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11-130AD ASIC calls for better disclosure in remuneration reports
As listed companies prepare for the release of the 30 June 2011 financial reports, ASIC has called for companies to provide more clarity on the remuneration arrangements for their directors and executives.
ASIC has identified a number of areas where disclosure to shareholders can be improved based on a review of 60 remuneration reports for listed companies for the year ended 30 June 2010. ASIC Deputy Chairman, Belinda Gibson, said the review was undertaken as a ‘health check’ on market practices in remuneration reporting.
‘In examining compliance with the statutory requirements, our review exposed some areas where disclosures about remuneration arrangements could be more effective’, Ms Gibson said.
These areas are:
the board’s policy on the nature and amount of remuneration of the key management personnel
the non-financial performance conditions in short-term incentive plans
why performance conditions have been chosen; and
the terms and conditions of incentive plans.
‘To assist directors in the preparation of the 30 June 2011 reports, we have included some of the better examples* of disclosure we observed during our review. We encourage company directors to prepare this year’s reports with the overriding objective in mind of explaining the relationship that exists between the company’s performance and the remuneration of its’ executives’, Ms Gibson said.
The attachment to this advisory provides further information on each of the four areas for improvement, including examples of where companies provided better disclosure.
Under section 300A of the Corporations Act 2001 (the Corporations Act), listed companies are required to publish annually in the ‘Remuneration report’ section of the director’s report for the financial year:
discussion of the board policy for remuneration
discussion of the relationship between the board policy and company performance
explanation of performance related remuneration and performance conditions
additional information where securities are an element of remuneration
additional information where options are an element of remuneration; and
additional information where a person is employed under a contract.
ASIC’s review examined the narrative content of the remuneration report and its compliance with section 300A of 60 companies in the ASX300. ASIC conducted this review to measure and identify areas where companies could improve their disclosure to shareholders.
In conducting its review, ASIC was mindful of the purpose of remuneration reports set out in the Explanatory Memorandum to the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Bill 2004. That Explanatory Memorandum stated:
In making disclosures about director and executive remuneration companies should approach their obligation from the starting point of providing shareholders with comprehensive disclosures. Shareholders should be placed in a position where they can understand the nature of the remuneration including any performance hurdles or contingencies on which the payment is based.
This will ensure shareholders are informed about the framework and main components of remuneration and understand the relationship between performance and remuneration. In addition the disclosure framework will limit the element of surprise in the event of a payment being made especially where that payment accrued over a number of years.
Attachment to 11-130AD: ASIC calls for better disclosure in remuneration reports
* These examples are for illustrative purposes only and ASIC is not mandating the form of words in the examples; the form of words will depend on the particular circumstances of the company. By providing these examples ASIC is not endorsing the remuneration report of any of the companies from which they have been drawn. Similarly, ASIC is not endorsing the remuneration strategy or arrangements of those companies.