11 issues that could flare up at the next shareholder meeting

11 issues that could flare up at the next shareholder meeting

U.S. public companies are operating in an environment full of both
risk and opportunity as they prepare for their annual shareholder meetings.

Cyberthreats, disaster planning, and political and economic unrest
are among many factors that make the current climate hazardous for
many companies.

Although high values in the stock market indicate an environment that
has improved significantly—if slowly—since the lowest depths of the
global financial crisis, recent dips in the market indicate that
volatility still exists.

Shareholders are likely to be focused on both the risks and the
opportunities in upcoming shareholder meetings, according to Wendy
Hambleton, CPA, a partner in the corporate governance practice who
also heads up the SEC practice at BDO.

“There is still that overriding sense of still coming out of that
economic downturn, whatever you want to call the period from 2007 to
2009,” Hambleton said. “I think people are cautious, so they want
companies to be cautious and prudent with their funds. I don’t think
people are pushing as much for huge growth as they are for measured
growth and maybe a little more secure growth.”

Against this backdrop of risks and a desire for secure growth, BDO
has compiled a list of issues in a news release that
corporate management and boards of directors should be prepared to
discuss with shareholders in connection with annual meetings this spring:

M&A opportunities and takeover defenses. Is
management seeking M&A opportunities? Are potential targets
properly vetted to prevent buyer’s remorse? And are boards poised to
fend off unwanted takeovers and maximize shareholder value if a
transaction is accepted?

“We are seeing more M&A activity,” Hambleton said. “A lot of
companies have some cash on hand, but I think everyone wants to be
cautious to make sure plenty of due diligence is done, that it’s the
right transaction, that it makes sense, no one is rushing into deals”

Spinoff advocacy. Management and the board need to
be prepared to respond to well-funded, activist shareholders who have
the potential to try to break up companies, according to BDO. This can
be a costly exercise, Hambleton said.

“If you’ve got activist shareholders making suggestions and urging
the company to take certain actions, that takes a lot of time and in
some cases dollars that the company might have wanted to use in an
alternative way,” she said.

Global economic concerns. Investors are concerned
about how the crisis in Ukraine and slowing growth in China, Brazil,
Japan, and other markets will affect the global economic recovery,
according to the news release. Shareholders may ask about how prepared
the company is to deal with a serious economic collapse in a certain
country or region.

The crisis in Ukraine demonstrates that problems can occur in
unexpected places, Hambleton said. And emerging markets pose different
political and economic concerns than more mature markets such as the
United States, Canada, and Western Europe, according to Hambleton.

“That’s not a reason not to go into those markets,” she said. “It’s
just a reason to go in from a measured perspective. And from a
shareholder perspective, that’s what people want to see is a measured
perspective, that people are thinking about the risks, thinking about
the concerns, and then taking a measured response to that.”

Cybersecurity. Headlines about numerous
high-profile breaches are certain to have shareholders’ attention, and
companies should be prepared to explain their approach and their defenses.

“Companies need to be able to explain to shareholders—without getting
into the minutiae of the details and what they do—how they monitor,
what kind of controls they have in place,” Hambleton said. “Have they
looked at refreshing their risk management approaches in this area?
How often do they do certain types of monitoring activities?”

Executive compensation. Performance-focused
compensation models at public companies have gained favor in the wake
of new avenues for shareholder feedback, according to the news release.

Since regulations do not require disclosure of the relationship
between pay and company performance, it appears that an emerging
consensus is that disclosures should report how the company’s total
shareholder returns relate to the CEO’s realizable pay, BDO said.
Shareholders will ask more questions when the executives are
compensated handsomely while the company struggles, Hambleton said.

Succession planning. An improving economy may
create more opportunities for executives to change jobs. This could
cause shareholders to ask whether the board has a succession plan and
has identified candidates for CEO and other key positions. Surveys
have shown that board members are
interested
in this issue, Hambleton said.

“If it’s something board members would want to spend time on, you’d
think it’s something shareholders care about, too,” she said.

Accessing public equity markets. In 2013, total
U.S. initial public offerings and proceeds raised reached their
highest levels since 2000, according to BDO. This may lead
shareholders to wonder whether management is considering new
securities offerings.

“Certainly, a good IPO market is an opportunity for companies that
may be looking at spinning off either their noncore businesses or
businesses that maybe would perform better in a separate company
rather than as part of the overall conglomeration,” Hambleton said.

Disaster planning. Events such as Hurricane Sandy
in the United States and Typhoon Haiyan in the Philippines have caused
tragic losses of human life and disrupted supply chains and
operations. Shareholders may want to know if businesses have backup
plans
that will minimize the effects of such events.

For example, Hurricane Sandy showed that backup servers located far
apart on the same coast may be vulnerable to the same storm.

“No one probably envisioned a storm that would start where it did and
go all the way and cause so many blackouts that we need to have
[servers] on opposite coasts or in the middle of the country or
something like that,” Hambleton said.

New COSO framework. Shareholders may want to know
if a company has updated its system of internal control to reflect the
guidance
in the updated 2013 framework of the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).

“I wouldn’t expect there to be significant changes to companies’
assessments,” Hambleton said. “But the new framework does have more
particular guidance built into it, so I think some of the controls and
the mapping will need to change. There will be some work to do.
Hopefully, some enhancement of controls will come out of it.”

Conflict minerals. New SEC
rules
require public companies to report to the SEC whether their
products contain certain minerals produced in mines in the Democratic
Republic of Congo. In some cases, those mines are run by warlords who
oppress residents of the region. Although some companies may be behind
in gathering information needed to report on these minerals by the May
31 deadline for the 2013 calendar year, Hambleton said shareholders
will have a wider perspective.

“They’re going to want to know if [the company is] going to have to
report that they use conflict minerals,” she said. “And that gets into
the whole question of sustainability and corporate social
responsibility with companies.”

Auditor tenure. Mandatory audit firm rotation no
longer is part of the PCAOB’s agenda after legislative
pushback
on the issue, but BDO said management and audit
committees should be prepared for shareholders to ask about the length
of their auditor’s tenure and their process for hiring their auditors.

“If you’re an audit committee member, you will have heard the
discussion, and you need to be prepared to answer the question, what
consideration did they give,” Hambleton said. “Not that they should be
making a change, but what consideration did they give to it?”


Ken Tysiac (

ktysiac@aicpa.org
) is a JofA senior editor.

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