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Shareholders call for clarity

IN the midst of the company reporting season and with the wreckage of major listed companies still fresh in their memory, shareholders are calling for greater corporate disclosure.

Information about executive remuneration and any contingent liabilities a company may face if it discharges a director are some of the main areas of concern.

However, financial experts believe Australian companies already have strict disclosure requirements and that increasing the amount of information they have to release could have a negative effect.

One of the main arguments against increased disclosure is that giving shareholders too much information will make it harder for them to make a decision.

Australian Shareholders Association WA branch chairwoman Anne Price said that, besides executive remuneration information, other things worth reporting included a list of a company’s top 20 shareholders and what its performance had been over, at least, the past five years.

“With an industrial company it is alright to include a performance list, but it’s not as appropriate for a resources company where its annual results can be affected by things such as exchange rates, hedging and commodity prices,” she said.

“We would also like to see more information on return on assets and return on equity and how intangible assets were valued.

“Personally I would like to know what the workload of the directors is. How many boards do they sit on? That sort of information is not readily available.

“Contingent liabilities is another area of concern. Do these liabilities exist for companies regarding contracts they’ve entered into with their executives? Hopefully we’ve heard the last of these big payouts.”

Financial analyst Trudo managing director Anthony Wooles said companies were becoming more transparent in their reporting.

“However, shareholders are still having to rely on CEOs and boards to say: ‘Let’s be up-front’,” he said.

“One of the issues is that a company can bury information in the way its business is structured. This doesn’t mean the company is not complying with the regulations.

“It’s a balance between not giving away strategic information while still giving shareholders an accurate impression of what’s going on.”

Mr Wooles said some accounting profit reporting methods did not necessarily give a true economic picture of the business, but still complied with the reporting regulations.

“I think the capital markets

are increasingly saying they don’t like surprises,” he said.

CPA Australia WA director Justin Walawski said he would like to see company reports that were clearer and easier to use.

“While transparency is valuable, we need to avoid information overload. Otherwise you can end up with the opposite of what you’re trying to achieve – a clear document that is valuable to a decision maker,” he said.

“Our position is, let’s get information in there that helps people to make decisions.”

Mr Walawski said there were some things that could be added to company reports to help share-holders.

“The experience of the board members and proposed board members could be valuable information to shareholders,” he said.

“I think another thing that should be included is whether any related party transactions exist.”

Ms Price said the sheer volume of information available to share-holders could prove problematic.

“It’s a matter of tying all of the information together. When you look at BHP’s financial statements it is very complex. The financial statements alone are about 200 pages long,” she said.

Chartered Secretaries Australia WA chairman Bernard Yates said that, while he thought most of the demands for transparency were reasonable, some were excessive.

“The law requires huge amounts of information to be disclosed now, most of which is of little use to the user,” he said.

“With prospectuses the law requires a company to include huge amounts of information, much of which is not digested and never referred to again. It’s a similar situation with annual reports.

“I’m not saying we shouldn’t make that disclosure, if that’s what our shareholders want. The law and practise and common sense says we should disclose everything of use to our shareholders.”

Mr Yates said there was too much emphasis placed on the reporting of executive remuneration packages.

“However, shareholders are clearly saying that they don’t want options schemes,” he said.

Australian Institute of Company Directors CEO John Hall said Australia’s reporting requirements were sound but he could see problems emerging with a move towards a more form-over-substance-based regime.

“In Australia the question has been whether the accountants have been producing reports meeting both accounting principles and accounting standards but now there is a move towards accounting standards,” he said.

“That means the accounts will become more pro-forma.

“We’re also facing adjustment issues as we move towards inter-national standards.”

Mr Yates said he, too, saw trouble ahead if Australia moved to a more rules-based regime.

“The danger I see in highly prescriptive regulations is that people will just stick to the letter of the law rather than the spirit of it,” he said.

Besides the accuracy and content of company reports, timeliness is also becoming an issue.

‘Window dressing’, where a company took a loan and buried it in its long-term liabilities while using the money to boost its cash statements, was one of the major concerns to shareholders in the 1980s. The loan could be taken before June 30 – showing a rosy picture to shareholders – and repaid shortly after July 1.

While this issue has been addressed by stronger corporate laws, it also could have been dealt with through more timely reporting.

Mr Walawski agreed timeliness was a concern.

“There are some overseas companies that are putting monthly financial statements up on their websites,” he said.

“It’s not something we necessarily advocate but it could be a solution.”

Ms Price agreed timeliness was an issue but said more financial statements would not necessarily be the answer.

“I personally think that sort of approach would lead to a short-term focus rather than a long-term wealth creation view,” she said.

“Companies that are seasonal could be adversely affected by this.”

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