1. It seems the Rudd
government has
applied bellows
to the embers
of the executive
remuneration
debate.
28 | April 29, 2010 www.wabusinessnews.com.au WA Business News
■ OPINION |
Tax a key driver of remuneration restructure
The government may
have further inflamed
the simmering debate
over executive
remuneration.
ON April 16, the federal govern-
ment responded to the Productivity
Commission’s report on executive
remuneration in Australia.
At the time of the release of the
draft report, I wrote that I thought
the commissioners had largely got it
right. It was a view that was based
not only on the report itself, but
also formed from observing all of
the appearances before the commis-
sioners in Sydney last November.
Time and time again the commis-
sioners pushed for detailed expla-
nation of the views presented, not
because they could, but because they
wanted to as far as possible avoid
unintended consequences.
Although it is pleasing to note the
government has heeded the commis-
sioners’ rejection of imposing caps
on total pay and bonuses, it seems
the Rudd government has applied
bellows to the embers of the execu-
tive remuneration debate.
The fire that had largely died down
as a result of the commissioners’con-
sidered approach, which acknowl-
edged the high regard Australian
corporate governance is held inter-
nationally, now has a new supply of
oxygen thanks to increasing use of
legislation, the rejection of recom-
mendation 13, and the addition of a
provision to clawback bonuses paid
when it is found financial informa-
tion is materially misstated.
The government supported 16 out
of the 17 recommendations and sug-
gested strengthening six. It expects
to have the necessary changes
in place by the beginning of the
2010-2011 financial year following
further rounds of public consultation
on exposure drafts and discussion
papers.
The government:
• seeks to strengthen recommenda-
tions 4 and 5 by extending the pro-
hibition on executives voting their
own shares on remuneration reports
and hedging of unvested equity
or equity subject to holding locks
to ‘closely related parties’. This is
designed to ensure that related par-
ties are not used to circumvent the
intention of the prohibition;
• has extended the recommendation
to require all proxy holders to cast
all of their directed proxies to all
resolutions not just the remunera-
tion report (recommendation 7). It
believes this extension ensures that
shareholders have increased con-
fidence that the voting system is
representative of their intentions;
• by appointing CAMAC as the
advisory committee for the recom-
mended changes to improve the
information content and accessibil-
ity of remuneration reports (recom-
mendation 8) the government seeks
to minimise costs that would be
associated with a stand-alone panel.
They will also instruct the CAMAC
to make recommendations on how
the incentive components of execu-
tive pay could be simplified;
• aims to ensure transparency and
accountability in relation to remu-
neration consultants and potential
conflicts of interest that may arise
as a result of their engagement by
proposing legislation and extend-
ing recommendations 10 and 11 to
all listed companies, not just the
ASX300;
• rejected recommendation 13 to
remove the cessation of employment
as the taxation point for deferred
equity to risk of forfeiture, stating
that to remove it would result in a
disproportionately large benefit to
higher income employees, compro-
mise the integrity of the tax system,
make it more difficult to ensure the
correct amount of tax is paid, and
have a significant cost to Australian
government revenue; and
• has added a clawback proposal
designed to provide shareholders
with the ability to recover overpaid
bonuses that have occurred as a
result of materially misstated finan-
cial statements and will be subject
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bnd3259
Pamela-Jayne
Kinder
of a discussion paper to be released
in coming months.
The rejection of recommenda-
tion 13 is the response that has met
with most criticism. By removing
the cessation of employment as the
trigger for the taxation of deferred
equity, the commissioners origi-
nally sought to strengthen the link
between executives and shareholders
past the point of the executive leav-
ing the company, ensuring that the
executive continued to hold equity
and therefore have a vested interest
in the long-term performance of the
company.
In rejecting the recommendation,
the government has effectively
robbed shareholders of an improved
mechanism to prevent executives
from being rewarded for perform-
ance that proves to destroy value in
the long-term and made taxation a
key driver for remuneration struc-
ture.
Is this perhaps an unintended
consequence that the commission-
ers were at pains to avoid?
We now have the response and
await the discussion paper and draft
legislation.
■ Pamela-Jayne Kinder is prin-
cipal of PJ Kinder Consulting –
Board and Executive Remuneration
Governance.
Recommendation Response
1 Any declaration of ‘no vacancy’ at an AGM to be agreed by shareholders. Support.
2
On an ‘if not, why not’ basis:
Remuneration committees to comprise at least three members, all non-executive directors, with a majority and the chaira.
independent.
Companies to have a charter setting out procedure for non-committee members attending meetings.b.
Support in-principle.
3 For ASX300 companies, executives to be prohibited from sitting on remuneration committees. (Listing rule) Support in-principle.
4 Prohibit executives and directors voting their own shares on remuneration reports. Support with additional strengthening.
5 Prohibit executives hedging unvested equity remuneration or vested equity subject to holding locks. Support with additional strengthening.
6 Prohibit executives and directors voting undirected proxies on remuneration reports. Support.
7 Require proxy holders to cast all their directed proxies on remuneration reports. Support with additional strengthening.
8
Improve information content and accessibility of remuneration reports through:
A plain English summary of remuneration policies.a.
Reporting actual remuneration received and total company shareholdings of individuals in the report.b.
An expert panel to advise on revised Corporations Act architecture to support changes.c.
Support with: Corporations and
Markets Advisory Committee (CMAC)
to act as expert panel and additional
referrals.
9 For ASX300 companies, executives to be prohibited from sitting on remuneration committees. (Listing rule) Support with further streamlining.
10
Companies to disclose executive remuneration advisers, who appointed them, who they reported to and the nature of any other
work undertaken for the company. (if not, why not’)
Support. To be implemented through
legislation.
11
For ASX300 companies, advisors on executive pay to be commissioned by, and their advice provided directly to, the board,
independent of management. (Listing rule)
Support. To be implemented through
legislation.
12 Institutional investors to voluntarily disclose how they have voted on remuneration reports (and other remuneration-related issues). Support in-principle.
13 Remove cessation of employment as the taxation point for deferred equity subject to risk of forfeiture. Not supported.
14 Confirm allowance of electronic voting without amendment to company constitutions. Support in-principle.
15
‘Two strikes and re-election’:
25 per cent ‘no’ vote on remuneration report triggers reporting obligation on how concerns addresseda.
Subsequent ‘no’ vote of 25 per cent activates a resolution for elected directors to submit for re-election within 90 days.b.
Support.
16
The Australian Government to implement intent of recommendations 2, 3, 10 and 11 by legislation if the ASX and Corporate
Governance Council do not make the requisite changes.
Support.
17
Review within five years to consider:
The effectiveness and efficiency of the reforms, including to termination payments and employee share schemesa.
The regulatory architecture.b.
Support.
18
A director or executive must repay to the company any bonuses which were based upon financial information that subsequently
turned out to be materially misstated.
Additional Government proposal.
GOVERNMENT RESPONSE SUMMARISED
Source: Executive Remuneration in Australia pp395-396 and Joint Media Release Treasurer and Assistant Treasurer 16/04/2010.