survey.
The survey, by the accounting and consulting firm BDO USA, found that almost four-fifths (79 percent) of public company board members believe the increased use of corporate tax inversions is an expected outcome given the U.S. high corporate tax rate. In an inversion, a U.S.-based corporation merges with a foreign company and moves its tax domicile abroad to lower its tax rate.
A 56 percent majority are in favor of Congress addressing the issue through legislation.
Of those in favor of legislative action, an 85 percent majority believe any remedy must be part of broad-based tax reform on both the corporate and personal level. Directors were evenly divided (40 percent for, 40 percent against, 20 percent unsure) when asked if they were in favor of replacing the corporate and personal income tax with a tax on consumption.
“After a wave of tax motivated mergers and acquisitions, the U.S. government has begun to crack down on the practice of tax inversions, but a majority of corporate board members believe Congress should address this issue further and they believe the solution should be part of broad-based tax reform legislation,” said Wendy Hambleton, a partner in the Corporate Governance Practice of BDO USA, in a statement. “From a risk management perspective, this year's board survey clearly shows that boards are becoming more involved in their businesses' cyber-security programs and are increasing resources to defend against attacks. Directors also report some frustration with the move to uniformity in executive pay practices and an inclination to use more discretion in determining appropriate compensation.”
The board directors were also surveyed about other issues, such as the new revenue recognition standard that was issued this spring by the Financial Accounting Standards Board and the International Accounting Standards Board. More than half (52 percent) of the board members polled said they have been briefed by management on how their companies will adopt the new revenue recognition standard, which can have a significant impact on contracts, policies, systems and disclosures.
When asked to identify the most challenging aspect of the new revenue recognition standard, the most commonly cited were updating systems and policies (28 percent), revising existing revenue contracts with customers (25 percent) and revising debt covenant agreements with banks and other financial institutions (17 percent).
On the issue of cyber-security, a 59 percent majority of the directors surveyed reported that their board is more involved in cyber-security today than it was 12 months ago. More than two-thirds (71 percent) indicated that they are briefed on cyber-security at least once a year, including 25 percent who are briefed on a quarterly basis. A 55 percent majority said they have increased their company’s investments in cyber-security within the past year. Among those reporting growth in their information security budgets, the average increase was 19 percent.
“There has been a plethora of well publicized data breaches in the media over the past year and boards of directors are becoming more proactive on this topic,” said Karen Schuler, managing director of Forensic Technology Services at BDO Consulting. “It is a certainly a positive that a majority of boards are becoming more involved and are increasing resources to combat this problem, however it is troubling that more than a quarter of the board members report they are not briefed on information security at all. Although certain sectors of the economy are more likely to be the target of cyber-attacks than others, all boards should be engaged in cyber-security regardless of the company's industry.”
Despite the increased emphasis on cyber-security, only 39 percent of the directors indicate their businesses have a chief of cyber-security in place. Of the majority without a C-level officer for IT security, most (61 percent) rely on their chief financial officer for oversight of this function, while just over a third (35 percent) identified their chief information officer or chief technology officer for this responsibility.
When asked about internal and external disclosures of data breaches, almost three-quarters (72 percent) of board members believe their management is completely forthcoming with them on any breaches. Approximately two-thirds (65 percent) feel businesses should always notify customers, vendors and authorities of cyber breaches, regardless of any negative publicity.
As businesses seek shareholder approval of compensation practices through "Say-on-Pay" votes mandated under the Dodd-Frank Act, many believe executive pay practices have become much more uniform in order to achieve positive recommendations from firms that advise institutional shareholders on proxy issues. When asked for their opinion on this trend, more than two-thirds (71 percent) of the directors polled said they believe this is a negative development, believing boards should be open to the use of a reasonable degree of discretion in determining appropriate compensation for executives. A 29 percent minority took a contrary view, believing the uniformity of compensation practices sets the standard for shareholder-friendly pay practices and makes peer comparisons easier.
"The advent of 'say-on-pay votes' has led to a homogenization of executive compensation in order to elicit favorable recommendations from proxy advisory firms,” said Andrew Gibson, a partner on compensation in the Corporate Governance Practice of BDO USA. “But boards are starting to push back against this trend as they feel they have abdicated their responsibilities and need to exercise more discretion in structuring senior compensation.”
While the final rules have yet to be issued, beginning in 2016 companies will be required to disclose the ratio of median employee pay to CEO compensation. As this new requirement will apply to 2015 compensation, 33 percent of the directors surveyed reported that their boards have already taken steps to comply with this calculation. More than a quarter (28 percent) of the board members polled said they have yet to take any action to comply with the rule, while sizable proportions were either unfamiliar with the pending requirement (23 percent) or unsure (16 percent) about any actions taken.
When asked their main concern with the pending CEO/median employee disclosure requirement, directors cited unfair comparisons to other companies due to vague guidance (38 percent), internal and external reaction to perceived high ratios (29 percent) and a feeling that the ratio doesn't take into account contributing factors such as location and cost of living (25 percent). Only 8 percent of the board members polled cited the difficulty of identifying median employee pay as their main concern.
A 69 percent majority of board members said their own compensation is commensurate with their workload. However, 31 percent of the directors polled admitted they were dissatisfied with their compensation, even though they vote on their own compensation.
PCAOB Related-Party Standard
Only one-quarter of board members said they have been briefed on the Public Company Accounting Oversight Board’s new rule focused on related parties and unusual transactions, known as Auditing Standard 18. Scheduled to take effect in 2015, the new standard, in part, requires auditors to more closely scrutinize executive pay and identify inherent risks, such as incentives that have the potential to reward management for decisions that could prove detrimental to shareholders interests.
Of those familiar with the new rule, just one-third believe it will impact their governance of compensation programs moving forward. Companies have already had to disclose risk associated with their compensation programs, this new standard simply takes these disclosures to a new level.
When asked what topics they would like their board to spend more or less time on, a 52 percent majority of the directors cite succession planning as a topic they wish to devote more time to. Sizable minorities expressed an interest in spending more time on risk management (49 percent), industry competitors (40 percent) and evaluating management (37 percent).
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