Grand Rapids companies prepare for a challenging annual meeting season
Shareholder meetings promise to be especially challenging for public companies in Grand Rapids this year. “Say on Pay” is finally taking hold and, as of May 17, nearly two dozen companies have failed to pass shareholder resolutions on pay. Compensation decisions will need to be handled delicately as boards will continue to face scrutiny from shareholders, and will have to balance company needs with the various regulations set in place. The Dodd-Frank Act is also impacting bank lending, prompting shareholders to question a company’s ability to access capital, fundraise and ultimately expand. One novel benefit of Dodd-Frank, however, is the “proxy access” rule that will allow large investors to place their own board candidates on company ballots.
Investors are also keenly interested in how management will navigate local economic turbulence this year. While the current economic climate in Michigan has shown improvement, much of the business community has not fully recovered from the recession. Shareholder meetings provide an annual forum for investors to dig into these microeconomic issues, and boards and management need to be prepared to address challenges through the lens of the local economy. While the local automotive sector was able to weather the recession and will most likely see business growth in the year ahead, others, like the smaller regional banks, are still struggling to access capital and may shutter their doors by the end of the year if they’re not able to raise needed funds.
With this in mind, corporate management and boards of directors should be prepared to address the following issues this year:
Proxy access. 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 Grand Rapids that have previously ignored corporate governance changes proposed by stockholders or have recently experienced narrow re-elections should be prepared for this tactic.
Impact of Dodd-Frank Act on executive compensation. 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 executive officers. Shareholders will want the compensation discussion and analysis of the proxy statement to provide meaningful and transparent disclosure of and rationale for the executive compensation structure. Companies should assess current pay practices and consider amending or eliminating programs that may trigger “no” votes.
*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 to shareholders.
Dodd-Frank on bank lending. Despite positive economic signs, such as increased consumer spending during the holidays and strong corporate profits, credit remains tight and the Dodd-Frank Act’s impact on bank lending is likely to increase the difficulty of borrowing by businesses. Grand Rapids shareholders will want to know how management plans to access capital to fund current operations, buildup inventories and fuel expansion should opportunities arise.
Accessing public equity markets. The number of initial public offerings 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 will surpass prior year numbers and may end up being the most active IPO month since 2007. In Michigan, however, there have not been any local company filings so far this year. Shareholders may want to know how the favorable IPO market will translate to new securities offerings from existing public companies in Grand Rapids, and whether management is considering any such offerings in the foreseeable future.
Revenue recognition. Beginning Jan. 1, 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 will want to know that the business’s accounting is in compliance with the new rules and what the impact may be on revenue.
Are companies prepared for IFRS? Sometime this year, the SEC will vote on if and when the U.S. will adopt the use of international financial reporting standards (IFRS). Grand Rapids shareholders will want to know if management is prepared to meet the potential timeline of 2015, what the conversion may cost and how it might affect them.
Thomas Hiller is a partner in the Grand Rapids office of BDO.