Disclosing COVID-19 government support impact on profit and executive incentives
13/07/2020
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Proxy advisers, investors, and ASIC have now formulated their views on how to report COVID-19’s impact on earnings. Investors and proxy advisers will be very interested in how these various measures of earnings will impact executive incentive payments.

In the view of some stakeholders, executives whose industries have been most negatively impacted by COVID-19 should receive no incentives for the 2020 year, regardless how well they have performed.

Many companies have already announced that short-term incentives (STI) will not be paid in FY20 (see HERE). Other company boards are yet to decide.

Also singled out will be executives whose companies received government assistance such as JobKeeper, which may have had a material and positive impact on profit. Some investors and proxy advisers have expressed concerns about incentives being paid as a result of government support through JobKeeper. For example, refer to comments from Vas Kalesnikov of ISS (see HERE) referencing COVID government support, and Dean Paatsch of Ownership Matters, Louise Davidson of ACSI, and two institutional investors (see HERE). Ownership Matters have provided a 10-page guide to their clients to assist understanding the accounting issues that could mis-represent underlying company accounts and performance (resulting in incentive payments) because of government support (see HERE).

Investors and proxy advisors have indicated that they will scrutinise remuneration reports and look for how much JobKeeper assistance companies have received. The award of incentives that have effectively been paid with taxpayer money will be a red flag.  Some have suggested that an “underlying” profit amount, excluding JobKeeper, be disclosed in order to assess the reasonableness of incentive awards.

ASIC is sceptical about using alternative profit measures that remove the impact of the pandemic since they are likely to be misleading. However, it has acknowledged it is possible to quantify and disclose some transactions, such as government support, in the notes to the financial statement as a significant item that arose solely due to the impact of the COVID-19 pandemic (see the response to question 5 in its FAQ HERE). In addition, it has stressed the importance of noting underlying drivers of profit relating to the COVID-19 pandemic in the operational and financial review. Therefore such disclosures to assist investors and proxy advisers in their reviews would not be against the regulator’s expectations.

Companies hoping, however, to base incentive targets on adjusted profit, excluding the impact of COVID-19 (aka EBITDAC, see HERE) may find such profit numbers only acceptable in a limited form based on ASIC’s Q&A.

Some proxy advisers and investors will also be sceptical of any TSR-based incentive outcomes where there is an inference that TSR has been boosted by government support via JobKeeper. This will bring them into line with other proxy advisers and investors such as CGI Glass Lewis, which has been leery on the use of TSR measures for some years. In practice it will be very difficult to discern the impact of government support on TSR and hence incentive vesting. This would be a true test of board judgement and discretion (see ASIC’s view HERE), and its disclosure

Directors may have to tell executives who have worked harder than ever to keep people employed and deliver positive TSR that they can have their cake, but not eat it.

© Guerdon Associates 2020
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