Accounting firm BDO Seidman anticipates that shareholder meetings this year will be dominated by concerns about excessive executive compensation, recession plans and credit concerns.
The firm has compiled a list of topics that corporate management and boards of directors should be prepared to address in connection with their 2009 annual meetings:
1. Say on pay. Reports of excessive compensation during times of poor economic performance have put executive pay at or near the top of shareholder concerns. Investors will want to know that a company’s compensation discussion and analysis meets the Securities and Exchange Commission’s requirements, and an increasing number of shareholders will be seeking advisory approval of executive pay. Some groups may try to use the strict compensation limits required in the Troubled Asset Relief Program bailout as a guideline to rein in perceived excess in other industries.
2. Repricing options. Does the company have plans to reprice “underwater” stock options or change the performance targets for incentive plans? If so, what is the basis for repricing or resetting the bar on performance?
3. Weathering the recession. Given the forecast for an extended economic downturn, shareholders will want to know if management has considered:
-- Adopting a comprehensive plan to reduce costs, improve inventory controls, enhance purchasing procedures, accelerate cash flow and extend cash retention;
-- Real-time reporting to collect and report data on a daily basis in order to allow management the ability to react in real-time to deteriorating gross margins and unexpected market changes;
-- Restructuring to consolidate facilities, make the business more scalable through outsourcing of functions, eliminate redundancies in operations and headcount, close selected locations, or sell unproductive assets;
-- Poison pills to guard against takeovers given the depressed stock values of many businesses; and,
-- Asset impairment, given the current economic environment, operational results and the depressed stock market.
4. Turmoil in credit markets:
-- Losses on Investments. Numerous companies have reported losses on a variety of investments—subprime mortgages, collateralized debt obligations, asset-backed securities, auction rate securities, etc. Shareholders may question why the investments were made and how much exposure to loss still exists, as well as any changes in risk management to avoid similar losses in the future. Investors may also ask about the value of investments held in the company’s pension plans.
-- Liquidity risk. Companies that funded long-term assets with short-term liabilities may face liquidity problems resulting in distressed sales of assets, when creditors won’t roll over the existing loans. Shareholders may ask what the company is doing to mitigate any liquidity problems.
-- Off-balance-sheet entities. A number of financial institutions have incurred losses rescuing off-balance-sheet entities that they sponsored from investment losses or liquidity problems. Shareholders may question why the entities were off-balance-sheet and what exposure still exists.
5. Changing accounting practices:
-- Are companies prepared for IFRS? The SEC has provided a roadmap on the transition from generally accepted accounting principles to International Financial Reporting Standards. Shareholders will want to know if management is prepared to meet this timeline, what the conversion will cost and how it might affect earnings per share.
-- Fair value accounting. Does the company expect to experience wide fluctuations in the value of assets and liabilities due to fair value accounting?
-- Impact of 141R on M&A. FASB Statement No. 141R on business combinations is now in effect. Shareholders will want to know how this dramatic new rule will affect M&A activities.
-- Public interest issues. Companies are being called upon to report on political donations made from corporate funds. Shareholders may also ask for reports that describe the businesses environmental policies and community and charitable activities.
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