The USA more often than not has led the world in standards of disclosure. Several countries have even copied elements of the oft-criticised 2002 Sarbanes Oxley Act. Recently the SEC has announced details of changes to executive compensation disclosures for implementation in 2007 (to view this on the Internet click HERE).Will this result in changes down the road for Australia? Are the proposed US changes to disclosure better than what Australia has now? In assessing this, an underlying assumption is that better disclosure attracts more and cheaper global capital. With over 42% of Australian listed company shares owned by foreign institutions, this has a great impact on the cost of doing business here.
It is understandably difficult to make a clear cut judgement when comparing public company governance standards internationally. While some countries are better in one area, they are lacking in others. But with our work often straddling several countries for our larger clients, combined with our consultants’ direct experience working in several different regimes, we have had a crack at comparing the standards of international disclosure. And while this may surprise some, Australia ranks very highly.
While policy disclosure requirements in Canada, the UK and Australia are broadly similar, Canadian disclosures probably are superior in governance aspects, followed by the UK and then Australia and the US. Canadian companies disclose the independence of directors and any possible influences or conflicts of interest. UK companies disclose who was present at remuneration committee meetings other than the committee members, who were external advisers, and if external advisers provide services to management. All countries except Australia require companies to have independent directors determining executive remuneration.
We think Australia is currently the world leader in disclosure of individual levels of remuneration. So far Australia is the only country that tabulates the accounting fair value of all remuneration received by directors and executives and requires this to be subject to audit.
Will this comparative disclosure advantage hold beyond 2007 when the SEC changes become effective in the USA?
The changes in the US are almost a carbon copy of Australia’s current disclosure, but with some important differences. The US will require disclosure of 3 years’ compensation data (for Australia is it 2 years). US companies will be required to disclose the actuarial present value of changes in pension benefits. This is a major change, given that a large proportion of US companies provide “special” pension arrangements that often escape scrutiny. This includes up to decades of “service credit” for determining defined benefit pension payouts that are worth many millions. In addition, they will include the present value of deferred compensation. This very tax ineffective and relatively expensive form of compensation hides many more millions of compensation that, in theory at least, cannot escape being quantified and reported in Australia (in any case, prevalence of this form of compensation in Australia is miniscule compared to the US). Long term incentives that are not share based will be reported as they are paid out, unlike Australia’s method of reporting cash LTI accrual for the period. Lastly, and importantly, they will have to more comprehensively disclose equity value received and accrued as compensation in the summary compensation table, and in various other tables.
So in summary, Australia will still be well positioned in global terms. It will still remain ahead of the UK in totalling all compensation items in one table, and in disclosure of individual equity rewards; and it will remain ahead of Canada for similar reasons until they copy US reforms (which they will find necessary because of capital market proximity and relatedness). From 2007 we believe Australian disclosure will remain the equal of the USA except in two major areas of difference. Australian cash LTI will be reported on an accrual basis relating to the service period, while the US will report cash LTI on pay out rather confusingly alongside current period accruals for other items. So in this regard Australia will probably remain ahead of the US. In the US it is proposed to disclose separately in tabular form equity compensation that is subject to performance and equity compensation not subject to performance. This is not done in Australia, and is the area of disclosure that is most seriously lacking, given that it is the fastest growing area of compensation. Will this change in Australia, and if so when?
The short answer is that we cannot see this happening in the near term. CLERP 9 and adaptation to new IFRS accounting standards has probably sated any appetite for further reform. And it could be argued that the Section 300A directors’ remuneration report describes all aspects of performance-related equity remuneration adequately. Lastly, it could be argued that private sector analysts currently assess, break down and publish equity compensation in performance and non performance related components from existing disclosures. That last claim is a little tenuous; given there is only one firm in Australia that does this (i.e. Guerdon Associates through the GuerdonData™ service). Nevertheless, our conclusion is that in regard to capital market disclosure standards on director and executive remuneration, Australia is currently world leader and should remain near best practice after new US disclosure standards are implemented in 2007.© Guerdon Associates 2021 Back to all articles