Moving into the proxy season, what are the hottest board topics this year? Disclosure of corporate political contributions, the impact of enhanced SEC disclosure requirements on executive compensation, heightened audit committee responsibility, and board responsiveness to socially motivated activist shareholders, according to an expert panel convened January 12th by the National Association of Corporate Directors-New England Chapter.
Additional discussion included speculation as to the impact on board governance of the growing number of foreign shareholders (about 15% of all United States equities are now held overseas), and foreign countries have different ideas, including about proxy access [it is normal and why is there resistance?], boardroom diversity [many foreign countries have statutes fixing quotas for female board members], and a greater focus on macro societal issues [impact of overseas reincorporation, breaking up big banks, political contributions].
The panel was critical of proposed SEC regulations attempting to prescribe disclosure of the relationship between corporate performance and executive compensation. The SEC proposals rest on total shareholder return as the metric against which performance pay should be evaluated, and TSR is not appropriate for all companies.
Audit committees will be under increasing pressure to supervise auditors to ensure “audit quality.” This involves making sure that the team of accountants has the requisite time, experience and industry knowledge. There will be increased pressure also on the quality of critical accounting estimates such as fair value, pension liability, loss contingencies and asset impairment. Further down the road, in 2019, revised treatment of long-term leasehold obligations will have substantial impact on balance sheet presentation.
Socially active shareholders last year created pressure on disclosure of corporate political spending, environmental and climate change matters, deforestation, renewable energy, board gender diversity, and perhaps most importantly opening proxy access (minority shareholders having access to the corporate proxy mechanisms for soliciting board vote proxies). These pressures will continue.
Long-term trend? A changing view of the role of the corporation in society, driven by data (for example, data demonstrates higher profitability for gender diverse boards), and demographics, as women and millennial investors seem more interested in corporate social responsibility than traditional investors.