2012 BDO BOARD SURVEy - HyperSites
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2012 BDO board survey BDO USA CORPORATE GOVERNanCE PRACTICE 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.
Contact:
W
hether it be increased disclosures in financial reporting, the greater focus on risk management practices or the growing influence of proxy advisory firms and Dodd-Frank on executive compensation, corporate directors at public companies have had to deal with substantial changes to the governance environment in recent years. Yet, sometimes change – however well intentioned – is not always for the best and corporate board members clearly have some issues with both recently implemented and currently proposed changes to governance. According to a new study by the Corporate Governance Practice of BDO USA, LLP, 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. These are the findings of The 2012 BDO Board Survey, which examined the opinions of corporate directors of public company boards with revenues ranging from $250 million to $750 million, regarding corporate governance issues. The survey, conducted in late August and early September of 2012, covered various topics related to financial reporting, executive compensation, fraud risk and management of directors’ time.
Read more
WENDY HAMBLETON 312-616-4657 / [email protected] LEE GRAUL 312-616-4667 / [email protected] STEPHEN FERRARA 312-616-4683 / [email protected] ALBERT LOPEZ 305-420-8008 / [email protected] CHRISTOPHER TOWER 714-668-7320 / [email protected] MICHAEL WHITACRE 404-979-7116 / [email protected] ANDREW GIBSON 404-979-7106 / [email protected] RANDY RAMIREZ 212-885-8015 / [email protected] LEE DEWEY 212-885-8430 / [email protected] ANTHONY LENDEZ 212-885-8025 / [email protected] GLENN POMERANTZ 212-885-8379 / [email protected]
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2012 BDO BOARD SURVEY
CONTINUED FROM PAGE 1
“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. 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.” – Wendy Hambleton, Partner in the Corporate Governance Practice of BDO USA
u 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 five years, compared to smaller percentages that favored seven-year (36%) and 10-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 twothirds (70%) feel there are so many financial disclosures in financial statements today that it is difficult to decide what information is most important.
Are you in favor of a requirement for mandatory rotation of external auditors at U.S. public companies?
32% Yes
If no, are you in favor of mandatory tender, or putting up for bid, of the external audit relationship?
22% Yes 68% No
78% No
Source: 2012 BDO Board Survey
Do you feel that there are so many disclosures in financial statements today that it is difficult to decide which information is most important? 70%
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.
30%
Yes
No
Source: 2012 BDO Board Survey
“The board members’ concerns regarding financial disclosures mirror those of BDO. As a firm we have frequently commented that the number and content of required financial disclosures has gotten out of hand, making it difficult to focus on what is really important to investors’ understanding of the financial statements.” – Lee Graul, Partner in the Corporate Governance Practice of BDO USA Read more
2012 BDO BOARD SURVEY
3
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“Proxy advisory firms are having a growing influence on shareholder voting related to executive compensation at public companies. The 2012 BDO Board Survey reveals that corporate directors have multiple concerns with these firms and believe they should be subject to regulatory oversight in order to protect against perceived conflicts of interest.” – Randy Ramirez, Senior Director of Compensation in the Corporate Governance Practice of BDO USA.
u 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. Threequarters (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%).
Do you believe proxy advisory firms should be subject to regulatory oversight?
Do you believe that the peer groups used for executive compensation comparison purposes by proxy advisory firms are an accurate reflection of your company’s peers?
25% No
41% Yes
75% Yes
Source: 2012 BDO Board Survey
59% No
Source: 2012 BDO Board Survey
What is the most important criteria for determining a peer company for executive compensation purposes?
61%
Industry
Revenues
Human Capital Competitor
Market Cap
15% 13% 11%
Source: 2012 BDO Board Survey
Read more
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2012 BDO BOARD SURVEY
CONTINUED FROM PAGE 3
For the latest proxy year, have you increased your communications to shareholders on the topic of executive compensation?
What issue represents the greatest risk for fraud at your company?
33% 22%
20% 46% Yes
18%
54% No
7%
Corruption/ Bribery
Revenue recognition
Source: 2012 BDO Board Survey
Source: 2012 BDO Board Survey
Does your company conduct business in foreign locations or with foreign customers or suppliers?
If yes, does your business deal with foreign government officials in these markets?
32% No 57% Yes
68% Yes
Earnings management
43% No
Insider trading
Other
If yes, over the past two years, do you believe your company’s compliance risks related to bribery of foreign government officials have...
32% Increased
4% Decreased
64% Stayed about the same
Source: 2012 BDO Board Survey
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.
u Risk One-third (33%) of directors cite corruption/ bribery as the greatest fraud risk facing their company, compared to approximately onefifth 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 “whistleblowers” 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%). Read more
2012 BDO BOARD SURVEY
5
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“Risk management is a priority for public company boards and corruption/bribery is the number one fraud risk according to directors. Given the fact that more than two-thirds are conducting business in foreign locations or with customers or suppliers in other countries, it isn’t surprising that a sizable portion are reporting an increase in compliance risks related to bribery of foreign government officials. We are increasingly being called upon to help protect clients from this threat.” – Glenn Pomerantz, Partner at BDO Consulting 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.
During the past few years, do you think your liability risk as a director has increased?
Given the heightened responsibility and workload brought about by regulatory changes, do you believe your board compensation is commensurate with your responsibilities?
u Time Management When asked what topics they would like their board to spend more time on, almost one-half of the directors cite succession planning (49%), risk management (47%), industry competitors (46%) and evaluating management (44%). See chart to the right:
63% Yes
37% No
Source: 2012 BDO Board Survey
42% Yes
58% No
Source: 2012 BDO Board Survey
Would you like your board to spend more or less time on each of the following topics? Topic
More
Less
Same
Succession planning
49%
1%
49%
Risk management
47%
7%
46%
Industry competitors
46%
3%
51%
Evaluating management performance
44%
3%
53%
Executive compensation
27%
20%
53%
Compliance and regulatory issues
21%
30%
49%
Source: 2012 BDO Board Survey
About the Survey 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. 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 40 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 1,118 offices in 135 countries. BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. For more information, please visit: www.bdo.com. Material discussed is meant to provide general information and should not be acted on without professional advice tailored to your firm’s individual needs. © 2012 BDO USA, LLP. All rights reserved. www.bdo.com
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2012 BDO board survey BDO USA CORPORATE GOVERNanCE PRACTICE 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.
Contact:
W
hether it be increased disclosures in financial reporting, the greater focus on risk management practices or the growing influence of proxy advisory firms and Dodd-Frank on executive compensation, corporate directors at public companies have had to deal with substantial changes to the governance environment in recent years. Yet, sometimes change – however well intentioned – is not always for the best and corporate board members clearly have some issues with both recently implemented and currently proposed changes to governance. According to a new study by the Corporate Governance Practice of BDO USA, LLP, 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. These are the findings of The 2012 BDO Board Survey, which examined the opinions of corporate directors of public company boards with revenues ranging from $250 million to $750 million, regarding corporate governance issues. The survey, conducted in late August and early September of 2012, covered various topics related to financial reporting, executive compensation, fraud risk and management of directors’ time.
Read more
WENDY HAMBLETON 312-616-4657 / [email protected] LEE GRAUL 312-616-4667 / [email protected] STEPHEN FERRARA 312-616-4683 / [email protected] ALBERT LOPEZ 305-420-8008 / [email protected] CHRISTOPHER TOWER 714-668-7320 / [email protected] MICHAEL WHITACRE 404-979-7116 / [email protected] ANDREW GIBSON 404-979-7106 / [email protected] RANDY RAMIREZ 212-885-8015 / [email protected] LEE DEWEY 212-885-8430 / [email protected] ANTHONY LENDEZ 212-885-8025 / [email protected] GLENN POMERANTZ 212-885-8379 / [email protected]
2
2012 BDO BOARD SURVEY
CONTINUED FROM PAGE 1
“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. 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.” – Wendy Hambleton, Partner in the Corporate Governance Practice of BDO USA
u 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 five years, compared to smaller percentages that favored seven-year (36%) and 10-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 twothirds (70%) feel there are so many financial disclosures in financial statements today that it is difficult to decide what information is most important.
Are you in favor of a requirement for mandatory rotation of external auditors at U.S. public companies?
32% Yes
If no, are you in favor of mandatory tender, or putting up for bid, of the external audit relationship?
22% Yes 68% No
78% No
Source: 2012 BDO Board Survey
Do you feel that there are so many disclosures in financial statements today that it is difficult to decide which information is most important? 70%
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.
30%
Yes
No
Source: 2012 BDO Board Survey
“The board members’ concerns regarding financial disclosures mirror those of BDO. As a firm we have frequently commented that the number and content of required financial disclosures has gotten out of hand, making it difficult to focus on what is really important to investors’ understanding of the financial statements.” – Lee Graul, Partner in the Corporate Governance Practice of BDO USA Read more
2012 BDO BOARD SURVEY
3
CONTINUED FROM PAGE 2
“Proxy advisory firms are having a growing influence on shareholder voting related to executive compensation at public companies. The 2012 BDO Board Survey reveals that corporate directors have multiple concerns with these firms and believe they should be subject to regulatory oversight in order to protect against perceived conflicts of interest.” – Randy Ramirez, Senior Director of Compensation in the Corporate Governance Practice of BDO USA.
u 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. Threequarters (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%).
Do you believe proxy advisory firms should be subject to regulatory oversight?
Do you believe that the peer groups used for executive compensation comparison purposes by proxy advisory firms are an accurate reflection of your company’s peers?
25% No
41% Yes
75% Yes
Source: 2012 BDO Board Survey
59% No
Source: 2012 BDO Board Survey
What is the most important criteria for determining a peer company for executive compensation purposes?
61%
Industry
Revenues
Human Capital Competitor
Market Cap
15% 13% 11%
Source: 2012 BDO Board Survey
Read more
4
2012 BDO BOARD SURVEY
CONTINUED FROM PAGE 3
For the latest proxy year, have you increased your communications to shareholders on the topic of executive compensation?
What issue represents the greatest risk for fraud at your company?
33% 22%
20% 46% Yes
18%
54% No
7%
Corruption/ Bribery
Revenue recognition
Source: 2012 BDO Board Survey
Source: 2012 BDO Board Survey
Does your company conduct business in foreign locations or with foreign customers or suppliers?
If yes, does your business deal with foreign government officials in these markets?
32% No 57% Yes
68% Yes
Earnings management
43% No
Insider trading
Other
If yes, over the past two years, do you believe your company’s compliance risks related to bribery of foreign government officials have...
32% Increased
4% Decreased
64% Stayed about the same
Source: 2012 BDO Board Survey
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.
u Risk One-third (33%) of directors cite corruption/ bribery as the greatest fraud risk facing their company, compared to approximately onefifth 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 “whistleblowers” 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%). Read more
2012 BDO BOARD SURVEY
5
CONTINUED FROM PAGE 4
“Risk management is a priority for public company boards and corruption/bribery is the number one fraud risk according to directors. Given the fact that more than two-thirds are conducting business in foreign locations or with customers or suppliers in other countries, it isn’t surprising that a sizable portion are reporting an increase in compliance risks related to bribery of foreign government officials. We are increasingly being called upon to help protect clients from this threat.” – Glenn Pomerantz, Partner at BDO Consulting 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.
During the past few years, do you think your liability risk as a director has increased?
Given the heightened responsibility and workload brought about by regulatory changes, do you believe your board compensation is commensurate with your responsibilities?
u Time Management When asked what topics they would like their board to spend more time on, almost one-half of the directors cite succession planning (49%), risk management (47%), industry competitors (46%) and evaluating management (44%). See chart to the right:
63% Yes
37% No
Source: 2012 BDO Board Survey
42% Yes
58% No
Source: 2012 BDO Board Survey
Would you like your board to spend more or less time on each of the following topics? Topic
More
Less
Same
Succession planning
49%
1%
49%
Risk management
47%
7%
46%
Industry competitors
46%
3%
51%
Evaluating management performance
44%
3%
53%
Executive compensation
27%
20%
53%
Compliance and regulatory issues
21%
30%
49%
Source: 2012 BDO Board Survey
About the Survey 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. 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 40 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 1,118 offices in 135 countries. BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. For more information, please visit: www.bdo.com. Material discussed is meant to provide general information and should not be acted on without professional advice tailored to your firm’s individual needs. © 2012 BDO USA, LLP. All rights reserved. www.bdo.com
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