Regnan Submission on Consultation Paper 187: Effective Disclosure in an Operating and Financial Review

November 2012

Ms Crystal Kwan
Executive Assistant, Financial Reporting & Audit
Australian Securities and Investments Commission
By email:

Dear Ms Kwan

Regnan Submission on Consultation Paper 187: Effective Disclosure in an Operating and Financial Review

Regnan – Governance Engagement & Research Pty Ltd was established to investigate and address environmental, social, and corporate governance (ESG) related sources of risk and value for long term shareholders in Australian companies.

Its research is used by institutional investors making investment decisions, and also used in directing the company engagement and advocacy it undertakes on behalf of long term investors with $43 billion invested in S&P/ASX200 companies (at June 2012).

Regnan was launched in 2007 having operated previously as the BT Governance Advisory Service. It is owned by eight institutional investors: Commonwealth Superannuation Corporation (formerly ARIA); BT Investment Management; Hermes (UK); HESTA Super Fund; Local Government Super; Vanguard Australia; VicSuper; and the Victorian Funds Management Corporation.

Summary of Regnan’s Response

Corporate disclosures, including the Operating and Financial Review (OFR), are critical inputs to the decisions investors make in allocating capital. We agree that there is a need to improve the quality of corporate disclosure and its relevance for investor decision-making and commend ASIC for addressing this important topic. We note that there is currently a wide gap between the best and worst disclosers, even among the large listed companies that are the focus of our work. We consider the draft guide could play an important role in closing that gap, to the benefit of investors, financial market efficiency, and the reporting entities themselves.

Overall, we consider the draft regulatory guide well adapted to this end. We consider the positions taken to be uncontroversial and the guidance and examples consistent with the current practices of companies we consider leading disclosers.

Material Environmental and Social Matters

We agree that a high-quality OFR is important in meeting the information needs of current and prospective investors, that it should be tailored to the circumstances of each entity, and provide insightful information and analysis. We also agree that this includes explaining underlying drivers of an entity’s performance more generally.

In our view, the proposed guidance could be enhanced by explicitly stating that environmental and social matters should be addressed in the OFR where these are material to the company’s operations, financial position, business strategies and prospects for future financial years.

We consider there is a need for explicit guidance on this point because material environmental and social matters are too often overlooked or inadequately explained in communication to investors. For example, it is accepted that over recent years skills shortages have been an important exposure for the resources sector, with implications for production costs and project timetables. Yet it remains common for resources companies to fail to address human capital management and skills in the annual review to the extent relevant for investors.

Even among companies that disclose significant amounts on environment and social matters, this disclosure is generally not adequately focussed on the aspects most material to business value, nor is the link to corporate strategy and value creation sufficiently clear to meet investor needs.

Communication Between Companies and Investors

Further, the guidance could be enhanced by recognising the role of direct communication between companies and investors and their intermediaries (analysts and managers) to better understand their information needs.

Integrated Reporting

Regnan is strongly supportive of, and actively engaged in, the development of guidance for integrated reporting.

We consider that the concerns with current disclosure practices underlying the push for integrated reporting are well understood and that there is no reason that companies should not be attempting to address these concerns and adopt the principles of integrated reporting now, even before the framework is fully detailed.

We see the proposals contained within this consultation paper as consistent with integrated reporting and likely to help companies in moving toward integrated reporting.

Nonetheless, we agree that it would be premature for ASIC to explicitly include guidance on integrated reporting at this stage.

Future Orientation and Director Liability

We note that the requirement for the OFR to address prospects for future financial years (plural) is specified under the current legislation (as mentioned in the consultation paper). We consider concerns about increased director liability associated with this requirement to be excessive.

In our view, much meaningful information could be provided without going as far as providing forecasts, including (as proposed):

  • disclosure of the main risks that could adversely affect the successful fulfilment of the business strategies of the entity; and
  • identification of key factors relevant to an entity’s prospects, but outside management’s control.

We do not consider the guidance set out would often entail presenting forecasts; but information relevant to sensitivity analysis, such as ranges for key factors over which the company’s view remains valid should be included, e.g., the price for the company’s product over which its expansion strategy remains viable.

We do not view such disclosure as likely to increase director liability. On the contrary, fuller disclosures, including of key risks to successful fulfilment of strategy, would assist directors in fulfilling their obligations to shareholders, managing investor expectations, and thereby safeguarding against potential liability.

Compliance Costs

We do not consider the proposals will add materially to compliance costs. In our view, the proposals do not create additional obligations, but rather clarify existing ones. This clarity should reduce compliance burden.

Further, significant resources are expended by corporations in communicating with investors. Better targeting these communications to investor information needs should reduce the resources required to be expended.

Effect on Competition

We foresee that individual reporting entities and their representatives may express concerns about the potential detriment associated with making commercial information visible to competitors.

We question the basis for such concerns, given the wide-reaching applicability of the proposed guidance – it will likely apply equally to competitors. Further, we observe that the guidance is consistent with existing good practice, indicating companies that adopt higher quality disclosure have not experienced significant negative impacts from doing so. We suggest more effective communication may, in fact, be a source of competitive advantage, including for access to capital.

Moreover at the market-wide level, the availability and quality of information is a key determinant of the efficiency of a market. By reducing the cost of acquiring quality information and by ensuring it is readily available to all investors, the proposed enhancements to the OFR would support market efficiency.

Other Impacts, Costs and Benefits

We consider other benefits may also arise including for the disclosing entities reduced stock-price volatility associated with a closer match between investor expectations and company performance under a range of conditions – a relationship we have observed in practice for leading disclosers.

Our full response to each of the consultation questions is set out in Appendix 1.

Should you have any queries in relation to this submission, please contact Alison George, in the first
instance, on

Yours sincerely,

Amanda Wilson
Managing Director


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