In Australia listed companies are required to disclose the performance conditions used in executive incentive plans and explain why the performance condition was chosen and how it is assessed (Corporations Act s.300A(1)(ba)).  While most Australian listed companies provide detailed information on long term incentives, few disclose anything like as much detail for short term incentives, generally without explanation as to why this detail is lacking (see our GuerdonNews® review of ASX 50 compliance HERE).

The US disclosure requirements are now similar to those in Australia.  The US corporate watchdog, the Securities and Exchange Commission (SEC), introduced new executive compensation disclosure rules for the 2007 proxy season with the “…overarching goal [of making] disclosure more accessible and more useful to investors.” (Christopher Cox, Chairman of the SEC, 23 March 2007, available HERE).

According to Chairman Cox, the SEC had in mind that the Compensation, Discussion & Analysis reports  would be just a few pages long, and is pushing hard to have them written in plain English.  As mentioned in an earlier GuerdonNews® article (see HERE) the SEC has been disappointed on both counts.

To date, the Australian corporate regulator, ASIC, has apparently preferred to leave enforcement of disclosure requirements to shareholders via their non-binding vote on the directors’ remuneration report.  This is not withstanding ASIC Chairman, Mr Tony D’Aloisio, indicating that simpler and more targeted disclosure is one of ASIC’s current priorities for retail investors (refer to Mr D’Aloisio’s presentation to the Senate Standing Committee on Economics on 30 May 2007, available HERE).  ASIC has similar powers to the US’s SEC in forcing companies to comply.

Note that we have not mentioned external auditors and their role in regulation of remuneration reports.  While we do deal constantly with auditors on behalf of clients on remuneration report matters, they have tended to focus on assumptions used to value share options and performance rights, rather than the disclosure of performance requirements (perhaps this is because Guerdon Associates’ clients tend to be more complying?).

In any case, we think it likely that Australia’s ‘say on pay’ via shareholders’ non-binding vote, despite valid criticisms, does reduce the prospect of heavy-handed action by the regulator compared to the US system.  It is still early days, but over time we would expect that proxy, governance and shareholder groups would turn their attention to better disclosure of performance requirements.  When this happens, disclosure will improve.

In contrast, the US, despite pressure for its introduction, has not yet required a shareholders’ say on pay.  Unlike Australia’s ASIC, the SEC has not allowed much leeway for non-disclosure.  Stepping up its campaign to shed light on the mysteries of executive pay, from 21 August 2007 the SEC has sent letters to nearly 300 companies across America critiquing disclosures in this year’s proxy statements and demanding more information. 

Recipients of the letter include drug makers Pfizer Inc., Schering-Plough Corp. and Bristol Myers Sqibb Co.; insurance company Prudential Financial Inc.; Coca Cola Co. and General Electric Co.

The SEC says many companies are not disclosing enough information about the link between pay and performance.  In the case of one company, the SEC has requested information for each individual executive, including the business objectives to be met and any individual performance factors taken into account.

Companies may be concerned that the targets used in executive incentive plans are commercially sensitive, even if it would not qualify for confidential treatment under SEC rules (because it would not demonstrably cause competitive harm).

The next phase in the SEC’s campaign will be a report on its review of compensation disclosure in the 2007 proxies, to provide guidance for companies for their 2008 filings.

Meanwhile, Australian companies continue to gradually improve their disclosure through the annual feedback each gets from shareholders and proxy firms via the non-binding vote and its aftermath.

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