As both accountants and good corporate citizens we advocate for accurate and transparent disclosure that will cater for a wide user audience and aid in decision-making. This also talks to acting in the public interest, which is one of the core mandates of an accountant
Disclosure had advanced over the years. Originally disclosure was used to help unpack or analyse a balance. For example, a large balance sheet item such as accounts payable would in the early days have a note that illustrated the breakdown of these creditors and whether any other amounts such as accruals or provisions were also included in the balance sheet amount. To an extent, then, disclosure was originally an illustration of a reconciliation to the users of financial statements.
As reporting advanced and after the adoption of IFRS, disclosure was enhanced to include detailed analysis of transactions, balances, acquisitions and disposals, among other items. Disclosure also progressed from merely an arithmetical exercise (as described above) to rather include a qualitative and quantitative analysis of the entity at financial year end and to allow the user to make informed decisions and exercise his or her judgement based on the detailed information now found within disclosure.
In recent times this has increased to include financial and non-financial reporting, integrated, forward-looking reporting that task to multiple stakeholders and − a current global focus – that of sustainability, climate and ESG as a whole. So, all good then: more and more and better and better disclosure.
Public entities listed on the Johannesburg Stock Exchange (JSE) need to adhere to the listing requirements of the JSE. One of these is that directors of listed entities are required to disclose their remuneration including salary, bonus, share options or any other fees earned or fringe benefits received.
In October 2021, the Draft Companies Amendment Bill 2021 was published with a period of 30 days for commentary. One of the major changes is the requirements for listed entities and state-owned entities to provide a remuneration report that, inter alia, clearly lays out the entities remuneration policies and all remuneration received by the entities’ principal management, namely its directors. However, the new requirements further require that this report disclose, to the fullest extent possible, the entire suite of remuneration earned by the highest-paid employee of the entity, most likely the chief executive officer.
The requirement further extends to include the same disclosure requirement as the CEO, but to the lowest-paid employee of the entity instead. Essentially then the requirement serves to disclose the earnings gap between the highest- and lowest-paid employee.
A further requirement is the disclosure of the average remuneration of all employees as well as the median of that of the top 5% earners and bottom 5% earners.
The objective of this piece is not to provide a detailed analysis of all these amendments and the other proposals but to rather ask the question if ‘over-disclosure’ or too much transparency may actually have the opposite effect to what was intended − in other words, the unintended consequences of perhaps too much disclosure. Even within the public domain there is certain information that contains inherent sensitivity that renders it potentially inappropriate to have in the public domain. Strategic advantages, recipes, databases, etc, are often the privy of the holder thereof, and to require this type of information to be publicly disclosed could impair their inherent value quite dramatically. (Like that beloved grandmother who never shared her chocolate cake recipe with anyone and took it with her to the grave …)
It can be argued that remuneration is one of those extremely sensitive areas. Generally speaking, payroll is extremely confidential, and entities take caution and put controls in place to keep remuneration within the entity confidential to only that of top management and/or the appropriate governance committee.
With this in mind, one must consider the unintended consequences of the requirement to these prescribed remuneration disclosures. What could the impact on staff morale be? What would the disclosure of the gap between the CEO and the lowest wage earner achieve? How would this information add value to the users? It is almost guaranteed that the gap will be vast. How would make the lowest or lower wage earners feel, how would that affect their morale? Could it incentivise them to strive to climb the corporate ladder to achieve the status of CEO in time to come, or could it rather disincentivise them and either spur on potential wage negotiations, discussions and even unrest? The lowest remunerated employee by mere context will always earn less than other employees – most notably than that of top management.
Executives carry a significant amount of risk, of accountability to shareholders, to government, to stakeholders. They often carry vast amounts of experience, technical expertise and knowledge that allow them to create opportunities and business and to afford the entity the ability to employ staff. Seemingly, without these executives business would not survive and the impact on both employee and the economy could be devastating.
To the point of disclosure then, and enhanced disclosure and its related transparency, disclosure should serve a purpose, should create additional value, should give further insight that would ordinarily would not have been accessible to allow the regulator/user/stakeholder to make the most informed decision possible. Disclosure then should give insight and perspective.
Sensitivity needs also to be applied when considering disclosure in a public environment and both the intended and possible unintended consequences should be evaluated. Arguably, and as illustrated by the proposed remuneration disclosure within the draft amendments, it is possible to over-disclose, to be overtly transparent to the point that it may erode value or lack benefit rather than enhance the user insight or experience.
Bill Boughey said in 2018, ‘Transparency fosters a sense of trust and provides serious motivation.’ In the case of the proposed remuneration disclosure, the opposite may in fact be true.
Milton Segal CA(SA), Senior Executive: Corporate Reporting | Standards