Performing the duties of a CFO demands a strong awareness of the board of directors’ priorities. The law firm Akin, Gump, Strauss, Hauer & Feld, for which advising boards is a major practice area, on Wednesday released its list of the top topics for directors in 2014. Here are seven of them:
1. Oversee strategic planning amid continuing fiscal uncertainty.
Gridlock in Washington is wreaking havoc on business planning, Akin Gump contends. It cites the federal government shutdown in October as a prime example, which was ended only by a kick-the-can-down-the-road approach that will require Congress to again address spending levels by Jan. 15 and the debt ceiling by Feb. 7.
“Fearing that ‘governing by crisis’ is becoming the new norm, the business community remains skeptical that any meaningful long-term solution to the nation’s fiscal woes will be reached before the country has to suffer through this fire drill again,” the law firm writes.
Adding to the uncertainty is growing concern over the Federal Reserve’s massive bond-buying program. Critics charge that the unprecedented stimulus effort may be creating asset bubbles, and the financial markets have reacted strongly to any news about the Fed’s future plans for the program.
The uncertainty is a likely cause of pervasive cash-hoarding in corporate America. A Sept. 28 article in The Wall Street Journal estimated that companies are sitting on $1.8 trillion in cash and other liquid assets. “While the profits of S&P 500 companies have doubled since June 2009 and are near a 60-year high, wages and salaries as a percentage of GDP have fallen to the lowest level on record, and corporate capital expenditures are about one-third the average in previous recoveries,” Akin Gump says, citing a Dec. 6 Dallas Morning News article.
2. Address cybersecurity.
A recent Ponemon Institute study found that cyber attacks on companies have leaped by an astonishing 42 percent this year compared with 2012.
In addition to potential lawsuits, damage to reputation and loss of customers, companies are facing increasing regulatory scrutiny over the adequacy of their data-security measures. The Federal Trade Commission has brought more than 40 actions against companies for data breaches, claiming that failures to prevent unauthorized access to consumers’ information constitute unfair or deceptive acts.
Akin Gump made several recommendations for directors. They should have a clear understanding of who is responsible for cybersecurity oversight; seek education, as rapid advances in information technology may make keeping on top of the issues a challenge; understand the company’s cybersecurity risk profile; and ensure the adequacy of the company’s insurance coverage for data breaches.
3. Set appropriate executive compensation.
Shareholders and proxy advisory firms are increasingly focusing on pay for performance, and activists are targeting disparity between pay for executives and other employees.
Most boards took some action in response to their companies’ most recent say-on-pay shareholder polls, but only 3 percent reduced executive compensation, Akin Gump points out. Far more common steps included enhancing proxy statement disclosures, increasing the use of compensation consultants and making compensation more performance-based.
The law firm recommends that boards do more shareholder outreach. But many board members don’t want to: a 2013 study by PricewaterhouseCoopers found that 34 percent of directors believe it is not appropriate for the board to engage in executive compensation discussions with shareholders.
Akin Gump notes that “much to the delight of companies, the SEC continues to lag in its rulemakings on several [executive-compensation] provisions of the Dodd-Frank Act.” These include new disclosures on the pay disparity between the CEO and the median of all other employees; proxy-statement disclosure of the relationships between executive compensation and company financial performance; and the development and disclosure of clawback policies for the recovery of incentive-based compensation earned during periods for which financials are later restated.
4. Address the growing demands of compliance oversight.
Constantly changing and overlapping legislative and regulatory requirements are weighing down companies and usurping more board time. Akin Gump notes that since 1993, almost 82,000 new federal rules have been issued, while 2,305 rules are in the pipeline, many of them deriving from the Dodd-Frank Act and the Affordable Care Act.
“With the growing demands on directors’ time, there is increasing temptation for directors to adopt a ‘check-the-box’ approach to their legal and regulatory oversight responsibilities,” the law firm wrote. But that can lead to penalties: “Enforcement agencies often consider the effectiveness of a company’s compliance programs when deciding whether to bring charges or settle an enforcement action.”
And such enforcement is increasingly vigorous. For example, both the SEC and the Justice Department been ramping up their enforcement efforts under the Foreign Corrupt Practices Act. Two-thirds of the 20 largest criminal penalties in FCPA cases have been issued in the past three years, and three of the five largest have occurred in the past year.
5. Address the impact of health-care reform on the company’s benefits plans and cost structure.
Despite the continuing legal challenges and political hardball, as well as the delays and technical glitches, it appears that the Affordable Care Act is here to stay. As such, boards and companies need to be prepared for certain key provisions scheduled to take effect in 2014 and beyond.
For one, Akin Gump recommends that boards address strategies and costs related to “pay or play” — the decision to offer health insurance that meets minimum quality and affordability standards or else pay a penalty, usually $2,000 per employee per year.
There will also be penalties for companies that have at least 50 full-time employees and some of them them opt to use the public exchanges instead of company-provided insurance.
Some new lawsuits are focusing on language in the statute that says subsidies are available for qualified individuals who purchase insurance through an exchange “established by the state.” Because many states did not create their own exchange but instead opted for the federally run exchange, these lawsuits claim that the statute precludes individuals who purchase insurance through a federally run exchange from receiving subsidies.
If the lawsuits are successful, it’s likely that fewer employees will opt to use federally run exchanges and therefore less likely that employers would be subject to penalties.
Many companies are using health-care reform as a catalyst to review and redesign their health-care programs in order to slow rising costs. For example, Akin Gump notes, UPS recently announced it is eliminating coverage for employee spouses who have other available coverage, and next year Trader Joe’s and Home Depot are dropping health insurance for part-time workers and steering them toward the state insurance exchanges.
6. Determine whether the CEO and board chair positions should be separated.
During the 2013 proxy season, calls for an independent board chair were the second-most-frequent shareholder proposals submitted to companies. Even though JPMorgan Chase managed to win highly publicized battles in each of the last two years against activists seeking to separate the posts, currently held by Jamie Dimon, board leadership structure will likely continue to be a top priority for activists in 2014, Akin Gump says.
7. Ensure appropriate board composition in light of increasing focus on director tenure and diversity.
Public-company boards are having difficulty refreshing their ranks. According to the latest Spencer Stuart Board Index, the boards of S&P 500 companies elected 339 new independent board members this past proxy season, down 11 percent from five years ago and 14 percent from 10 years ago. Last year they elected just 291 new directors, the smallest number in more than a decade.
Low director turnover is drawing the attention of activist investors and governance advocates who question whether aging boards are keeping pace with the rapid technological advances and other new challenges companies face, Akin Gump writes. Critics also charge that the limited availability of new board seats hampers opportunities for achieving greater racial and gender diversity on boards and compromises board oversight, since long-serving directors are more likely to align with management.
Recent academic research lends some credence to the critics’ position. According to one study, the value of companies rises as the average tenure of outside board members increases to nine years, after which company value begins to decline.