BDO Survey covers financial reporting and executive compensation among other issues
Chicago, IL – According to a new survey by BDO USA, LLP, one of the nation’s leading accounting and consulting organizations, three-quarters (74 percent) of public company board members are in favor of placing limits on the total number of boards on which a director may serve and they generally favor more stringent limitations than those supported by proxy advisory firms. When asked if regulators should provide additional guidance on the use of non-GAAP (Generally Accepted Accounting Principles) measures in financial statements, directors are fairly evenly split (51 percent for vs. 49 percent against); however, a majority (67 percent) believe auditor involvement would provide higher investor confidence in the reporting of non-GAAP measures. Overall, better than three-quarters (70 percent) of directors feel the plethora of disclosures in current financial statements make it difficult to decide what information is important.
“The 2016 BDO Board Survey reveals frustration among boards with the growing number of disclosures in financial statements today, though they clearly see use for non-GAAP metrics – especially with regard to executive compensation calculations,” said Amy Rojik, Partner in the Corporate Governance Practice at BDO USA. “Directors are also clearly in favor of setting limits on how many total boards on which a director can serve, but not on the amount of pay they can earn for their service.”
In recent years, directors have seen a major increase in the number of hours required to serve on a public company board. Given this trend, in 2017, proxy advisory firms ISS and Glass Lewis have indicated they will oppose non-executive directors with more than five board seats. Interestingly, board members themselves are in favor of more severe limits.
When asked about the issue of “overboarding,” approximately three-quarters (74 percent) of directors believe corporate boards should proactively limit the number of boards on which a director can serve. Of those in favor of setting limitations, more than three-quarters (79 percent) would set more severe limits than the proxy advisors. Forty-four percent would set the limit at three boards, more than a quarter (28 percent) chose four and less than 10 percent said two (6 percent) or one (1 percent). Only 19 percent of directors agreed with the proxy advisors’ suggested limit of five board seats.
Financial Reporting Disclosures
Seventy percent of board members believe that there are so many disclosures in financial statements today that it is difficult to decide what information is most important. When asked to identify the most meaningful financial reporting disclosures for investors, approximately half (49 percent) cited critical audit matters that involve complex judgments on material issues. Non-GAAP financial measures that provide supplemental information on a business’ performance (29 percent) and how the organization is addressing risk management (19 percnt) were the next most cited as meaningful disclosures.
More than two-thirds (71 percent) of public company board members believe disclosures regarding the audit committee’s oversight of the external auditor provide value to current and potential shareholders. Alternatively, less than a quarter (24 percent) of directors believe disclosures regarding sustainability matters (climate change, corporate social responsibility, etc.) are important to investors’ understanding of a company’s business and enabling them make informed decisions.
Board members were split when asked whether they thought additional guidance from regulators on non-GAAP metrics would be helpful, given the increased use of these measures in financial statements. About half (51 percent) were in favor of additional guidance, while a similar proportion (49 percent) saw no need for more regulatory guidance. Of those in favor of additional guidance on non-GAAP measures, close to half (46 percent) identified EBITDA as the metric that causes them the most concern. Restructuring costs (14 percent), stock-based compensation (13 percent) and acquisition integration costs (13 percent) were areas of concern cited by much smaller minorities of directors.
Two-thirds (67 percent) of the board members feel auditor involvement would provide higher investor confidence in the reporting of non-GAAP measures, compared to one-third (33 percent) who do not feel it will have an impact.
Despite the popular criticism that non-GAAP or pro forma figures – when used with compensation metrics – can help executives draw bigger pay packages, approximately three-quarters (74 percent) of directors are opposed to prohibiting the use of non-GAAP measures in executive compensation calculations.
Frequency of Say-on-Pay. In 2011, the Dodd-Frank Act instituted mandatory “Say-on-Pay” shareholder votes on executive compensation which should be conducted every one, two or three years, as determined by the shareholders. The frequency of these shareholder votes is to be revisited and voted on every six years. In 2017, most public companies will be conducting a new shareholder vote to determine the frequency of Say-on-Pay votes moving forward. This year’s survey reveals that directors see a disconnect between themselves and shareholders on this issue.
Based on their experience over the past six years, a majority (56 percent) of board members believe the votes should take place every three years, compared to approximately one-fifth (19 percent) preferring two years and one-quarter (25 percent) opting for every year. However, when asked to predict how their shareholders will vote on the frequency of Say-on-Pay votes, half (51 percent) of the directors predicted every year. The remainder were split between every two years (22 percent) and every three years (27 percent).
Communicating on Pay. Forty-one percent of directors do not consider it appropriate to communicate with institutional shareholders regarding incentive pay packages. In contrast, at least one-fifth (22 percent) of directors say their board or compensation committee does proactively communicate with institutional shareholders on the topic and slightly fewer (18 percent) indicate they are considering such communications. Interestingly, of the relatively few actively communicating, two-thirds (66 percent) believe it has positively impacted their investor relations. Only three percent believe it hasn’t. The remainder (31 percent) weren’t sure.
CEO – Median Employee Pay Ratio. Beginning with 2018 proxies, public companies will be required to disclose the ratio of median employee pay to CEO compensation. This 2018 requirement will report on 2017 compensation. When asked if their boards had begun to take steps to comply with this new requirement, directors were split. Almost half (49 percent) are familiar with the new requirement but have taken no actions, while better than one-third (37 percent) are already preparing pay ratio calculations for internal planning purposes – though they will not disclose the ratio prior to the required disclosure date. Relatively few (8 percent) say they are planning to disclose the pay ratio calculation prior to the mandatory disclosure date. Surprisingly, 6 percent of the directors say they are still unfamiliar with the requirement.
Director Pay Limits? Recent shareholder lawsuits alleging excessive director pay have put a spotlight on how boards determine their own pay. When asked about the topic, a majority (56 percent) of board members were opposed to director pay limits, compared to 44 percent in favor of limits. Of those in favor of limits on director pay, a strong majority (81 percent) favor total compensation limits versus the remainder (19 percent) that prefer only equity limits.
When asked which of the two major party presidential candidates would positively impact corporate governance, Donald Trump (25 percent) received twice the support of Hillary Clinton (12 percent), but the most popular opinion (54 percent) of the board members was that neither candidate will have a positive impact.
BDO Board Survey
These are just a few of the findings of the 2016 BDO Board Survey, conducted by the Corporate Governance Practice of BDO USA in September 2016. The annual survey examines the opinions of 160 corporate directors of public company boards regarding financial reporting, executive compensation, risk management and other corporate governance issues.
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 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 more than 60 offices and more than 400 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multinational clients through a global network of more than 1,300 offices in over 150 countries.
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