According to a new study by BDO USA, LLP, one of the nation’s leading accounting and consulting organizations, majorities of public company board members do not agree with proxy advisory firms use of total shareholder return as an accurate measurement for determining “say-on-pay” recommendations or with the peer groups that advisory firms assign their company for executive compensation comparison purposes. Moreover, three-quarters (75%) of the directors believe proxy advisory firms that consult to public companies suffer from a conflict of interest and that these firms should be subject to regulatory oversight. Many board members are also clearly opposed (68%) to U.S. and international regulators proposals for implementing mandatory rotation of the external audit relationship.“The 2012 BDO Board Survey reveals broad optimism among boards regarding their ability to stay current on accounting and financial reporting standards, but also concerns with the plethora of disclosure requirements in financial statements and the lack of progress on moving to IFRS,” said Wendy Hambleton, a Partner in the Corporate Governance Practice of BDO USA. “The directors cite corruption/bribery as the greatest fraud risk facing their businesses, while also expressing concerns with proxy advisory firms and the power they wield with shareholders.”
Financial Reporting
Both the PCAOB and the EU are currently debating the use of mandatory rotation of auditors of public companies as a way to ensure a fresh set of eyes viewing a company’s books after a period of time and to spur competition in the audit field. However, more than two-thirds (68%) of board members are opposed to mandatory rotation of the external audit relationship. Moreover, of those opposed to rotation, better than three-quarters (78%) are also opposed to mandatory tendering of the external audit. Of the minority (32%) in favor of mandatory rotation, a majority (55%) suggest the term for rotation should be every 5 years, compared to smaller percentages that favored seven year (36%) and ten year (5%) terms.
Although the vast majority (88%) of directors indicate they are comfortable with their ability to stay current on changes to accounting and financial reporting standards, more than two-thirds (70%) feel there are so many financial disclosures in financial statements today that it is difficult to decide what information is most important.
When it comes to the long debate about the U.S. moving to international financial reporting standards (IFRS), almost two-thirds (63%) believe U.S. companies should be allowed to use IFRS in their public reporting.
Executive Compensation
Board members have clear concerns with proxy advisory firms that advise shareholders on “say-on-pay” recommendations while also consulting to public companies. Three-quarters (75%) of directors believe these firms suffer from a conflict of interest and the same proportion (75%) believe proxy advisory firms should be subject to regulatory oversight.
A majority (59%) of directors believe that the peer groups used by proxy advisory firms for executive compensation comparison purposes are not an accurate reflection of their company’s peers. When asked what was the most important criteria in determining a peer company for executive compensation purposes, industry (61%) was by far the most cited response. Revenues (15%), human capital competitor (13%) and market cap (11%) were mentioned by a much smaller percentage of the directors.
Proxy advisory firms compare total shareholder return (TSR) to executive compensation on a one year and three year basis to help determine their “say-on-pay” recommendations, but two-thirds (68%) of directors do not believe TSR is an accurate measurement. Nevertheless, there was little agreement among board members regarding what to substitute for TSR. Just over one-fifth recommend revenue growth (22%) and cash flow (22%), while slightly smaller proportions cite profit growth (16%) and operational efficiency (16%).
An overwhelming majority (90%) of directors report that the Dodd-Frank “Say-on-Pay” disclosure rules implemented in 2011 haven’t helped them manage the compensation of key executives.
Almost one-half (46%) of the directors say their boards have increased their communications to shareholders on the topic of executive compensation during the past proxy year.
Risk
One-third (33%) of directors cite corruption/bribery as the greatest fraud risk facing their company, compared to approximately one-fifth that identify either revenue recognition (20%) or earnings management (18%).
Two-thirds (68%) of directors indicate their companies conduct business in foreign locations or with foreign customers or suppliers. Of those conducting international business, a majority (57%) say they deal with foreign officials and almost one-third (32%) of those believe compliance risks related to bribery of government officials has increased over the past two years, compared to just four percent reporting a decrease.
Board members are conflicted when discussing the SEC’s “whistle-blower” bounties enacted in 2011. A slight majority (51%) of the directors believe the SEC bounties enacted by the SEC in 2011 have undermined internal anti-fraud and compliance programs that businesses have put in place, yet when asked whether their business had experienced an increase or decrease in internal “whistle-blower” since the SEC program began, the vast majority (83%) say there has been no change.
Although one-third (33%) of the directors indicate their company has a Chief Risk Officer in place, the majority (51%) identify the CEO as the person who is most helpful to the board in assessing and managing risk at the company. The only other title cited by a sizable proportion of the directors was the CFO (30%).
Almost two-thirds of board members (63%) perceive that their liability risk as a director has increased during the past few years and, perhaps as a result, a majority (58%) do not believe their board compensation has kept pace with their increased responsibilities.
These are the findings of The 2012 BDO Board Survey which examines the opinions of 72 corporate directors of public company boards, with revenues ranging from $250 million to $750 million, regarding financial reporting and corporate governance issues. The survey was conducted in late August and early September of 2012.
BDO USA's Corporate Governance Practice is a valued business advisor to corporate boards. The firm works with a wide variety of clients, ranging from entrepreneurial businesses to multinational Fortune 500 corporations, on a myriad of accounting, tax, risk management and forensic investigation issues.
About BDO USA
BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through 42 offices and more than 400 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multi-national clients through a global network of 1,118 offices in 135 countries.