Asia needs to improve executive compensation disclosure: study
(SINGAPORE) Developed Asian markets lag international best practice on revealing executive compensation, which is putting investors at risk, says the CFA Institute Centre for Financial Market Integrity.
The institute - in a recent study titled 'It Pays to Disclose: Bridging the Information Gap in Executive Compensation Disclosures in Asia' - found that prevailing disclosure regulations and practices in Singapore, Hong Kong and Japan leave much to be desired.
The study says a lack of regulatory push, inadequate information in financial reports, little use of long-term incentive plans, poor board oversight and lack of investor influence on executive compensation render Asian markets vulnerable to pay abuses.
In particular, the study notes that Singapore, Hong Kong and Japan fall short of reporting the compensation of executives on an individual basis - which is the practice in the US, the UK and Australia, and is advocated by institutional investors worldwide.
'The current practice in Asia deprives share owners of their right to know how much of the corporate funds they helped build are going to the individuals whom they have entrusted to run the business,' the report says. 'It also turns a blind eye on individual accountability.'
And Singapore is just such an example, according to the CFA Institute. It says that prior to Singapore adopting the Code of Corporate Governance, the Singapore Exchange (SGX) acknowledged that disclosure on an individual basis should be in line with global best practice and that share owners should have the right to know how directors are compensated.
'This awareness, however, failed to translate into policy because of considerations for directors' personal privacy and concerns that individual disclosure might lead to an inflation of directors' remuneration,' says the institute. 'As such, companies are now required to identify directors and key executives based only on the range of their pay levels in bands of $250,000.'
In Hong Kong, companies are required to disclose remuneration of directors on an individual basis, but for the five highest paid non-director executives they are required to disclose on an aggregated basis. In Japan, companies with the traditional statutory auditor board structure are not required to disclose the names of either directors or executives.
Lee Kha Loon, head of Asia-Pacific at the CFA Institute Centre in Hong Kong, says: 'Understanding executive compensation structures is important because it gives investors an idea of the incentives that drive executives' behaviours and business decisions. Investors need to have the right information to analyse how companies' executive pay packages are aligned with their long-term interests.'
Abe De Ramos, policy analyst at CFA Institute Centre, adds: 'In Asia, non-prescriptive disclosure requirements and investors' lack of initiative to demand information have given companies little incentive to provide meaningful information.'
The CFA Institute suggests that investors exercise vigilance to ensure that management incentives are aligned with their long-term interests, and make their voices heard through proxy resolutions, voting and speaking out at annual meetings.
It also says companies should try to exceed minimum requirements on executive compensation disclosure, especially when it comes to individual executives' remuneration, total compensation and breakdown of their components, the terms of share-based compensation, and discussion of remuneration policy.
It recommends that regulators should work with the investment community and company executives to find practical and realistic enhancements to the current disclosure requirements.
The CFA Institute Centre is a research and policy centre on global capital markets issues, which seeks to promote fair and open markets and advocate for investor protection and high professional standards.
