|
1.1. High Court rules that
the privilege against exposure to a penalty applies to Corporations Act civil
penalties
On 22 April 2004 the High
Court of Australia ruled that the privilege against exposure to a penalty
applies to proceedings brought under the civil penalty regime in the Corporations Act. In so doing, the High court upheld the
appeal of Jodee Rich and Mark Silbermann in an action brought against them by
the Australian Securities and Investments Commission and overturned the decision
of the New South Wales Court of Appeal. The
decision of the High Court means that Rich and Silbermann will not be required
to give discovery and file witness statements until the conclusion of evidence
by ASIC’s witnesses during its civil penalty proceedings. These proceedings are
scheduled to commence on 5 July 2004 before Justice Austin of the New South
Wales Supreme Court.
The background to the appeal is that in
December 2001, ASIC commenced civil penalty proceedings in the Supreme Court of
New South Wales against Rich, Silbermann and two other former directors of
One.Tel, seeking orders that each of the defendants be disqualified from
managing or being a director of any company for such period as the court thinks
fit. ASIC is also seeking compensation of $ 93 million from the defendants,
being the reduction in the value of One.Tel over a period of approximately eight
weeks during which time One.Tel continued to trade because of the alleged
failure of the defendants to properly discharge their
responsibilities.
ASIC obtained an order in its Supreme Court proceedings
that the defendants are required to give discovery and file witness statements
prior to the commencement of the proceedings. This order was appealed by Rich
and Silbermann, initially to the New South Wales Court of Appeal and then to the
High Court, which overturned the order.
The High Court has not yet handed
down its reasons. The appeal was heard on 22 April 2004 and on that same day the
High Court issued its decision and said that its reasons would follow at a later
date. The transcript of the appeal is available on the website of the High Court
at http://www.hcourt.gov.au
The issue before the High
Court (and before the lower courts) was whether the appellants are entitled to
resist the orders for discovery and for the filing of witness statements on the
basis of the privilege against self-exposure to a penalty. The lower courts
concluded that the fact that disqualification orders were a principal component
of the relief sought by ASIC did not make it appropriate to classify the
proceedings as proceedings for the imposition of a penalty for the purpose of
the privilege invoked by the appellants. The courts relied on case law which
characterised orders such as disqualification orders as protective rather than
punitive in nature.
The decision of the New South Wales Court of Appeal
was discussed in the December 2003 issue of this bulletin (Bulletin No 76). The
decision of the High Court will be the subject of further analysis in this
bulletin when the High Court publishes its reasons.
 
1.2 Ernst & Young found
to breach auditor independence rules
On 19 April 2004 the
United States Securities and Exchange Commission announced that an
Administrative Law Judge has issued an Initial Decision finding that
Ernst & Young LLP (Ernst & Young) was not independent when
it audited the financial statements of PeopleSoft Inc.
(PeopleSoft) for fiscal years 1994 through 1999.
The independence violations occurred while Ernst & Young
was PeopleSoft's auditor. Ernst & Young held a PeopleSoft license,
which made possible a software product for which Ernst & Young
paid royalties to PeopleSoft, and Ernst & Young worked
with PeopleSoft to obtain contracts to implement PeopleSoft
software.
The judge concluded that Ernst
& Young's conduct violated Rule 2-02 of securities and Exchange
Commission's (Commission) Regulation S-X, caused PeopleSoft to violate Sections
7(a) and 10(a) of the Securities Act of 1933, Sections 13(a) and 14(a)
of the Securities Exchange Act of 1934 (Exchange Act), Rules 13a-1 and
14a-3, and Section 4C of the Exchange Act and Rule 102(e) of the Commission's
Rules of Practice.
The Initial Decision orders Ernst & Young
to:
·
cease and desist from
violating and causing violations of the statutory
provisions cited above;
·
disgorge audit fees of US
$1,686,500 and prejudgment interest; and
·
retain an independent
consultant to review its procedures and practices
on auditor independence in
connection with business relationships with audit
clients.
The Initial
Decision also suspends Ernst & Young from accepting audit engagements for
new Commission registrants for six months.
1.3
Code of Standard Practices aims to restore confidence in credit rating
system
In a move designed to restore
confidence in the credit rating process, three prominent global treasury and
corporate finance associations announced on 14 April 2004 the release of an
Exposure Draft of a "Code of
Standard Practices for Participants in the Credit Rating
Process."
The Code of Standard Practices is designed to restore confidence among issuers,
credit rating agencies, investors and the regulators who oversee the credit
rating process by creating enhanced transparency, protecting non-public
information, guarding against conflicts of interest, and improving
communications with market participants.
The Association for Financial
Professionals (AFP), an organization of 14,000 corporate finance and treasury
professionals in the United States, along with the United Kingdom's Association
of Corporate Treasurers (ACT) and France's Association Française des Trésoriers
d'Entreprise (AFTE), together took the initiative to develop the Code of
Standard Practices for participants in the credit rating process. The three
associations undertaking this effort are each leaders in their geographic
regions and collectively they represent more than 18,500 corporate treasury and
finance professionals. The Code of Standard Practices is further supported by
the International Group of Treasury Associations (IGTA) and the Euro
Associations of Corporate Treasurers (EACT).
The Associations
are soliciting comments from interested parties through 31 May 2004 on the
Exposure Draft and regarding the appropriate manner in which to incorporate the
final Code into the credit rating process.
Concerns about the credibility and
reliability of credit rating agencies and the credit rating process have
heightened during the past several years due to the unforeseen collapse of
Parmalat, Enron, WorldCom, and other companies. These concerns prompted the
United States Securities and Exchange Commission (SEC) to conduct hearings in
November 2002 and issue a Concept Release in June 2003 on rating agencies and
the use of credit ratings under Federal securities laws. The G7, Financial
Stability Forum, and European Parliament are also looking into ways to regulate
rating agencies, yet up to now, these concerns have not materialized in any
specific action.
The Code of Standard Practices for
participants in the credit rating process is intended to improve investor and
issuer confidence in the credit rating agencies and the judgments they
promulgate in their reports. The Code includes recommendations for regulators,
credit rating agencies and issuers of debt. The Rating Agency Code of Standard
Practices includes recommendations to improve the transparency of the rating
process, protect non-public information that is provided to credit rating
agencies, protect against conflicts of interest, address the issue of
unsolicited ratings, and improve communication with issuers and other market
participants.
Regulatory recommendations focus
on the credibility and reliability of ratings, transparency in the rating agency
recognition process and improving ongoing regulatory oversight of approved
rating agencies. Regulatory recommendations also include removing barriers to
competition in the credit rating agency marketplace.
Recognizing that the credibility
and reliability of credit ratings is heavily dependent on issuers providing
accurate and adequate information to the credit ratings agencies, the Issuer
Code of Standard Practices outlines issuer obligations in the credit rating
process. These obligations are intended to improve the quality of the
information available to the credit rating agencies during the initial rating
process and on an ongoing basis, and to ensure that issuers respond
appropriately to communications received from credit rating
agencies.
The Exposure Draft of the
Code of
Standard Practices for Participants in the Credit Rating
Process is
available at www.AFPonline.org, www.treasurers.org, www.afte.com.
1.4 New Zealand
Insolvency Law Reform Bill released
On 14
April 2004 the New Zealand Commerce Minister Margaret Wilson released the draft
Insolvency Law Reform Bill for public consultation.
The Bill introduces
a voluntary administration procedure for companies that can be rehabilitated.
This will bring New Zealand into line with other OECD countries. The procedure
is closely modelled on Australia's voluntary administration regime, making it
easier to conduct business rehabilitation involving trans-Tasman businesses.
The Bill
also introduces a new no-asset procedure. This reflects a concern that some of
the more punitive restrictions of bankruptcy are not appropriate for individuals
that have few or no assets and may have become insolvent through no fault of
their own. The no-asset procedure will provide them with a better opportunity
for a fresh start.
The Government is also seeking feedback on two
remaining policy issues - regulating insolvency practitioners and the priority
of employee entitlements to wages in lieu of notice.
The insolvency
review began in 1999 with the release of Law Commission Reports on priority
debts and cross-border insolvency. The government has also considered ways to
facilitate business rehabilitation, the need for alternatives to bankruptcy for
debtors with few or no assets, and the role of the State in insolvencies.
The Bill is available at http://www.med.govt.nz/ri/insolvency/review/draft-bill/
Submissions should arrive at the
Ministry by the close of business on Friday, 11 June 2004. They
can be sent either by e-mail (in Microsoft Word 2000 format or compatible) to insolvencyreview@med.govt.nz, or
in hard copy to: Insolvency Law Review, Ministry of Economic Development, PO Box
1473, Wellington, Attention: Kristina Ryan, Regulatory and Competition Policy
Branch.
1.5 US
SEC adopts fund disclosure rules
On 13
April 2004 the United States Securities and Exchange Commission voted to adopt
disclosure requirements for investment companies regarding their policies and
procedures on market timing, fair valuation and selective portfolio
disclosure.
The Commission voted to adopt amendments that are
designed to improve transparency of policies and procedures of mutual funds and
variable insurance products with respect to market timing. The amendments will
also require mutual funds and insurance company managed separate accounts that
offer variable annuities to disclose the circumstances under which they will use
fair value pricing and to disclose their policies and procedures regarding
disclosure of portfolio holdings.
(a) Disclosure of market
timing policies and procedures
The amendments will:
·
require a mutual fund to describe in its prospectus the risks, if
any, that frequent purchases and redemptions of fund shares may present for
other shareholders;
·
require a
mutual fund to state in its prospectus whether or not the fund's board of
directors has adopted policies and procedures with respect to frequent purchases
and redemptions of fund shares and, if the board has not adopted any such
policies and procedures, state the specific basis for the view of the board that
it is appropriate for the fund not to have such policies and
procedures;
·
require a
mutual fund to describe with specificity in its prospectus any policies and
procedures for deterring frequent purchases and redemptions of fund
shares;
·
require a
mutual fund to describe in its Statement of Additional Information any
arrangements to permit frequent purchases and redemptions of fund shares;
and
·
require
similar disclosure for insurance company separate accounts offering variable
insurance contracts.
(b) Disclosure regarding fair
value pricing
The amendments will
clarify that mutual funds and insurance company managed separate accounts that
offer variable annuities are required to explain in their prospectuses both the
circumstances under which they will use fair value pricing and the effects of
using fair value pricing.
(c) Disclosure of
policies regarding disclosure of fund portfolio holdings
The amendments will require mutual
funds and insurance company managed separate accounts that offer variable
annuities to describe in their Statements of Additional Information any policies
and procedures with respect to the disclosure of portfolio securities and
ongoing arrangements to make available information about portfolio securities to
any person.
Initial registration statements, and post-effective
amendments to effective registration statements, filed on or after 5 December
2004, must include the disclosure required by the amendments.
Further
information is available on the SEC website at http://www.sec.gov/
1.6 UK Accounting Standards Board issues standard on share
options
On 7 April
2004 the United Kingdom Accounting Standards Board (ASB) issued FRS 20 (IFRS 2)
"Share-based Payment". The new FRS requires companies to recognise an expense,
measured at fair value, in respect of their employee share option plans, share
purchase plans, and other share-based payments. It is mandatory for
accounting periods beginning on or after 1 January 2005 for listed entities and
1 January 2006 for all other entities.
The new standard has the effect of
implementing in the UK IFRS 2 "Share-based Payment", which was published in
February by the International Accounting Standards Board (IASB). The
requirements of FRS 20 are identical to those of IFRS 2, except that
implementation of the standard for unlisted entities has been deferred one year
to allow more time for unlisted entities to prepare themselves for
implementation and entities applying the Financial Reporting Standard for
Smaller Entities (FRSSE) are exempt from the standard.
Announcing the
decision, Mary Keegan, Chairman of the ASB, said:
"This is an important
standard which addresses a weakness in the existing requirements. At last
there will be comparability between companies that use share-based payments to
pay employees and other suppliers and those that don't. Implementing an
international accounting standard in this way also shows how committed we are to
the convergence process, a process which is to the benefit of preparers and
users alike."
"Share-based payments" include:
·
all executive share option and share purchase plans and all
employee share option and share purchase schemes, including all Save As You Earn
(SAYE) plans and similar arrangements;
·
arrangements
such as share appreciation rights, where a cash payment is made, the amount of
which depends on the share price; and transactions with suppliers that involve a
share-based payment being made in exchange for goods or non-employee
services.
Further information
relating to FRS 20 is available from the ASB website at http://www.frc.org.uk/asb
1.7
New study of US option grants
On 7 April 2004 the Investor
Responsibility Research Center (IRRC) published a study showing that although
potential dilution from stock-based incentives continued to rise last year,
results from IRRC’s Stock Plan Dilution 2004: Overhang from Stock Plans at
S&P Super 1,500 Companies show the rate of option grants beginning in
2002 was cut by companies, a trend that’s likely to continue. Findings also show
that the rising overhang levels were largely attributable to stock options that
remained underwater at the end of 2002 and into 2003.
The study
measures equity dilution disclosed by companies in the S&P 500, MidCap, and
SmallCap indices—for this edition, a total of 1,466 companies that filed
documents related to fiscal 2003 prior to 1 August 2003, the latest
comprehensive information available, were analysed.
IRRC
calculated each company’s overhang by dividing the sum of outstanding stock
option grants, plus shares reserved for future awards (including new shares
authorized in 2003), by the number of total common shares outstanding. Overhang
is one way that shareholders gauge the potential dilution to their holdings from
the equity being transferred to employees via stock incentive programs. Overhang
and grant rate comparisons were also analysed and compared in 10 economic
sectors and within cross-sections by market cap and economic
sector.
(a) Dilution “creep” continues
Overall
equity overhang rose for the seventh consecutive time since the initial release
of the study in 1997. The average potential dilution from stock plans at all
S&P 1,500 companies as of 2003 stands at 17 percent, up from 15.7 percent
the prior year. Median overall dilution is 16.3 percent, compared with 14.8
percent previously. Other key findings include the following:
·
Dilution levels rose
in all three S&P indices. Generally, the smaller the market capitalization
of a peer group, the higher its dilution level. The average dilution of S&P
500 companies is 16.9 percent in 2003, up from 15.4 percent the prior year; the
average for MidCap companies is 17.4 percent, up from 16.7 percent; and the
average for S&P SmallCap companies rose to 19.3 percent from 17.7
percent.
·
Nine of the 10
industry sectors analyzed showed an increase in dilution from the previous
year—average dilution decreased only for companies in the Industrials group, to
14 percent, which was down just 0.3 percentage points from the prior
year.
·
Information
Technology companies continue to have the highest average dilution, at 25.7
percent, while Energy and Utility companies still maintain relatively low
average dilution, 8.9 percent and 9.4 percent, respectively.
·
The biggest 1-year
increase was recorded in the financial sector, which had reported lower than
average dilution rates from 2000 to 2002, but showed the highest increase of any
sector most recently—16.6 percent in 2003, as compared to 13.8 percent the prior
year. At least some of that may be explained by enhanced disclosure requirements
for non-shareholder approved plans. Goldman Sachs had the highest overhang among
all study companies, a large 98 percent, driven primarily by a newly adopted
stock plan with a share replenishment (“evergreen”) feature.
·
An increasing number
of companies have very high dilution levels. In 2003, a total of 67 companies in
the study (or 4.6 percent) had dilution levels above 40 percent. In 2002, 3.6
percent of study companies had overall dilution above 40 percent, while in 2001
a total of 3 percent of study companies had such high dilution
rates.
(b) Run
rates reverse course as use of restricted stock grows
The bear market and
financial scandals have reduced the popularity of stock options. “For long-term
investors, the focus on short-term earnings and stock price that options seem to
motivate can be counterproductive,” says study author Annick Dunning, a senior
analyst and project manager in IRRC’s Governance Research Service. Companies
seem to have gotten the message. For the first time since 1997, it appears that
most trimmed their option grants in 2002, according to disclosures made last
year. The average option run-rate—the total number of options granted, divided
by total outstanding common shares—dropped over both the latest one-year and
average three-year periods. The change is most dramatic when comparing the
one-year average grant rates, which fell to 2.5 percent from 2.9 percent the
prior year.
Most companies that have announced they will reduce or
eliminate option grants are switching to more restricted stock awards. The trend
is also evidenced when comparing stock incentive plans adopted in 2003 with
those adopted in 2000. While only 69 percent of stock plans launched in 2000
allowed for time-lapsing restricted stock grants, 81 percent of those adopted in
2003 do so.
(c) Voting opposition flat last
year
Despite the continued rise in overall dilution levels,
opposition to stock-based incentive plans decreased very slightly for the second
consecutive year and now stands at 21.9 percent (down a slight 0.3 percentage
points from 2002.) Nevertheless, voting practices indicate that the higher the
dilution, the more likely shareholders are to vote against a stock plan. Stock
plan proposal dilution that exceeds 10 percent often triggers a vote against a
stock plan by institutional investors. Similarly, overall company dilution of
above 20 percent raises a red flag for investors, and stock plans at these
companies face stiff shareholder opposition.
(d) About the
study
IRRC
extracted data on dilution from company proxy statements, annual reports and 10K
forms. The 2004 edition of the study includes:
·
487 S&P 500
companies
·
391 S&P MidCap
companies
·
588 S&P SmallCap
companies
Stock Plan Dilution
details the specific factors contributing to each company’s overhang level. It
also includes analysis by peer groups, as well as separate sections dealing with
stock plan features such as awards types and repricing policies; stock purchase
plans; regulatory developments; and trends in shareholder voting on stock
incentive plan proposals.
1.8 News Corporation to reincorporate in the United
States
On 6 April 2004 News
Corporation announced that it will pursue a reorganization that would change the
Company's place of incorporation from Australia to the United States. In
connection with this reorganization, News Corporation would also acquire from
the Murdoch Interests the 58% controlling holdings in Queensland Press Pty Ltd
(QPL) not currently owned by the Company.
According to the News
Corporation announcement, the proposed reorganization would benefit all
shareholders by increasing the scope and depth of the Company's shareholder base
and increasing its liquidity, while maintaining News Corporation's listings on
the Australian Stock Exchange. The proposal also reflects News Corporation's
presence in the U.S., where more than 75% of the Company's revenues and profits
are generated. For various Australian purposes, News Corporation is already
treated as foreign-owned. The transactions contemplated in this proposal will be
non-taxable to the vast majority of shareholders.
The proposal is subject
to shareholder approval. The Murdoch family interests will not vote with other
shareholders on any of the proposed transactions and the Murdoch voting
interests will not increase if shareholders approve the proposal.
The
Board has established a special committee of non-executive directors to evaluate
the reorganization and the QPL transaction and the benefits to the Company's
shareholders. The completion of the reorganization and the QPL transaction will
be subject to obtaining regulatory clearances, court approvals, certain tax
rulings and the requisite vote of the Company's shareholders and option holders.
In addition, the reorganization and QPL transaction will be subject to obtaining
independent appraisals and fairness opinions.
The special committee will
retain independent legal counsel and investment banking advice to assist the
committee in evaluating the reorganization and the QPL transaction. If approved
by the special committee and subsequently by the Board of Directors, the
transactions will be presented to an Australian court and then submitted to News
Corporation's shareholders and option holders for approval. If approved, the
reorganization is expected to be completed by the end of this calendar
year.
(a) Reorganization
The proposed
reorganization will be accomplished under Australian law whereby existing
holders of News Corporation's ordinary and preferred shares, including those
ordinary shares and preferred shares represented by American Depositary Shares
(ADRs), will exchange their shares for equivalent shares of voting and
non-voting common stock in New News Corporation, a Delaware corporation that
will become the new parent company. The new shares will have essentially the
same rights as the Company's existing ordinary and preferred shares. The
exchange is expected to be tax-free for the vast majority of News Corporation's
shareholders.
Following the reorganization, the Board of Directors of
New News Corporation would consist of the existing directors of News Corporation
and New News Corporation will be renamed News Corporation.
(b)
Benefits to shareholders
The reincorporation is expected to
benefit all shareholders by increasing the scope and depth of the shareholder
base, improving trading liquidity, enhancing access to the capital markets and
making the Company's shares eligible for inclusion in a variety of U.S.-based
indices.
In addition, many U.S. investment institutions have formal or
informal limits on ownership of non-U.S. companies securities and on ownership
of preferred shares, such as News Corporation's preferred shares. These
limitations would not restrict the ownership of the non-voting common stock of
News Corporation after the proposed reorganization.
The Company believes
the increased demand for News Corporation stock following a US reincorporation
may narrow the historic trading discount of the non-voting shares relative to
the voting shares, thereby reducing the Company's cost of capital.
The
Company expects that after the reincorporation News Corporation's primary stock
exchange listing will be on the New York Stock Exchange and, in addition to the
Australian Stock Exchange, the Company intends to maintain a secondary listing
on the London Stock Exchange.
(c) QPL
transaction
As part of the proposed arrangements, the special
committee of the Board will also consider the acquisition by the Company of
entities which own the approximately 58% controlling interest in QPL from
certain entities and trusts, the beneficiaries of which include Mr. Rupert
Murdoch, members of his family and certain charities (the Murdoch Interests).
News Corporation currently owns the approximately 42% remaining interest in QPL.
QPL, one of Australia's most profitable newspaper publishing groups, is the
publisher of the Courier-Mail, Sunday Mail and other fast-growing newspapers. In
addition, QPL owns an approximately 15.2% voting interest in News Corporation,
currently controlled and voted by the Murdoch Interests.
The Murdoch
Interests will receive voting common stock in New News Corporation in exchange
for the value of their pro-rata ownership of the newspaper publishing business
held by QPL and sold to the Company. The amount of New News Corporation shares
issued for the Murdoch Interests holdings of the QPL publishing business will be
based on a mutually agreed valuation of the net value of that business which
will be reviewed by independent appraisers and the special committee of the
Board. The Board of Directors believes the QPL transaction provides News
Corporation with a unique opportunity to acquire 100% ownership and control of
QPL, thereby simplifying the ownership of QPL, eliminating related-party
considerations, and permitting consolidation of QPL for financial and tax
purposes.
(d) Resulting ownership by Murdoch
Interests
As part of the reorganization, certain of the related
entities comprising the Murdoch Interests will be conveyed to News Corporation
in return for shares in New News Corporation (net of certain debt being assumed
by the Company). As a consequence, the Murdoch Interests will directly own
shares in New News Corporation, rather than indirectly owning shares in News
Corporation through various entities. Like all other shareholders, the Murdoch
Interests will receive identical voting and non-voting shares in New News
Corporation in exchange for the shares in News Corporation that they own
directly. In addition, in connection with the QPL transaction, the Murdoch
Interests will receive directly shares in New News Corporation representing
their pro-rata 58% ownership in each class of the News Corporation shares
currently held by QPL.
Based upon the Company's current assumptions of
the value of the QPL business and the current price of News Corporation Ordinary
Shares, after the completion of the proposed transactions the Murdoch Interests
will directly own slightly less voting equity of New News Corporation than the
voting equity of News Corporation presently held and controlled by the Murdoch
Interests. In addition, the Murdoch Interests will have a slightly greater
percentage of economic interest in New News Corporation resulting from the
exchange of their interests in the QPL publishing business for voting stock in
New News Corporation.
(e) Required approvals
The
holders of ordinary shares, preferred shares and employee stock options, each
voting as a separate class, must vote to approve the transactions. In order to
be approved, 75% in number of shares held by holders in each class that vote and
50% of the number of holders in each class that vote must approve the
transactions. Before the shareholders meeting, all News Corporation shareholders
and option holders will receive an Information Memorandum, including opinions of
independent experts, explaining the terms of the transactions.
The
reorganization and the QPL transaction are subject to obtaining certain
regulatory approvals, including approval of the Australian Foreign Investment
Review Board and obtaining for New News Corporation a primary listing on the New
York Stock Exchange and a full foreign listing on the Australian Stock Exchange
and obtaining appropriate tax rulings.
The News Corporation Limited
(NYSE: NWS, NWS.A; ASX: NCP, NCPDP) had total assets as of 31 December 2003 of
approximately US$52 billion and total annual revenues of approximately US$19
billion. News Corporation is a diversified international media and entertainment
company with operations in eight industry segments: filmed entertainment;
television; cable network programming; direct broadcast satellite television;
magazines and inserts; newspapers; book publishing; and other. The activities of
News Corporation are conducted principally in the United States, Continental
Europe, the United Kingdom, Australia, Asia and the Pacific Basin.
Information regarding the reorganization and QPL transaction, including
questions and answers, is posted on the News Corporation web site, www.newscorp.com/reorg
1.9 Group of 100
seeks 12 month deferment of 2005 deadline for International Accounting
Standards
On 6 April
2004 the Group of 100, which represents the CFOs of Australia's largest
companies, issued a statement reiterating that deferment in the introduction of
International Accounting Standards for 12 months is appropriate but with the
option for Australian companies to adopt all standards from 1 January 2005, if
they wish. The statement follows the Financial Reporting Council's in principle
decision not to defer the implementation of international accounting standards
on 1 January 2005.
The National Executive of the Group of 100 said that
while it continues its strong support for IASB Standards it believes
implementation of the FRC's Year 2005 strategy should be deferred for 12 months
or until the European Union endorsement of all the standards occurs, in
particular IAS 32 and IAS 39 which relate to financial instruments. The Group of
100 stated that it strongly supports the objectives of the 2005 strategy but is
concerned with the delays in the acceptance of IAS 32 and IAS 39 in Europe and
the potential for substantial amendments to the Australian
equivalents.
Copies of submissions made to the FRC on this subject may be
accessed from the Group of
100 website (www.group100.com.au).
1.10 Benchmarking company secretariat functions in
Australia
On 6 April 2004
Chartered Secretaries Australia (CSA), released its second survey,
Benchmarking Company Secretariat Functions in Australia.
(a) About the
study
The aim of the
survey was to understand the standards and practices of company secretariat
functions in Australian companies.
Following an earlier
survey in 2001, the second survey was conducted late in 2003. The survey
examines the following areas:
·
company secretaries’
roles and functions
and the staffing and structure of secretariats
·
management of boards
and their committees, including the
impact of technology and performance indicators for the management of boards and
their committees
·
governance, including
directors’ deeds and corporate governance
·
shareholder
management, including annual
reports, annual general meetings, webcasting, electronic communication with
shareholders and corporate compliance
·
share
management, including registry
management and dividend payments and
·
costs and
salaries, including
shareholder servicing costs, the indicative costs of company secretariat
functions and salaries paid for company secretariat roles.
The survey was
issued to Australia’s top 200 listed companies and saw a response rate of 33.5
per cent, which is a statistically valid sample representative of small,
mediumsized and large companies. It should be noted that all results are
susceptible to some statistical aberrations from changes in survey respondents.
Typically, survey respondents represented companies that were:
·
publicly
listed
·
had market
capitalisations of between $500 million and $10 billion
·
had annual turnovers
of between $500 million and $10 billion
·
had between 10,000
and 50,000 shareholders
·
had fewer than 10
subsidiaries in Australia and fewer than 10 overseas
subsidiaries.
Table: Size of
companies surveyed
|
Breakdown by company
size |
% of survey
respondents |
|
Small Companies:
<$500m market capitalisation |
16.4% |
|
Medium Companies:
Between $500m–$3bn market capitalisation |
35.8% |
|
Large Companies:
>$3bn market capitalisation |
41.8% |
|
Did not
answer |
6.0% |
(b)
Summary
The following is
extracted from the study’s executive summary.
(i) A changing
landscape
The role of the
company secretary is clearly still evolving. The focus on corporate governance and
investor scrutiny, expanded and delineated by the new ASX Corporate Governance
Council’s Principles of good corporate governance and best practice
recommendations (ASX CGC guidelines), continues to change the
landscape of the company secretary in many ways.
The findings of the
study show that the company secretary’s traditional responsibilities, timely
management of the meetings of the board, its committees and shareholders and
facilitation of continuous disclosure, are among the few things which remain the
same in today’s corporate environment.
The company
secretary is still the key person making certain that the board operates in an
optimal and well-informed manner. But the job has grown in complexity and
workload. It is therefore unsurprising that there has also been a large increase
in salaries. Two years after the first report, a snapshot of the 2003 boardroom
reveals some major differences.
·
Boards meet more
frequently than in the past. Expectations of directors have risen, along with
the workload, and companies of all sizes are holding more board
meetings.
·
There are a lot of
extra people in the boardroom: general counsel and investor relations managers
have become regular attendees, reflecting higher levels of sensitivity to both
legal issues and shareholder impact. Even the CFO is a more frequent attendee
than in the past, as is the corporate affairs manager.
·
The board pack has
come into its own, increasing dramatically in size. There are more issues to
address and the board expects more information of a higher calibre on which to
base its decisions. In a larger company, directors are expecting the company
secretary to deliver, on average, 202 pages of reading for each board
meeting.
·
Board meetings are
shorter in duration, at least for medium to larger-sized companies. The average
10.3 hours for board meetings in larger companies, recorded in 2001, has eased
to a more manageable 4.7 hours. Smaller companies are resisting this trend,
increasing the duration of meetings.
·
Corporate governance
casts a long shadow in the boardroom, and the company secretary has primary
responsibility for implementing governance policy in 95 per cent of Australian
companies. The new ASX CGC guidelines have increased the amount of time spent on
corporate governance (by about 10 per cent in 40 per cent of
companies).
·
Paradoxically, the
company secretary’s traditional responsibility for compliance issues has
decreased slightly. Others appear to have taken up these duties, reflecting the
increased workload of the company secretary in other areas, including
governance.
·
Quite possibly, the
company secretary is also too busy compiling the minutes of the meetings, that
take more time to run, and this responsibility takes longer to complete and
distribute than ever before.
(ii)
Shareholders
Seemingly, the power
of the shareholder has never been greater. The survey provides an interesting
picture of shareholders, who seem decidedly unenthusiastic about much of what is
offered to them in the form of traditional communications.
Shareholders in
2003:
·
continued to record
lower attendances at annual general meetings (AGMs). About one third of
companies have fewer than 300 shareholders, or about 1.5 per cent, attending
AGMs and they have halved their costs in response. More AGMs are now held in
Sydney, with Melbourne’s popularity dropping dramatically.
·
showed little
interest in webcasting of AGMs. Nearly two-thirds of companies offered a
webcast, but only between 300-1300 shareholders used it to view the
AGM.
·
failed to respond
well to the electronic distribution of reports, preferring the traditional full
report or no report at all. Larger company shareholders have returned in
strength to the full report, while shareholders across all companies are less
interested in receiving concise reports and increasingly ask to be sent no
report at all.
·
demanded more
fact-based, ‘plain vanilla’ communication, allowing companies to further
decrease their annual report costs.
·
were not offered the
option of electronic or telephone proxy voting by most companies, although
electronic voting was flagged as a future possibility.
·
continued to hang on
to the delight of the dividend cheque. Although shareholders receiving their
dividends by direct credit rose slightly, more than a third of all shareholders
still like to receive a cheque.
(iii) The company
secretary in 2004
This survey provides
a real indication that the company secretary’s role is evolving. The
broad-ranging brief which once characterised the role, reflecting the
broad-ranging subject matter which they were expected to bring to the board
table, is now following the corporate trend of increasing
specialisation.
The survey showed
that responsibilities such as investor relations, risk management and running
general meetings are increasingly being handed over to others, either internal
managers or external consultants. This allows the company secretary of 2004 to
focus more strongly than ever on the growing level of professionalism and detail
required by board directors in assessing and addressing board matters, along
with the increasing demands of stringent corporate governance.
1.11
Public exposure of draft guidelines for the release of price-sensitive
information by government departments and agencies
The Hon
Ross Cameron MP, Parliamentary Secretary to the Treasurer, on 5 April 2004
released for public comment draft guidelines for the release of price-sensitive
information by Australian Government departments and agencies.
The draft
guidelines have been released for a six week public consultation period. They
are available on the Treasury
website.
The aim
of the guidelines is to support the continuous disclosure regime which seeks to
ensure that investors have timely and equal access to materially price sensitive
information. Continuous disclosure of such information should ensure that the
price of securities on secondary markets reflects their underlying economic
value.
‘Adoption
of the guidelines would not reduce the obligation on the listed entity to
release the required information or involve the disclosure of information which
a listed entity would not itself be obliged to disclose,’ Mr Cameron
said.
‘They
would form a back-up mechanism, with departments and agencies complying on a
best endeavours basis,’ he said.
The
guidelines would not impose rigid and expensive new procedures on government
departments or agencies, but instead would raise awareness of this issue. Their
purpose is to encourage departments and agencies to consider whether they make
price-sensitive decisions and, if so, to consider, in consultation with the
market operator, their own procedures for announcing them.
Mr
Cameron encouraged all with an interest in this issue, particularly listed
entities, to consider the draft guidelines and provide their comments within the
consultation period.
1.12 New Australian study of executive and board
remuneration
There has been a
considerable level of change in the area of executive and board remuneration
over the past 12 to 18 months according to a new study published in April 2004.
Ernst & Young has carried out an analysis of the executive and non-executive
director remuneration practices of the major listed companies in Australia. The
analysis is based on information disclosed by ASX 200 companies for the 2003
reporting cycle. The report also considers trends in key aspects of executive
remuneration such as:
·
Fixed
remuneration levels
·
Long-term
incentive award levels and plan designs
·
Short-term
incentive payments
·
Non-executive
director fees
·
Superior
performing companies and corresponding remuneration
trends.
The
following is a summary of the key findings.
(a) Remuneration levels –
executives
The analysis indicates that
remuneration levels increased with company size. Generally, the larger the
company and the more senior the role, the proportion of pay at risk increased.
Long-term incentives continued to play a key role in
executive remuneration,
particularly in larger companies.
The following tables show the median levels
for each remuneration element by market capitalisation and
position.
Fixed remuneration – median levels ($’000s)
|
Position |
Market
Capitalisation |
| |
Below
$400
million |
$400
million to
$1 billion |
$1
billion to
$5 billion |
Above
$5
billion
|
|
Managing
Director |
408 |
670 |
969 |
1,481
|
|
Chief
Financial Officer |
256 |
336 |
500 |
730 |
|
Business
Unit Head |
233 |
344 |
488 |
688 |
Short-term incentive
payments – median levels ($’000s)
|
Position |
Market
Capitalisation |
| |
Below
$400
million |
$400
million to
$1 billion |
$1
billion to
$5 billion |
Above
$5
billion
|
|
Managing
Director |
156 |
201 |
504 |
982
|
|
Chief
Financial Officer |
52 |
86 |
139 |
489 |
|
Business
Unit Head |
71 |
70 |
160 |
518 |
Long-term incentive awards
– median levels ($’000s)
|
Position |
Market
Capitalisation |
| |
Below
$400
million |
$400
million to
$1 billion |
$1
billion to
$5 billion |
Above
$5
billion
|
|
Managing
Director |
152 |
291 |
1.584 |
2.683 |
|
Chief
Financial Officer |
96 |
91 |
733 |
1,077 |
|
Business
Unit Head |
77 |
76 |
308 |
720 |
Total
remuneration – median levels ($’000s)
|
Position |
Market
Capitalisation |
| |
Below
$400
million |
$400
million to
$1 billion |
$1
billion to
$5 billion |
Above
$5
billion
|
|
Managing
Director |
509 |
918 |
1,612 |
3,787 |
|
Chief
Financial Officer |
356 |
435 |
708 |
1,715 |
|
Business
Unit Head |
288 |
395 |
699 |
1,771 |
(b) Short-term and
long-term incentives
In looking at the use of short-term and
long-term incentives, the analysis indicated that Managing Directors had the
highest proportion of total remuneration delivered through long-term incentives.
Share options continued to be the most common long-term incentive plan type,
however this was more distinct in the ASX 100 to 200 companies than in the top
100. Total
Shareholder Return (TSR) was the most common performance measure
for executive long-term incentive plans, and larger companies were more likely
to re-test performance. In addition:
The incidence of short-term
incentive payments was higher in larger companies – 95% of companies with market
capitalisations above $5 billion made short-term incentive payments compared to
66% of companies with market capitalisations of less than $400
million.
·
One fifth
(20%) of companies did not operate a specific long-term incentive plan for
executives.
·
Of those
companies that did operate an executive long-term incentive plan, almost half
(48%) did not make grants during the year.
·
Share option
plans remained the most prevalent type of executive plan (62% of companies) with
performance rights plans the second most common (16% of
companies).
·
Performance
measures used in executive long-term incentive plans varied according to company
size. Total Shareholder Return (TSR) was the most common measure in plans
operated by larger companies (and the most
prevalent measure overall).
Smaller companies were more likely to use share price as a measure in their
executive long-term incentive plan – more than a quarter of plans operated by
companies with market capitalisations less than
$400 million used share price
as a performance measure.
·
Almost
one-quarter of executive long-term incentive plans did not incorporate a
performance measure for vesting purposes.
(c)
Non-executive director remuneration
Increases in the fee pool for
non-executive directors from 2002 to 2003 were uncommon – the majority of
companies analysed (68%) did not change the pool. Non-executive director
retirement benefits were still prevalent (two thirds of
companies have a plan
in place) but many plans are being wound up or closed to new
participants.
·
As with
executive remuneration, the level of fees paid to non-executive directors
increased with company size. Median base fee levels for a non-executive
chairman, for example, range from around $84,000 for the smallest companies (by
market capitalisation) to $311,000 for the largest companies.
·
The median fee
pool ($1.5 million) for companies with market capitalisations greater than $5
billion was almost five times the median pool for companies with market
capitalisations less than $400 million.
·
A significant
proportion (almost two-thirds) of organisations still offer retirement benefits
to non-executive directors. However in many cases these plans are being phased
out.
(d) ‘Superior’ performing companies
In order to understand
the remuneration practices of ‘superior’ performing companies compared to other
organisations, an analysis was undertaken of the relative performance of the ASX
200 companies. ‘Performance’ for this purpose was determined by reference to
three measures for each company: growth in earnings per share, growth in return
on invested capital and Total Shareholder Return. Companies were ranked in order
of performance based on each measure and based on these, an ‘average’ overall
ranking was determined for each company. Those companies in the upper quartile
based on overall ranking were defined as ‘superior’ performers for the purpose
of this analysis.
The analysis is indicative only and was undertaken to
enable the remuneration data to be looked at from an alternative perspective.
Although the methodology used does not provide a definitive analysis of the
remuneration practices of ‘high
performing’ companies, it does present some
interesting results.
Within the group of the largest companies, the
superior performing companies generally had greater levels of variable
remuneration. Superior performing companies were more likely to use a share
price related performance measure (such as TSR) for their executive long-term
incentive plans. Non-executive director fee pools were generally greater for
superior performing companies. Larger organisations were less likely to be
superior performers.
(i) Remuneration levels
Managing Directors of superior
performing companies tended to have lower fixed remuneration and greater levels
of short term and long-term incentive awards.
(ii) Short-term and
long-term incentives
Executives in superior
performing companies were more likely to earn a short-term incentive than
executives in other companies, and were more likely to incorporate some deferral
of the payment.
·
Superior
performers had a higher prevalence of executive long-term incentive plans than
other companies.
·
Over 70% of
superior performing companies made long-term incentive grants during the year,
compared with around 50% of the other companies.
·
Superior
performers were more likely to use a share price related performance measure
(such as TSR) in their executive long-term incentive
plans.
For
further information, please contact Michael Hogan at michael.hogan@au.ey.com or Robert
Carroll at robert.carroll@au.ey.com
1.13 New study of directors’ and institutional investors’ views on
board governance
In April
2004 the consulting firm McKinsey published a study which is a survey of
directors’ and institutional investors’ views on board governance. 150 US
corporate directors serving as members of boards of more than 300 public
companies were surveyed as well as 44 US-based fund managers representing both
public and private funds with a total of US$ 3 trillion in assets under
management.
The key
finding is that the directors and investors wanted to see changes in three areas
in particular: separating the roles of chairman and CEO, improving board
accountability, and reforming executive compensation.
In
response to the question to what extent have recent reforms improved board
governance, 28% of directors responded a lot with 41% responding moderately and
22% a little. 83% of institutional investors responded a little or moderately,
with 12% responding a lot.
In
response to the question how much additional governance reform is needed, 22% of
directors responded a lot, 28% a moderate amount, 26% a little, and 23% none.
55% of investors responded a lot, 43% a little or moderate amount, and 2%
none.
In
response to the question what are the greatest impediments to improving board
performance, directors said the two greatest impediments are directors’
motivation and time commitment, and resistance from CEOs. Investors responded
that the two greatest impediments are resistance from CEOs and resistance from
directors.
In
response to the question do you support or oppose splitting chair-CEO roles, 40%
of directors said they supported this very much while 69% of investors gave this
response.
In
response to the question to what degree did remuneration plans lead to recent
corporate scandals, 59% of directors responded largely while 61% of investors
also responded largely.
In
response to the question how would you describe executive remuneration today,
39% of directors responded too high, with 13% responding far too high, 43%
responding about right, and 5% responding too low.
In
response to the question should remuneration be tied to company performance 75%
of directors responded either completely or largely while 77% of investors
responded completely or largely. When asked whether remuneration was tied to
company performance 5 years ago, only 20% of directors responded largely with
19% of investors giving the same response.
Further
information about the study is available on the McKinsey website at http://www.mckinseyquarterly.com
1.14 UK Financial Services Authority to bring in more flexible
rules for collective investment schemes
The Financial
Services Authority published on 23 March 2004 more flexible rules for UK
authorised collective investment schemes. These largely confirm the proposals
put forward last year in Consultation
Paper 185 (The CIS Sourcebook – a new approach) and halve the length
of the rulebook covering this sector. Retail investors will have access to a
wider range of investment opportunities and product features, together with
better information about the progress of their investments, while schemes
available only to professional investors will benefit from a reduction in
regulation.
New launches or
existing authorised funds that wish to convert will be able to operate under the
new rules from 1 April 2004. The rules will then apply to all authorised funds
from 13 February 2007, to coincide with the implementation of the UCITS
Management Directive.
The new regime
is intended to:
·
provide a type
of fund (now called Qualified Investor Schemes) for investment by institutional
and expert investors;
·
remove the
existing categorisation of non-UCITS authorised funds (separate categories of
UCITS authorised funds were removed in November 2002) and to provide more
flexible rules on authorised fund investments;
·
provide
further flexibility for fund managers to manage their funds;
·
set out a
framework to determine when investors should be consulted and to provide more
useful information for investors in regular reports;
·
allow limited
redemption of units in certain circumstances;
·
introduce unit
classes for Authorised Unit Trusts, align rules on expenses and allow
performance fees; and
·
retain the
current governance structure, pending further review following discussion with
the industry.
The FSA
consultation did not propose the introduction of UK-authorised hedge funds.
However, the widening of investment and borrowing powers and the ability to
undertake short selling proposed for qualified investor schemes would allow
funds to employ some investment approaches commonly adopted by hedge funds.
CP185 also
proposed additional guidance on fair value pricing (FVP) to help fund managers
counter the detrimental effects that can arise for continuing investors if
arbitrageurs buy and sell units in order to exploit stale pricing (an activity
known as "market timing"). The additional guidance, which the FSA Board has now
made, clarifies that funds have the ability to refuse to sell units to persons
whose dealing activities may cause detriment to continuing unit-holders.
Separately, FSA is also working with the Investment Management Association on
the development of an industry code on the use of FVP.
The details of
the new regime are set out in a policy
statement (The CIS Sourcebook - a new approach), published on the FSA
website at http://www.fsa.gov.uk
1.15 UK
Financial Services Authority publishes final rules on managing conflicts of
interest in investment research
On
22
March 2004 the
UK Financial Services Authority published final rules on managing conflicts of
interest in investment research.
Regulated
firms will now have to develop and publish policies to ensure that their
research analysts do not compromise their objectivity. Final rules announced by
the Financial Services Authority address conflicts of interest in the production
of investment research that is held out to clients as being objective.
Firms will be required to
publish and implement their policies by 1 July 2004. Each firm's policy will
have to make clear which of the material it produces it considers to be
objective research. Firms will need to have measures that ensure their analysts
impartiality and these measures will need to be clearly set out in the policy
statement. Without such policies, firms will not be allowed to claim or imply
that their research was objective.
The new
proposals have been refined slightly from the proposals in CP205 to
clarify the regulatory intent. These measures will focus firms' attention on the
real conflicts and how they are perceived. These refinements reflect comments
made during the last consultation.
Firms are responding to
the growing international focus on conflicts management generally, and the
revised Investment Services Directive will bring in provisions that will oblige
them to manage conflicts across the whole of their business.
The new rules are
available on the FSA website at http://www.fsa.gov.uk
1.16
Corporate representation at shareholder meetings – new guidance
In March 2004 the
Institute of Chartered Secretaries and Administrators (UK) issued a new Guidance
Note on corporate representation at annual general meetings.
According
to the Institute, increased shareholder engagement has resulted in several
institutional shareholder organisations considering how they can best be
represented at general meetings of the companies in which they invest. As a
corporation has no physical presence it cannot attend in person and must
therefore appoint someone to represent it. Company Law provides for two
alternative methods by which this can be done; the appointment of proxies and
corporate representatives. There is some confusion as to the restrictions,
rights and obligations attached to these two alternatives.
The object of
the Guidance Note is to attempt to clarify both the legal position and practice
that has developed in this area. The Guidance Note is free to download at www.icsa.org.uk/news/guidance.php
1.17
Ranking of governance at Hong Kong Exchange
Standard & Poor’s
(S&P) has ranked Hong Kong Exchanges and Clearing Ltd’s (HKEx) corporate
governance and given it a Corporate Governance Score of CGS-8.3. HKEx operates
the only exchange-based stock and futures market in Hong Kong.
Under the
current structure, HKEx consists of three principal wholly owned subsidiaries,
The Stock Exchange of Hong Kong Ltd, Hong Kong Futures Exchange Ltd and Hong
Kong Securities Clearing Co Ltd. Since its listing on the Hong Kong Main
Board on June 27, 2000, HKEx has undertaken dual responsibilities, that is, to
create value for its shareholders and to safeguard the integrity of Hong Kong
capital market.
According to S&P, the score and the updated analysis
reflect a number of
improvements in the areas of shareholder rights and
transparency and disclosure of financial and nonfinancial information but also
incorporate concerns regarding the balance of power and responsibility on the
board of directors. However, recent changes to S&P's analytical methodology
and some tightening of the scoring criteria have also impacted the updated
score. The analytical framework now places increased emphasis on external
stakeholder relations and board structure and effectiveness.
These
changes to the methodology in turn reflect the rapidly evolving nature of
corporate governance global best practices and investor concerns over a broader
range of governance issues. On the other hand, S&P's analysis continues to
recognize the special status of the HKEx given its role as both a publicly
listed company as well as the sole exchange controller in Hong Kong with a clear
public interest function.
The full report is available at http://www.acga-asia.org/loadfile.cfm?SITE_FILE_ID=216
1.18 European Commission consults on directors'
remuneration
The
European Commission has launched a consultation on directors' remuneration.
Responses will be taken into account in the Commission's forthcoming
Recommendation to Member States on this issue, scheduled for September 2004. The
consultation covers among other things disclosure of remuneration policy and of
individual remuneration and shareholder approval of directors' share option
schemes.
The main issues on which the Commission is seeking responses
are:
·
should the
Recommendation invite Member States to take regulatory measures to ensure that
listed companies comply with all its provisions? This would contrast with the
approach in some Member States which deal with the issue in a non-legislative
way, for example via a Corporate Governance Code.
·
should the
Recommendation cover only listed companies or also non-listed companies?
·
how should the
Recommendation define "directors" given the wide range of board systems used in
EU Member States?
·
how each EU
listed company should disclose in its annual accounts and annual report (or in
the notes to the annual accounts) the remuneration policy for directors for the
next financial year? Which elements for example the performance-related elements
of directors' remuneration, supplementary pensions and contract policy should be
included in that disclosure? Should such information be an explicit item on the
agenda of the annual general meeting (AGM) and should it be submitted to a vote?
·
what
information on the remuneration of individual directors should be disclosed?
Disclosure of the remuneration of individual directors - both executive and
non-executive or supervisory - in the preceding financial year is important so
shareholders can assess the appropriateness of the remuneration in the light of
the overall performance of the company. The consultation paper proposes that
such information should include at least information on salary and other fixed
elements of remuneration, share option schemes and supplementary pension
schemes. It also proposes specific additional disclosure for non-executive and
supervisory directors.
·
should
variable remuneration schemes, under which directors are remunerated in shares
or share options, and any substantial change in such schemes be subject to the
prior approval of the annual general meeting of shareholders? Such approval
would relate to the scheme in itself, in other words the system of remuneration
and the rules applied to establish individual remuneration under the scheme,
rather than to the remuneration of individual directors.
The
consultation paper is available at: http://europa.eu.int/comm/internal_market/company/directors-remun/index_en.htm
1.19 Expensing stock options – the US debate
A brief
article on the current state of debate on expensing stock options has been
published by the Wharton Business School. The article summarises recent
developments in this area and also discusses who is supporting the move to
expense stock options and who is opposing this move.
The
article is available at http://knowledge.wharton.upenn.edu/index.cfm?fa=whatshot
1.20 New study of corporate codes of ethics
A new
study of codes of ethics adopted by US companies has been published by
Delloitte. A questionnaire was sent to 5,000 directors of | 