Risk Management, Accounting and Audit Matters
Over the past year, boards of directors continued to face
increasing scrutiny from shareholders and regulators, and the consequences of
failures became more serious in terms of regulatory enforcement, shareholder litigation
and market reaction. We expect these trends to continue in 2014, and proactive
board oversight and involvement will remain crucial in this challenging environment.
During 2013, activist investors publicly pressured all types of companies-large
and small, high-flyers and laggards-to pursue strategies focused on short-term
returns, even if inconsistent with directors' preferred, sustainable long-term
strategies. In addition, activists increasingly focused on governance issues,
resulting in heightened shareholder scrutiny and attempts at participation in
areas that historically have been management and board prerogatives. We expect
increased activism in the coming year. We also expect boards to continue to have
to grapple with oversight of complex issues related to executive compensation,
shareholder litigation over significant transactions, risk management, tax strategies,
proposed changes to audit rules, messaging to shareholders and the market, and
board decision-making processes. And, as evidenced in recent headlines, in 2014
the issue of cybersecurity will demand the attention of many boards.
In light of these pressures and concerns, this post reviews the following issues
that we believe will require the attention of boards of directors and management
in 2014:
- preparing for and responding to shareholder activism;
- potential regulatory developments involving proxy advisory firms;
- compensation plans and awards, including increasing shareholder litigation,
shareholder engagement and regulatory issues;
- risk management and proposed changes to auditing and accounting requirements;
- managing board communications and processes and dealing with shareholder
representatives on the board;
- the challenge of cybersecurity;
- challenges for multinationals in formulating and implementing tax strategies;
and
- using forum selection clauses in bylaws and charters to manage potential
shareholder litigation.
In the face of these challenges, directors should ensure that management regularly
works with its advisors to monitor and adapt to the continually changing environment,
and directors should participate in that engagement. For the coming year, we recommend
that companies carefully track their shareholder profiles and pursue proactive
approaches to potential activism. In addition, frequent and well-structured engagement
with shareholders will continue to be crucial. Directors should focus on management's
ability to communicate its policies and vision in a way that is understandable
and convincing to shareholders and the market, and management and directors should
be prepared to respond to increasing external pressures in a manner that both
thoughtfully takes those pressures into account and fully reflects their carefully
considered view of the long-term interests of the company.