What’s the Association’s view of the current disclosure regime?
We continue to see corporations acting selectively in their disclosures; for example, reporting an ‘underlying profit’ which is not the statutory profit determined in accordance with international accounting standards, but a number which excludes certain supposed ‘one-offs’. As identified by ASIC, the one-offs tend to be expenses such that the profit disclosed is much higher than the statutory profit.
The ASA has made representations to ASIC to ensure that disclosure issues are scrutinised and identified. Whereas institutional investors and broker analysts have significant resources to reconstruct such disclosure anomalies, the small investor is often caught out. This is one reason why the presence of the ASA in the corporate marketplace is essential.
Then there is the disclosure of executive remuneration. It’s clear that the disclosure of companies at times is designed to obfuscate the true position. At least the Government has legislated the “two strikes” rule to provide a point of focus and mechanism for boards to be accountable to shareholders, when investors are not satisfied with the performance of the company or executives.
When ASA raises questions about remuneration, it is with reference to returns to shareholders. We see there is little alignment of executive remuneration with shareholder interests, which is the argument of directors justifying the corporate excess. The ASA advocates that it is not in the best interest of investors that their retirement futures and savings are managed by corporate Australia, where there is no clear link to shareholder returns. And the disclosure regimes are being used to selectively report information that is not easily understood by investors.
Share buy-backs are an area of confusion for small investors. Does this need closer scrutiny?
We receive many queries about buy-backs and capital management strategies, which are not well understood by investors. Such corporate actions also unsettle buy and hold investors, because they don’t want to go through the process of selling their stock in the buy-back and then buying it on-market.
Another big capital management issue is with hybrids. We’ve had questions from members who have not received distributions and do not understand how an income-style hybrid, as it would have been sold to them, does not produce ‘interest’ income. These are also an area of scrutiny for ASIC. There are risks for investors in hybrid securities and their terms and conditions are quite complicated for some investors to fully understand the consequences.
Then there is the issue of the establishment of the retail bond market. Historically, parcel size and limited disclosure requirements made corporate bonds only available to institutional investors and individuals who qualified as sophisticated investors under the provisions in the Corporations Act. The ability for small investors to invest in corporate bonds, which are like term deposits issued by highly rated corporations, is clearly an attractive alternative investment for a small investor’s portfolio. However, again the establishment of this market, its integrity and product disclosures are something that must be carefully scrutinised to ensure the interests of small investors are adequately safeguarded.
