By Thomas Hiller
June 16, 2011
Shareholder meetings have been especially challenging for public companies in Michigan this year. Between Dodd-Frank, “Say-on-Pay,” new proxy access and revenue recognition rules, and the ongoing IFRS vs. GAAP debate, boards have had their hands full this season. In Michigan specifically, local economic turbulence continues to amplify many of these concerns. Shareholder meetings provide an opportunity to revisit business practices, and ensure that current policies and procedures are effectively aligned with the company’s overall goals. With this in mind, corporate management and boards of directors who have yet to participate in their annual meeting should be prepared to address an array of issues.
Impact of Dodd-Frank Act on Executive Compensation & Bank Lending
Dodd-Frank contains a number of provisions that will require risk assessments and broader disclosure of executive compensation practices. Say on Pay requires a vote (non-binding), at least once every three years, to approve the compensation of the company’s executive officers. Michigan shareholders have been asking companies to provide meaningful and transparent disclosure of the rationale for the businesses executive compensation structures shown in the annual proxy statements.
Say on Frequency requires a vote (non-binding) on whether shareholders will cast a “Say on Pay” vote every one, two or three years. Annual votes, likely to be supported by shareholder activists, allow shareholder input every year and eliminate the chance of poor compensation practices continuing for a long period. Triennial votes are consistent with compensation programs that seek to incentivize and reward performance over a multi-year period. Biennial votes are viewed as a balance between the two. Businesses must determine what frequency makes the most sense and communicate the benefits of this approach to shareholders. Early results indicate shareholders prefer an annual vote.
Despite positive economic signs, credit remains tight and the Dodd-Frank Act’s impact on bank lending is likely to increase the difficulty of borrowing by businesses. Michigan companies need to keep shareholders updated on how they are accessing capital to fund current operations, buildup inventories and fuel expansion should these opportunities arise.
Under a new “proxy access” rule, large investors - those with a 3 percent stake for a minimum of two years - can now place their own board candidates on company ballots, greatly reducing the costs for shareholder activists seeking to improve underperforming boards. Large companies based in Michigan that have previously ignored corporate governance changes proposed by stockholders or have recently experienced narrow re-elections should be prepared for this powerful new tactic.
Michigan IPO Market
The number of initial public offerings (IPOs) on U.S. exchanges more than doubled in 2010 and, despite the recent economic turbulence, U.S. IPO activity shows that May’s pricing and filing activity surpassed prior year numbers and ended up being the most active IPO month since levels seen in 2007. In Michigan however, there have not been any local company filings so far this year. Shareholders are expressing concerns over how the favorable IPO market will translate to new securities offerings from existing public companies in Michigan, and whether management is considering any such offerings in the foreseeable future.
Revenue Recognition and Compliance Concerns
Beginning Jan. 1, 2011, the new FASB revenue recognition rules for certain bundled product and service offerings are now fully effective. Shareholders of businesses that sell products with the promise of providing technical service or future upgrades are inquiring whether the business’s accounting is in compliance with the new rules and what the impact may be on revenue. This issue will continue to be prominent in the technology sector.
Thomas Hiller is a partner at BDO, a professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies. Hiller is based in Grand Rapids and he can be reached at [email protected].