The Government has announced it will amend the Corporations Act to require a listed company to disclose in its remuneration report the steps the company has taken to clawback bonuses and other remuneration where a material misstatement has occurred in relation to the company’s financial statements.
The announced reforms do not require the remuneration to be clawed back or provide ASIC with any power to clawback remuneration. Rather the onus is put on the company to take appropriate action and disclose the action taken to shareholders in its remuneration report. The announcement indicates that where a company has not clawed back remuneration following a financial misstatement, the remuneration report will need to include a detailed explanation to shareholders explaining why this has not been done.
The sanction for the company will be that shareholders will be able to vote “no” when asked to adopt the company’s remuneration report. This will give the company a strike under the controversial “two strikes” rule.
The announcement notes that many listed companies have already included clawback provisions in executive contracts and that the proposed reforms will put the “onus on listed companies to make sure they have provisions to clawback bonuses and other pay from executives if there has been a material misstatement of a company’s financial statements”. Clearly the Government’s expectation is that listed companies will amend their executive employment agreements and incentive plans to provide the company with a claw back right.
The Government’s announcement follows public consultation in connection with a discussion paper released in December 2010. The discussion paper raised a number of issues for consideration, including:
• whether the clawback provision should be introduced via the Corporations Act, the ASX Listing Rules or ASX Governance Principles;
• who the clawback provisions should apply to;
• how the clawback event should be triggered;
• how any clawback amount would be calculated;
• when the clawback amount would need to be repaid;
• how far back the clawback provisions should apply; and
• who would be responsible for applying the clawback of bonuses – whether this should be the responsibility of the employer or ASIC.
The discussion paper presented a number of options for dealing with each of the above issues. The announcement made today by the Government leaves many of these issues unresolved save that it confirms that the provisions will be introduced in the Corporations Act and companies, rather than ASIC, will be responsible for enforcing any clawback.
The precise details of the reforms will be released in draft legislation which is expected to be released for public consultation in the latter half of 2012. This legislation will need to be examined closely once it is released to assess what provisions should be implemented by employers to ensure they have the power to claw back bonuses where required.
The announcement also addresses the Government’s response to the Corporations and Markets Advisory Committee (“CAMAC”) report on executive remuneration issued in April 2011. The Government has announced that it will be “improving disclosures contained in remuneration reports, by requiring more transparent disclosure of termination or “golden handshake” payments”. The Government proposes to remove unnecessary disclosure requirements and simplify remuneration reports through “clearer categorisation of pay” which will “better enable shareholders to understand the company’s remuneration arrangements”. The changes announced by the Government include requiring the remuneration report to disclose:
• a general description of the company’s remuneration governance framework (if this is not already covered elsewhere in the Annual Report);
• all payments for key management personnel upon their retirement from a company regardless of whether those payments were provided under a contract of employment;
• remuneration by categories - namely crystallised past pay, present pay and future pay to enable shareholders to clearly distinguish between different forms of remuneration covered in the report; and
• any options that have lapsed in the current financial year and indicate the year in which the options were granted.
The Government did not support a number of CAMAC’s recommendations including a recommendation which would have permitted companies to adopt their own valuation methodology in the remuneration report rather than relying on concepts in the accounting standards (for example, for valuing future vesting equity based compensation). The Government’s position is that remuneration reports should be prepared in accordance with the accounting standards so shareholders can make meaningful comparisons between remuneration reports.
Other proposed reforms announced by the Government include:
• relieving certain unlisted entities from the obligation to prepare a remuneration report; and
• inserting disclosure requirements for related party transactions into the regulations to the Corporations Act.
We will provide more detail on these reforms as further information is released by the Government. In the meantime, if you have any questions please contact any of our executive remuneration and corporate governance specialists listed in this alert.