Corporate management and boards of directors should be prepared for questions from shareholders about turmoil in the Middle East, rising energy costs and new rules in the Dodd-Frank Act during their companies’ annual general meetings this year, according to BDO USA LLP.
Revenue at many companies is back to prerecession levels and just a few weeks ago the Federal Reserve raised its forecast for U.S. growth in 2011, the accounting and consulting firm noted, yet the political unrest in the Middle East and the fiscal shortfalls being experienced at state and local governments have highlighted the fragility of the economic recovery. Shareholders will want to know if the company has adopted a comprehensive plan based on real-time reporting that will provide management with the ability to react quickly to potential downturns or opportunities in the market.
Under a new “proxy access” rule, large investors—those with a 3 percent stake for a minimum of two years—can now place their own board candidates on company ballots, greatly reducing the costs for shareholder activists seeking to improve underperforming boards. Large companies that have previously ignored corporate governance changes proposed by stockholders or have recently experienced narrow re-elections should be prepared for this powerful new tactic.
The Dodd-Frank Wall Street Reform and Consumer Protection Act contains a number of provisions that will require risk assessments and broader disclosure of executive compensation practices:
• Say on Pay. Requires a vote (non-binding), at least once every three years, to approve the compensation of the company’s executive officers. Shareholders will want the compensation discussion and analysis of the proxy statement to provide meaningful and transparent disclosure of and rationale for the businesses executive compensation structure. Companies should assess current pay practices and consider amending or eliminating programs that may trigger “no” votes.
• Say on Frequency. Requires a vote (non-binding) on whether shareholders will cast a “Say on Pay” vote every one, two or three years. Annual votes, likely to be supported by shareholder activists, allow shareholder input every year and eliminate the chance of poor compensation practices continuing for a long period. Triennial votes are consistent with compensation programs that seek to incentivize and reward performance over a multi-year period. Biennial votes are viewed as a balance between the two. Businesses must determine what frequency makes the most sense and communicate the benefits of this approach to shareholders. Early results indicate shareholders prefer an annual vote.
• Dodd-Frank on Bank Lending. Despite positive economic signs, such as increased consumer spending during the holidays and strong corporate profits, credit remains tight and the Dodd-Frank Act’s impact on bank lending is likely to increase the difficulty of borrowing by businesses. Shareholders will want to know how management plans to access capital to fund current operations, buildup inventories and fuel expansion should opportunities arise.
The number of initial public offerings on U.S. exchanges more than doubled in 2010 and, despite the recent economic turbulence, U.S. IPO activity through February is up 71 percent year over year. Shareholders may want to know if the favorable IPO market will translate to new securities offerings from existing public companies and whether management is considering any such offerings in the foreseeable future.
Federal and state deficits will be addressed through layoffs of government workers, reduced spending on infrastructure projects and reduced entitlement programs. Shareholders of any entities doing business with federal or local governments will want to know contingency plans for these likely scenarios.
New federal and state government tax initiatives to address budget deficits are likely to have an impact on a company’s ability to grow and invest in the business.
Beginning Jan. 1, 2011 the new FASB revenue recognition rules for certain bundled product and service offerings are now fully effective. Shareholders of businesses that sell products with the promise of providing technical service or future upgrades will want to know that the business’s accounting is in compliance with the new rules and what the impact may be on revenue. This issue will be especially prominent in the technology sector.
Sometime in 2011, the SEC will vote on if and when the U.S. will adopt the use of International Financial Reporting Standards. Shareholders will want to know if management is prepared to meet the potential timeline of 2015, what the conversion may cost and how it might affect earnings per share.
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