The Productivity Commission has released its draft discussion report on executive remuneration for public consultation. The report proposes reforms to the Corporations Act, the ASX Listing Rules and corporate governance standards to improve the accountability of boards, remove conflicts of interest and enhance shareholder engagement on executive remuneration.
Significantly, the Commission did not recommend that executive remuneration be subject to salary caps or shareholder approval. The Commission stated that these proposals would be unworkable and could have harmful economic impacts. The Commission believes new regulations requiring stronger corporate governance and engagement with shareholders are the key reform measure.
The purpose of the Commission’s report is to review the current Australian regulatory framework around remuneration of directors and executives of listed entities and recommend how this could be strengthened. The review is intended to compliment APRA’s guidelines in respect of remuneration practices in regulated financial institutions and international reforms to executive remuneration emanating from the G-20 meetings.
The draft recommendations proposed by the Commission are summarised below:
The Corporations Act should specify that only a general meeting of shareholders can set the maximum number of directors who may hold office at any time.
All ASX 300 companies should have a remuneration committee. This committee should have at least three members, all of whom are non-executive directors, with the chair and the majority of members being independent.
Key management personnel and all directors (and their associates) should be prohibited from voting their shares on remuneration reports and any other remuneration related resolutions.
Key management personnel and all directors (and their associates) should be prohibited from voting undirected proxies on remuneration reports and any other remuneration related resolutions.
Proxy holders should be required to cast all of their directed proxies on remuneration reports and any other remuneration related disclosures.
Company executives should be prohibited from hedging unvested equity remuneration and vested equity remuneration that is subject to holding locks.
Remuneration disclosure requirements should be improved and made more accessible to shareholders. Remuneration reports should be confined to key management personnel and should include:
(i) a plain English summary statement of the company’s remuneration policy
(ii) actual levels of remuneration received by executives, and
(iii) total company shareholdings of the individuals named in the report.
Where an ASX 300 company engages the services of expert advisors on remuneration issues then those advisors should be engaged by, and their advice provided directly to, the remuneration committee or board independent of management.
Companies should be required to disclose details of expert advisors they have used in relation to remuneration matters, who appointed them, who they reported to and the nature of other work undertaken for the company by those advisors.
Institutional investors should disclose, at least on an annual basis, how they have voted on remuneration reports and other remuneration related issues.
The cessation of employment trigger for taxation of equity based payments should be removed. The taxing point for equity, or rights that qualify for deferral, should be at the earliest of when the ownership of shares/rights is transferred to the employee or seven years after the employee acquires the shares.
ASIC should issue a public confirmation to companies that electronic voting is legally permissible without the need for constitutional amendments.
Where a company’s remuneration report receives a “No” vote of 25% or higher then the board should be required to report back to shareholders in the subsequent remuneration report explaining how shareholder concerns were addressed and, if they have not been addressed, the reasons why.
There should be a “two strikes test” so that if a company’s subsequent remuneration report receives a “No” vote above a prescribed threshold then all members of the board should be subject to re-election at either an extraordinary general meeting or the next annual general meeting of the company.
The Commission recognises there will be additional compliance requirements and compliance costs associated with its draft proposals. Accordingly the draft recommendations have been made available for public consultation and “stress testing” to ensure the right balance is achieved.
The period for written submissions ends on Friday, 6 November 2009. The Commission will issue its final recommendations on 19 December 2009.
Please contact any the partners in our Executive Compensation and Employee Benefits team if you would like to discuss the implications of the draft recommendations or require assistance with making any written submissions to the Commission. We will keep you updated as further developments occur in this area.