Companies exploiting share distribution loophole: research

Australian's top 100 companies are making increasing use of a loophole allowing them to sidestep the need for shareholder approval — or disclosure of share trades — for share distributions to their executives, according to The Australian Financial Review.

In total, Australia's top 100 companies spent $3 billion in the past two years buying shares for their executives, according to research by governance group Ownership Matters.

The research, published in a report called While You Were Sleeping, shows that use of the loophole has grown from $600 million in 2009 to $1.5 billion in the past year.

The report found that companies, such as Qantas Airways Ltd, that have been forced to cut dividends have continued to buy shares for executive incentive schemes, while other companies, such as Lend Lease Ltd, that faced negative operating cash flow were also increasing share purchases for their executives.

Other companies — such as Telstra Corporation Ltd, Aristocrat and Downer EDI — faced the liability of big losses when they bought shares for their executives ahead of steep share price falls.

“The cost of executive labour should be reported in operating cash flow,” the report's author, Martin Lawrence, told the AFR.

“There is no reason to treat these buybacks for executives as different from any other buybacks with the reporting requirements and shareholder approval. This problem is not insoluble.”

Companies were previously required to obtain shareholder approval to buy shares for an employee incentive scheme. However in October 2005, the ASX introduced an amendment that exempted any shares trading that was part of “a scheme that provides for the purchase of securities by or on behalf of employees or directors”.