We Don’t Speak No English Here – Poor Quality Disclosures Targeted
01/05/2007
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So far the Australian Securities and Investments Commission (ASIC), has not targeted poor public company remuneration report disclosures. Even if they did, it is unlikely they would go to the trouble of testing disclosures for readability.  A pity; because if the standard Gunning-Fog or Flesch-Kincaid tests of written English ability were applied we would know how Australian companies would stand up. 

We now have some inkling.  We subjected a random sample of remuneration reports to the Flesh-Kincaid test and found that a PhD is required to understand them.  If you are curious in regard to your own company’s remuneration report we suggest you cut and paste it into the link provided – it will only take a couple of minutes!  And, in case you are wondering, this article only requires a high school education to understand it.

ASIC’s US equivalent, the SEC, has already started to target large companies for the poor communication standards of their compensation reports.  Under new laws, these reports are very similar to Australia’s. 

Forty large companies were named by the SEC for not using “plain English” in their reports, according to a study that SEC chairman Chris Cox cited in a recent speech.

The SEC requires companies to report compensation for the highest-paid executives in clear terms. The SEC promised companies would provide “intelligible disclosure that can be understood by a lay reader” after the SEC overhauled executive-pay rules in July of 2006.

The part of the chairman’s speech that deals with compensation disclosures is quite long – below are just a few excerpts to give you a sense of his message:

– “I have to report that we are disappointed with the lack of clarity in much of the narrative disclosure that’s been filed with the SEC so far. Based on the early returns, the average Compensation Disclosure and Analysis section isn’t anywhere close to plain English. In fact, according to objective third-party testing, most of it’s as tough to read as a Ph.D. dissertation.”

– “For starters, the executive pay disclosures in the study were verbose. We had it in mind that they’d be just a few pages long, but the median length for the CD&As was 5,472 words, over 1,000 words more than the U.S. Constitution.”

– “Just as the Black-Scholes model is a commonplace when it comes to compliance with the stock option compensation rules, we may soon be looking to the Gunning-Fog and Flesch-Kincaid models to judge the level of compliance with the plain English rules.”

– “So where do you think our new Compensation Disclosure and Analysis sections come in, seeing as how they’re newly minted in “plain English” for the average investor? In these tests, the average Fog Index for the CD&As in the sample was 16.45. That’s about the same as an academic paper, such as a Ph.D. dissertation here at USC.”

– “But the SEC’s own qualitative review of this year’s proxy statements indicates that we have far to go before we can say that legalese and jargon have truly been replaced by plain English. It’s clear that many companies are letting lawyers have the final say on the CD&A. As the firm that undertook this study points out, many of the problems could easily have been fixed in just a few hours by a qualified copy editor. Retail investors deserve better.”

Realistically we cannot see ASIC gunning for poor written communication skills, given that it has yet to show any sign that it is policing basic disclosure compliance in remuneration reports.

© Guerdon Associates 2021
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