Loophole allows execs $3bn payday

The Australian Securities Exchange (ASX) is expected to make changes to disclosure rules to close a loophole that allowed Australia’s top 100 companies to spend $3 billion buying shares for their executives, without disclosing them.

Shareholders weren’t even asked to approve them.

The Australian Financial Review (AFR) says that it revealed the use of the loophole in March this year, which was then tracked by a corporate governance firm Ownership Matters. The AFR reports that use of the loophole rose from $600 million in 2009 to $1.5 billion in 2012.

Now the ASX and the Australian Securities and Investments Commission (ASIC) are expected to issue a joint discussion paper recommending changes to close the loophole. Ownership Matters has produced a report that shows Challenger (ASX:CGF), Computershare (ASX:CPU), United Group (ASX:UGL), Amcor Limited (ASX:AMC) and Macquarie Group (ASX:MQG) each spent between 6 to 16% of their operating cash flow buying shares for executive incentive schemes last year.

The companies masked the cost by recording it under financing cash flow. “Whenever a company has been in the market to acquire its own shares, investors and creditors should be informed the next day,” Ownership Matters co-founder Dean Paatsch has told the AFR. “The gaps in the listing rules are an accident waiting to happen, and the ASX should act immediately.”

The loophole used by the companies allows companies to issue options over existing shares that the company then went out to buy, without disclosure to the market. According to the AFR, 34 of the top 100 companies buy shares on market and place them in a trust, before the rights vest.

Foolish takeaway

For both retail and institutional shareholders, the sooner the loophole is closed, the better. Directors and executives not acting in the interests of all shareholders is a direct threat to the equity market as a whole, and in the end, a threat to the companies themselves.

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Motley Fool writer/analyst Mike King owns shares in Computershare.

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