Executive remuneration - productivity commission releases final recommendations

Written on the 17th of January 2010 by Anthony Ford

On 4 January 2010, the Australian Government released the Productivity Commission’s (Commission) final report on executive remuneration in Australia (Report) which contains the Commission’s final recommendations for law reform in this area. The Report follows on from public consultation late last year on the Commission’s draft reform recommendations.

In summary, the Commission’s fifteen core recommendations are as follows:

• Recommendation 1: that shareholder approval should be sought by way of an ordinary resolution where the board seeks to declare no vacancies for the election of directors at a general meeting but the number of directors is less than the constitutional maximum. For example, where the board has set the number of directors at four while the company’s constitution provides for a maximum of six, thus leaving two director positions vacant in which two actual directors could be appointed to the board. This recommendation attempts to eliminate ‘closed shop’ directorship practices identified as reducing the diversification and shareholder say on the composition of company boards.
• Recommendation 2: that the ASX Council upgrade its current suggestion to a formal recommendation requiring ‘if not, why not’ disclosure, that:
  • remuneration committees:
    • consist of a majority of independent directors;
    • be chaired by an independent director;
    • have at least three members; and
    • have no executive members;
  • the remuneration committee charter clearly set out the procedures for non-committee members to attend meetings.
• Recommendation 3: that a new ASX listing rule be introduced to require board remuneration committees of ASX300 companies to comprise solely of non-executives directors.
• Recommendation 4: that the Corporations Act be amended to include a prohibition on key management personnel and all directors voting their shares on remuneration reports and any resolutions related to those reports.
• Recommendation 5: that a new prohibition be inserted into the Corporations Act against executives hedging unvested equity remuneration or vested equity subject to holding locks.
• Recommendation 6: that a new prohibition be included in the Corporations Act and ASX listing rules against company executives identified as key management personnel and all directors from voting undirected proxies on remuneration reports and any resolutions related to those reports.
• Recommendation 7: that the Corporations Act be amended to require proxy holders to cast all their directed proxies on remuneration reports and any resolutions related to those reports, except in exceptional circumstances.
• Recommendation 8 - that:
  • a company’s remuneration report be required to include a plain English summary of remuneration policies, actual levels of remuneration received and the total company shareholdings for individuals named in the report; and
  • that an expert panel be established by the Government to advise on how best to amend the Corporations Act to support this recommendation.
• Recommendation 9: that section 300A of the Corporations Act be amended so that remuneration disclosure is confined to key management personnel (as opposed to the additional requirement of the top five executives as is currently the case).
• Recommendation 10: that the ASX Council make a recommendation that companies disclose the expert advisers that they have used in relation to the remuneration of directors and key management personnel, who appointed them, who they reported to and the nature of any other work undertaken for the company by those advisers.
• Recommendation 11: that the ASX listing rules be amended to require expert advisers used by ASX300 companies on matters pertaining to the remuneration of directors and key management personnel, only be commissioned by, and their advice provided directly to the remuneration committee or board, independent of management. Further, that this arrangement be confirmed and disclosed in the company’s remuneration report.
• Recommendation 12: that institutional investors, in particular superannuation funds, be required to disclose, on an annual basis, how they have voted on remuneration reports and other remuneration-related issues.
• Recommendation 13: that legislative changes be made to remove the cessation of employment trigger for taxation of equity or rights that qualify for tax deferral and are subject to risk of forfeiture, so that such payments are taxed at the earliest of:
  • the point at which ownership of, and free title to, the shares or rights is transferred to the employee; or
  • seven years after the employee acquires the shares.
• Recommendation 14: that ASIC should issue a public confirmation that electronic voting is legally permissible without the need for companies to amend their constitutions.
• Recommendation 15: that if there is a vote of more than 25 per cent against the adoption of a company’s remuneration report at two successive AGMs, the company must put a director re-election resolution to shareholders at that second AGM which, if supported by a majority of members, would force the directors who signed the directors’ report to face re-election at an EGM held within 90 days of the AGM. At the subsequent EGM, each of those directors could be voted from the board by a majority vote (the ‘three strikes’ test).

The Commission has also made two additional recommendations (Recommendations 16 and 17) which relate to the implementation of the core recommendations. They provide that:

• the Australian Government should legislatively implement the intention of the core recommendations if the ASX and ASX Council do not make the requisite changes; and
• a review of the corporate governance arrangements that emanate from the Government’s response to the Report should be conducted within five years of the introduction of the new arrangements which would focus on the effectiveness and efficiency of the reforms, including termination payments and employee share schemes and the regulatory architecture.

Since its release, the Report and the Commission’s final recommendations have received a mixed reception from the public. Some commentators have argued that the Report fails to address the problem of corporate greed, while others claim that the Report and its recommendations are well calibrated and strike a workable balance between regulation and the freedom to exercise board discretion.

In our opinion, it is unlikely that the Commission’s recommendations will:

• have any material impact on actual executive remuneration practices; and
• do anything more than create further administrative work and costs for companies as they seek to comply with the various additional disclosure and governance obligations.

The Government has confirmed that it will respond to the recommendations contained in the Report in the first quarter of 2010. Hynes Lawyers will provide a further update of any confirmed legal changes and keep you informed as the matter progresses.