The annual general meeting (AGM) is an opportunity for a board to communicate directly with its shareholders. It is often seen by shareholders as one of the few chances they have to meaningfully hold the board and management to account. The information provided to shareholders as part of the AGM is critical to their assessment of the company’s business strategies and future prospects. As directors prepare for the upcoming AGM and reporting season, the Australian Securities and Investments Commission (ASIC) suggests directors consider the following.
Realism and clarity
Are you satisfied that your financial reports accurately and clearly present the company’s financial circumstances? ASIC has indicated its focus for 30 June 2016 reports will be on the realism and clarity of financial reports. This means we are looking at:
- Asset values: Companies need to adopt realistic asset values. Directors should consider the need to impair goodwill, inventories and other assets, along with the bases of any impairment calculations. Fair values attributed to financial assets should also be based on appropriate models, assumptions and inputs.
- Accounting policy choices: Directors should consider how the choice of accounting policy can affect reported results. This includes treatment of off-balance sheet arrangements, revenue recognition, expensing of costs that should not be included in asset values, tax accounting and inventory pricing and rebates.
- Material disclosures: Clear and effective communication in financial reports is vital. There should be prominent disclosure of material information that assists users of financial reports, such as assumptions supporting accounting estimates, significant accounting policy choices and the impact of new reporting requirements.
While all directors are not accounting experts, ASIC does expect that directors seek explanation and advice supporting the accounting treatments chosen and, where appropriate, challenge the accounting estimates and treatments applied in the financial report.
Does the operating and financial review (OFR) of your directors’ report include risk disclosures that you have carefully considered? Have you considered the appropriate disclosures about environmental, social and governance issues in your company? The OFR should include a discussion about environmental and other sustainability risks if those risks could affect the entity’s achievement of its financial performance or outcomes disclosed.
Company chairs need to consider carefully whether circumstances exist that mean a poll should be called for voting on remuneration resolutions. ASIC has received reports of companies voting on resolutions to adopt the remuneration report by way of a “show of hands” rather than by poll, where proxies received prior to the vote indicated that a strike may be achieved. We encourage companies to adopt a poll on all resolutions as a matter of course as good corporate governance. Polls democratically reflect the principle of “one share one vote” and reflect those attending the meeting and those who may have voted by proxy.
Earnings guidance revisions
Many companies choose the AGM as the venue to make announcements about revisions to earnings guidance. While the AGM may be a convenient forum, delaying an announcement until the AGM may not meet the company’s continuous disclosure obligations. We encourage directors to carefully consider the requirements in ASX Guidance Note 8 on the circumstances when any revision to earnings guidance needs to be made, and the timing of revisions.
During the last AGM season, media commentary discussed the practice of superannuation funds engaging in stock lending to facilitate short selling. If directors are concerned with this practice, we would recommend that they engage with shareholders directly to make their views known to them and to understand why the particular shareholders may engage in this practice.