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The conflict of remuneration disclosure: more is not necessarily better!

The conflict of remuneration disclosure: more is not necessarily better!

By Mark Bussin, Chris Blair and Craig France who can be contacted at mbussin@21century.co.za

1. Introduction

Following infamous corporate failures over the past few years, there is increasing pressure being placed upon companies to get their governance in order. We have seen the King II Report on Corporate Governance placing requirements on companies to disclose more information, especially in the area of directors’ remuneration. The question being asked is: "If we disclose all our remuneration data, schemes and how they operate, we are giving our competitive advantage away." Where is the balance between transparency and competitive advantage?

2. JSE disclosure guidelines

Disclosure guidelines for each director’s remuneration in terms of the JSE requirements are:

# Disclosure of individual director’s emoluments: an analysis in aggregate and by director, of emoluments paid during the last financial period by the company, or receivable by directors, in their capacity as director, or in any other capacity, whether determined by the articles or not, distinguishing separately between executive and non-executive directors;


>> fees for services as a director;

>> management, consulting, technical or other fees paid for such services rendered, directly or indirectly, including payments to management companies, a part of which is then paid to a director of the company;

>> basic salary;

>> bonuses and performance-related payments;

>> sums paid by way of expense allowance;

>> any other material benefits received;

>> contributions paid under any pension scheme;

>> any commission, gain or profit-sharing arrangements; and

>> in respect of share options or any other right given which has had the same or a similar effect in respect of providing a right to subscribe for shares ("share options"):

# the opening balance of share options, including the number of share options at each different strike price;

# the number of share options awarded and their strike prices;

# the strike dates of differing lots of options awarded;

# the number of share options awarded and their strike prices;

# the closing balance of share options, including the number of share options at each different strike price;

# any shares issued and allotted in terms of a share purchase / option scheme for employees (or other scheme/structure effected outside of the issuer which achieves substantially the same objectives as a share purchase/option scheme), usually held as a pledge against an outstanding loan to an employee in for, including the number so issued and allotted, the price of issue and allotment, the release periods applicable to such shares and any other relevant information;

The issuer’s auditor shall modify the auditors report as considered appropriate in cases of non-compliance with any of the disclosure requirements set out in paragraphs 8.63 (b) to (I).

The user of the Annual Report can then see the whole picture of each director’s remuneration and reward levels, and compare this to the company’s share price performance and draw their own conclusions as to whether each director has been fairly rewarded for their efforts or more pertinently, has the shareholder shared equitably in the share price performance.

Disclosure, though, appears to be going even further down the disclosure road than many companies could feel comfortable with. This can be seen in the UK Directors Remuneration Report Regulations. Not only are the remuneration numbers required, there are detailed disclosure requirements which could open a company’s remuneration strategy and business strategy to the public domain. This could result in disclosure of competitive advantages a company may have through these strategies. Take the following disclosure requirements, for example:

# The remuneration report shall contain a statement of the company’s policy on directors’ remuneration. The policy statement shall include:

# For each director, a detailed summary of performance conditions attached to share options or any other long term incentive scheme

# An explanation as to why such performance conditions were chosen

# A summary of the methods used to assess whether the performance conditions are met, and an explanation as to why these methods were chosen

# If any performance condition involves comparison with external factors:

>> A summary of these factors

>> If the factors are companies or indices, the identity of these companies or indices

>> If any entitlement is not subject to performance conditions, an explanation as to why that is the case

>> The policy statement shall explain the relative importance of those elements which are, and those which are not, related to performance

>> The policy statement shall summarise and explain the company’s policy on:

>> The duration of contracts with directors

>> Notice periods and termination payments under such contracts

>> The remuneration report shall:

>> Contain a line graph that shows the company’s total shareholder return and a line that shows the performance of a chosen index. The graph is to cover the past five years

>> State the name of the index selected and set out the reasons for selecting that index

>> The remuneration report shall contain, for each director who served as such during the year:

>> The date of the contract, the unexpired term, details of notice periods

>> Any provision for compensation upon early termination of the contract

>> Details of other provisions to enable shareholders to estimate the company’s liability in the event of early termination of the contract

As can be seen from the above, there is little, regarding a company’s remuneration policy, that would not be open to the public domain. A company’s remuneration policy and strategy is what gives it a competitive edge in attracting and retaining key executives. Disclosure of these, would certainly be giving away a huge advantage. More importantly, a number of these disclosures would allow the public domain to have an insight into the business strategy – companies motivate performance criteria that drive their business strategy. Reading those in conjunction with the company financials may advertise the company’s business strategy – something that may give it a competitive advantage.

The shareholder is thus faced with a dilemma – better governance implies more detailed disclosure, but somewhere the line is crossed whereby the increased disclosure gives away competitive advantage. The shareholder may have to be satisfied with less disclosure that may lead to a competitive advantage that would enhance share price performance.

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Gary Watkins

Gary Watkins

Managing Director


C: +27 (0)82 416 7712

T: +27 (0)10 035 4185 (Office)

F: +27 (0)86 689 7862

Website: www.workinfo.com
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