Audit - Martyn Jones.
New disclosure regulations are in the pipeline for directors of British companies quoted not only in the UK but also in other EU states and possibly in other markets.
These regulations are likely to include requirements for the detailed remuneration disclosures currently laid down under the listing rules, a forward-looking remuneration policy, post hoc justification of compensation payments and graphical performance information against the comparators used for determining performance related pay. It is apparent that the regulations could be in force for 31 December 2001 year-ends, and after that AIM companies are likely to be exempted.
From an audit perspective, the proposals need careful attention. A distinction needs to be made between the facts that can be audited and the softer elements (such as policy and justification) that can just be read.
But there are also more worrying issues to consider. Performance graphics against other companies for, say, five years is an idea taken from US proxy statements. Will this be a good thing? For analysts (who surely already have enough sectoral information) the answer is clearly yes. But for British plcs as a whole, there must be doubts.
The effect would be yet another pressure on them to de-list or relocate. Another trend may be a move towards higher-paid executives no longer being directors, thus weakening the unitary board concept which has been so successful in the UK.
There is another even deeper concern for both business and auditors.
The US model in this area is worrying. Too much emphasis on the performance-driven metrics results in an excessive CEO churn. The Economist recently reported that, in the USA in the last six months of 2000, CEO departures were up by more than 40% on the first six months of the year.
It would also result in more short termism, which is not conducive to good governance, and in more attempts to manipulate earnings numbers – something else which auditors and others would want to see avoided if the good reputation of the UK in financial reporting and corporate governance is to be retained. Perhaps more consultation is needed on the major issues for the public good before this slips through.