Newsletter | Volume 1

Issue I
Issue II
Issue III
Issue IV
Issue V
Issue VI
Issue VII
Issue VIII
Issue IX
Issue X
Issue XI
Issue XII
Issue XIII
Issue XIV
Issue XV

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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.