This alert highlights the following recent developments in executive remuneration policy and disclosure:
ASIC's warning on how remuneration reports should be improved;
ASIC's recommended protocol for policing voting exclusions at annual general meetings;
the Federal Government's proposals regarding the claw back of executive remuneration where financial statements have been misstated; and
the Government's proposals to tighten up disclosure of termination payments.
Directors of listed companies may wish to undertake a review of the disclosures in their remuneration reports and consider how they measure up against ASIC's latest guidance. We will monitor developments with respect to the Government's proposed claw back legislation and provide a further update when more information is available.
Improved remuneration disclosure
Listed companies are required to include in their remuneration reports1 (among other things) a discussion of the board remuneration policy and its relationship with the company's performance and an explanation of performance related remuneration and performance conditions. The legislative policy underlying this requirement is to ensure that shareholders are provided with comprehensive disclosures in relation to director and executive remuneration, and can understand the nature of the remuneration (including any performance hurdles or contingencies on which the payment is based).
ASIC's 2012 review
ASIC recently conducted a sample review of remuneration reports2 similar to the one it conducted in 2011. Its latest findings mirror the same themes where disclosure could be improved, namely:
explaining why a remuneration mix was appropriate in a company's circumstances and the factors that directors considered in determining the amount of remuneration to be paid;
describing particular non-financial performance conditions, the weight to be given to the performance conditions and how actual performance against those conditions measured up;
providing detailed reasons for choosing each performance condition in both short and long term incentive plans and suitably linking them to a company's circumstances, strategy and/or priorities; and
explaining not just the terms and conditions prescribed in the regulations, but other key terms and conditions which would be relevant to the shareholder's assessment of the operation of the incentive plan.
In order to assist directors in their preparation of future remuneration reports, ASIC has published some illustrative examples of wording used in various remuneration reports that it considers may be helpful to explain what it considers to be effective disclosure of the particular remuneration issues flagged - these can be found in Annexure 1 to this note.
ASIC protocol for remuneration report voting exclusions
Under section 250R(4) of the Corporations Act, key management personnel whose remuneration details are included in the remuneration report and their "closely related parties"3 must not vote on the resolution to adopt the remuneration report4.
Following its recent review of how companies are managing this voting exclusion5, ASIC has encouraged companies to adopt the following practices to provide the Chair with confidence that only votes permitted under the law have been counted:
requesting key management personnel to advise their closely related parties of the voting prohibitions;
providing key management personnel with a pro forma letter containing instructions for nominee companies or trusts to not vote their shares on the relevant resolution;
seeking assurances from key management personnel that they will not cast votes on the relevant resolution; and
confirming that the share registry has excluded the relevant votes.
Chartered Secretaries Australia issued guidelines in November 2011 to assist companies in managing voting exclusions on remuneration-related resolutions which can be found here.
The Federal Government's proposed reforms
On 21 February 2012, the Federal Government announced that it will amend the Corporations Act to include a requirement that a listed company must disclose in its remuneration report the steps that it has taken to claw back remuneration where a material misstatement has occurred in connection with the company's financial statements and to improve disclosures in remuneration reports by requiring more transparent disclosure of termination payments. A link to the Treasury's announcement can be found here.
Proposed claw back disclosure requirement
The proposed requirement (as currently formulated) does not require the claw back of bonuses and/or remuneration - it simply places the onus on the company to disclose the action taken (or not taken) to its shareholders following the occurrence of a material misstatement in its financial statements. This "if not, why not" disclosure obligation would supplement the "two strikes rule" introduced last year, in that shareholders would presumably be more likely to vote against the adoption of the remuneration report if they are not satisfied with the action the company has taken (or not taken) to claw back bonuses and/or remuneration. If the remuneration report receives a "no" vote of 25% or more at the company's AGM, the company will incur a "strike" (and two consecutive strikes could result in a board spill).
The Government's proposal is consistent with action being taken overseas – the US has already passed legislation6 providing for claw backs of overpaid remuneration where financial information has been materially misstated, and the UK House of Commons and European Corporate Governance Forum have also encouraged companies to adopt similar policies. Several notable foreign companies have introduced claw back regimes including Royal Dutch Shell, British Telecom and GlaxoSmithKline, and some ASX listed companies have begun to do the same, including Leighton Holdings and Rio Tinto.
Termination payment disclosure to be tightened
This aspect of the Government's announcement addresses the Government's response to CAMAC's report of executive remuneration issued in April 2011. The Government's response to CAMAC's recommendations can be found in the Treasury's announcement hyperlinked above.
The Government has supported several of CAMAC's recommendations relating to increasing the transparency in the disclosure of termination (or "golden handshake") payments. Its proposed amendments to section 300A of the Corporations Act include requiring the following to be disclosed in the remuneration report:
a general description of the company's remuneration governance framework;
all payments to key management personnel upon their retirement (regardless of whether they arise under a contract of employment);
categorisation of remuneration, i.e. crystallised pay, present pay and future pay; and
options that have lapsed in the current financial year.
The details of the proposed reforms announced by the Government are expected to be released in the form of draft legislation for public consultation in the second half of this year. We will monitor the progress of these proposals and provide updates in due course.
1 See section 300A of the Corporations Act 2001 Cth.
2 50 reports drawn from Australia's 300 largest companies were reviewed for the financial year ended 30 June 2011.
3 This term includes a spouse, child, dependent, any other family member who may influence the key manager and companies controlled by the key manager.
4 Note however, that key management personnel may vote on the resolution if they do so as a proxy that is not another member of the key management personnel and the proxy specifies how that vote must be cast.
5 ASIC surveyed 12 companies that had their AGM between 21 October 2011 and 23 November 2011.
6 The Dodd-Frank Wall Street Reform and Consumer Protection Act, and to a lesser extent, the Sarbanes-Oxley Act.