In 2011, companies will be working to better understand the impact of ongoing legislative and regulatory actions on their business. A significant amount of rulemaking activities are underway as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), an aggressive SEC agenda, and the convergence of accounting standards.
At a Board Governance Session on May 12th, PwC leaders discussed these developments and their impact on companies and what directors should be considering in the boardroom.
Highlights from this session include:
Regulatory reforms and proxy season developments
With Michael J. Gallagher, Managing Partner, Assurance Quality & Transformation, PwC and Catherine L. Bromilow, Partner, Center for Board Governance, PwC
Companies and corporate boardrooms continue to address new rules in today’s active regulatory environment. Mike and Catherine provided insight on current activities in Washington, the focus of the SEC, proxy season developments, and other activities that are impacting corporate directors and senior executives.
Read more.
Executive compensation—The shareholders’ view and other perspectives
With Scott N. Olsen, U.S. Human Resource Services Leader, PwC
Regulatory activity around executive compensation, which began in the wake of the financial crisis, has intensified. Executive compensation provisions of the Dodd-Frank Act mandated shareholder advisory votes on executive compensation beginning with the 2011 proxy season. This new requirement has, in turn, driven changes to executive compensation disclosures and the design of executive compensation programs in future years.
Read more.
Tax proposals—Responding to the state of the nation
With Edgar D. McClellan, Principal, Legislative & Regulatory Services Group, PricewaterhouseCoopers
Debate about how to deal with record federal deficits and debt will dominate the policy discussion in Washington for the next few years. Projected growth in the big three federal entitlement programs—Social Security, Medicare and Medicaid—is widely viewed as unsustainable. Restraining the growth in these programs, while fraught with peril politically, is a key part of any long-term budget solution.
Read more.
Regulatory reforms and proxy season developments
Michael J. Gallagher, Managing Partner, Assurance Quality & Transformation, PwC and Catherine L. Bromilow, Partner, Center for Board Governance, PwC
Companies and corporate boardrooms continue to address new rules in today’s active regulatory environment. Mike and Catherine provided insight on current activities in Washington, the focus of the SEC, proxy season developments, and other activities that are impacting corporate directors and senior executives. Key points discussed were:
- The political landscape in Washington makes for a challenging regulatory environment.
- The Dodd-Frank Act requires significant rulemaking by the SEC. Final rules are forthcoming on conflict minerals, the whistleblower bounty program, and compensation clawback policies, among others.
- A congressional hearing on the SEC’s proposed whistleblower rule was held on May 11, 2011. We do not know if the hearing will impact the rulemaking process at the SEC. Issuance of the whistleblower rules was previously postponed until early summer.
- The SEC continues to focus on loss contingency disclosures and accounting and reporting practices that could be viewed as “window dressing.” In some companies, directors are increasing their oversight of publicly disseminated company information, including listening to analyst calls.
- The FASB and IASB have prioritized three projects—revenue, leasing, and financial instruments. Completion of the projects has been deferred to the end of 2011. Despite the deferral, the timeline for completion remains challenging.
- The path to potential convergence with IFRS in the U.S. is uncertain, and it is unclear how the FASB’s deferral discussed above will impact the SEC’s decision on incorporation of IFRS into the U.S. reporting system.
- Three new board members have joined the PCAOB, including a new chairman. A top priority for the PCAOB is the auditor’s reporting model, and changes to that model are likely. Other priorities include communications with audit committees, foreign inspections, and making enforcement proceedings public.
- The SEC and PCAOB are actively monitoring overseas developments, including the European Commission’s Green Paper and UK House of Lords inquiry.
- This proxy season was witness to the increasing influence of proxy advisory firms, highlighting the need for companies to continue to address shareholder engagement. There was also a new trend for companies to push back on ISS’s voting recommendations, particularly their negative vote recommendations for say on pay voting.
- The UK Bribery Act becomes effective July 2011 and has significant implications on U.S. companies that do business in the UK.
- The pace of IT change in emerging technologies and social information management is accelerating, creating new risks for companies and creating concerns with how to oversee these risks at the board level.
Executive compensation—The shareholders’ view and other perspectives
Scott N. Olsen, U.S. Human Resource Services Leader, PwC
Regulatory activity around executive compensation, which began in the wake of the financial crisis, has intensified. Executive compensation provisions of the Dodd-Frank Act mandated shareholder advisory votes on executive compensation beginning with the 2011 proxy season. This new requirement has, in turn, driven changes to executive compensation disclosures and the design of executive compensation programs in future years. Regulation specific to the financial services industry has also continued, with detailed guidance for incentive arrangements and greater restrictions for a large number of financial services firms. Scott discussed how companies have approached the say on pay vote, how to evaluate voting results, and changes in executive compensation programs and policies, especially for the financial services industry. Key points discussed were:
- The regulatory environment around executive compensation has created new disclosure and governance requirements, with additional rulemaking expected in 2011.
- While most companies have received strong majorities on their “say on pay” votes, additional work will be required to explain how the results of the votes will impact future compensation decisions and be reflected in next year’s proxy disclosure.
- Changes in how companies engage with shareholders have already been observed, and are expected to continue to evolve.
- There is a greater focus on risk and sustainability in executive compensation arrangements, as evidenced by changes in performance metrics, lengthening of time horizons, and reductions in executive contractual provisions.
- Regulation related to executive compensation that is specific to the financial services industry should be monitored as it may spread to other industries.
- The demands of regulators and the preferences of investors around executive compensation are not necessarily aligned. This lack of a “one size fits all” model will lead companies to develop executive compensation strategies that fit their business strategy and to be more transparent in communicating those strategies with both of these important constituents.
Tax proposals—Responding to the state of the nation
Edgar D. McClellan, Principal, Legislative & Regulatory Services Group, PricewaterhouseCoopers
Debate about how to deal with record federal deficits and debt will dominate the policy discussion in Washington for the next few years. Projected growth in the big three federal entitlement programs—Social Security, Medicare and Medicaid—is widely viewed as unsustainable. Restraining the growth in these programs, while fraught with peril politically, is a key part of any long-term budget solution. Some believe that additional revenues also will be needed. The first attempt to address these difficult budget issues will unfold as Congress considers an increase in the limit on federal borrowing in the near term. Ed shared insight on the Washington tax environment, the federal budget, and potential tax reforms. Key points discussed were:
- The Administration has stated that any deficit reduction plan should allow an increase in the top individual tax rates, which is scheduled to occur in 2013. The current individual, capital gains, and dividend tax rates are set to expire at the end of 2012. Republicans generally oppose these rate increases and seek to extend current rates indefinitely.
- If the 15% dividend rate is not extended, current law will increase taxes on dividends paid to upper income individual shareholders to 43.4% in 2013. These rate increases may create significant challenges for stock valuations that are tied to dividends.
- Traditional revenue sources have sharply declined, but this has not caused Congress to seek more revenue from the corporate sector. Competing budget reform proposals generally have called for making the tax code more internationally competitive by reducing the corporate rate in a revenue neutral manner.
- Reducing the corporate tax rate in a revenue neutral manner is generally accomplished by broadening the corporate tax base through repeal of provisions that benefit specific sectors or business activities. However, for corporations that rely heavily on such provisions, a reduction of the corporate rate could result in a higher overall effective tax rate.
- Several important business-related tax provisions expire at the end of this year, including the R&D tax credit, active financing exception and the Controlled Foreign Corporation (CFC) look-through rule. There is concern that these provisions may not be extended in a timely manner.
- The focus of Congress on federal deficits, the federal debt limit, and the 2012 election cycle may delay significant action on tax reform until 2013.
