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Disclosure Deluge Frustrates Many Board Directors

Nov 2nd 2016
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Facing an ever-growing number of financial reporting disclosures, public company board directors believe those involving audit are among the most valuable to investors, according to the 2016 Board Survey from BDO USA LLP.

But a majority (70 percent) of the 160 corporate directors surveyed believe there are too many disclosures in financial statements, which makes it hard to decide what information is most important.

Among the disclosures cited as important to investors, 49 percent said critical audit matters involving complicated judgments on material issues, while 71 percent believe disclosures regarding the audit committee’s oversight of the external auditor provide value to current and potential shareholders.

Further, if audit was involved in the reporting of non-GAAP measures, which increasingly are used in financial statements, investors would be more confident, according to 67 percent of directors.

But they were split on whether additional guidance from regulators about non-GAAP measures would be helpful. About half (51 percent) were in favor of regulators’ input, while 49 percent said no. Of those who favored more guidance, 46 percent said that earnings before interest, taxes, depreciation, and amortization (EBITDA) worries them the most.

About a third (29 percent) of directors said non-GAAP measures that provide information about business performance were helpful disclosures, while 19 percent cited risk management measures.

The survey “reveals frustration among boards with the growing number of disclosures in financial statements today, though they clearly see use for non-GAAP metrics especially with regard to executive compensation calculations,” said Amy Rojik, partner in the Corporate Governance Practice at BDO USA.

Here’s a snapshot of other concerns cited in the report:

Executive pay. Most (74 percent) oppose a ban on the use of non-GAAP measures in calculating executive pay.

Overboarding. Nearly three-quarters (74 percent) of directors believe corporate boards should limit the number of boards on which a director can serve. A majority (44 percent) of those polled said directors should be limited to three board positions.

Say-on-pay. The Dodd-Frank Act’s mandatory “say-on-pay” provision of 2011 requires shareholder votes on executive pay every one, two, or three years. How frequently that happens must be voted on every six years, which means that a lot of public companies will be conducting shareholder votes in 2017.

Most directors (56 percent) believe votes should be every three years, while 25 percent said every year and 19 percent said every two years.  But 51 percent of directors figure shareholders will vote for every year.

CEO-median employee pay ratio. Beginning in 2018, public companies must reveal the ratio of median employee pay to the CEO’s pay, based on 2017 compensation. About half (49 percent) of directors said their boards hadn’t yet taken action on the requirement, while 37 percent were calculating the ratios but won’t disclose them until the deadline.

Cybersecurity. For the third consecutive year, the majority of directors said their companies are spending more on cybersecurity, with average budget expansions of 22 percent. Boards with response plans to breaches in place increased from 45 percent in 2015 to 63 percent in 2016.

Related article:

SEC Audit Disclosure Proposal Not a Hit in Many Boardrooms

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