Corporations Act Reforms to Director and Executive Remuneration (24 May 2011)
by Meileng Tam
The Federal Government has introduced the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Bill 2011 (Bill) with an anticipated effective date of 1 July 2011.
The key measures affecting remuneration of the boards and directors of public listed companies are:
Two Strikes Rule
The current law provides that every listed company prepares and tables a remuneration report which is submitted to a non-binding vote of shareholders at the annual general meeting.
The Two Strikes rule proposed in the Bill provides that a first strike occurs when a remuneration report receives a “no” vote of 25% or more. The second strike occurs when the company’s subsequent remuneration report also receives a “no” vote of 25% or more.
Once two strikes occur, shareholders will have to vote on the spill resolution which determines whether the directors will need to stand for re-election. If the spill resolution passes with at least 50% of the eligible votes, then a spill meeting will take place within 90 days for the directors (with the exception of the managing director) to stand for re-election. There are saving provisions to ensure at least 3 directors remain on the board.
No Vacancy Rule
Many companies’ constitutions allow a board to declare that there are no vacant positions even though the maximum number of directors allowed by the constitution has not been reached.
The Bill provides that public companies will be required to obtain the shareholders’ approval for a declaration that there are no vacant board positions if the number of board positions filled is less than the maximum number specified in the company’s constitution.
Prohibition on Voting
Currently the Corporations Act does not prohibit directors or executives from participating in the non-binding vote on remuneration. The Bill proposes to prohibit key management personnel and their closely related parties that hold shares from voting on their own remuneration arrangements.
Prohibition on Cherry Picking
Shareholders can provide directed proxies or undirected proxies.
The current law requires all directed proxies held by the Chair to be voted however non-Chair proxy holders can choose which proxies to vote.
The Bill requires proxy holders to cast all of their directed proxies on all resolutions.
Prohibition on Hedging
Although the Corporations Act currently requires disclosure of the company’s policy in relation to directors and executives hedging their incentive remuneration, the Bill now prohibits key management personnel and their closely related parties from hedging the key management personnel’s incentive remuneration, although ASIC has the ability to declare in writing that the hedging prohibition does not apply to specified arrangements.
Remuneration Consultants
The Bill proposes that remuneration consultants’ reports must be disclosed and they must report to non-executive directors or the remuneration committee rather than company executives.
What does this mean to you?
The Bill explains that these recommendations are designed to improve board capacities, reduce conflicts of interest, encourage stakeholder engagement, improve relevant disclosure and support well-conceived remuneration policies. These recommendations are proposed to address community concerns on excessive executive pay and also the widening gap between the remuneration of executives and other employees.
There have been very public miscalculations by boards that excessively paid their executives or handled termination payouts badly during the global financial crisis. It is considered that minority interests should have an opportunity to send a strong message to the board when it comes to remuneration.
It is arguable that the effect of this Bill has a disproportionate effect on smaller companies where the Two Strikes and Re-election Process coupled with the Prohibition on Voting has the potential to give extraordinary power to minority interests.
For example, consider a small or mid cap listed company which has a dominant shareholder who is still among key management personnel; this dominant shareholder is prohibited from voting to accept the remuneration report. It is not uncommon for a low number of votes to be cast in small companies, which potentially give minority interests too much scope to create mischief and attempt to destabilise the board or create perceptions of board instability affecting share price.
The Federal Government is also, through a consultation paper “The Clawback of Director and Executive Remuneration in the Event of a Material Misstatement”, seeking comments on introducing legislation to claw back remuneration from any executive officer where financial information is materially misstated, irrespective of whether or not there has been any misconduct. Submissions closed on 31 March 2011 and the Federal Government has indicated that it will respond to submissions by 30 June 2011.
