Are you prepared for new laws set to affect executive remuneration practices?

Articles Written by Justin Szwaja

The Bill Introduced

The Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Bill 2011 was introduced before Parliament on 23 February 2011. As the debate on the Bill was adjourned at the March sitting of the House of Representatives (and will not resume until May), it will now be several months before the Bill can pass and the new law takes effect.

Regardless, leading companies have started reviewing their practices and protocols, particularly around engagement of external remuneration consultants. The Bill contains a raft of changes, including the controversial 'two-strikes test', (see below for a summary of the changes), many of which will lead to some 'tweaking' or, in some cases, major changes in the way director and executive remuneration practices are conducted.

In this article we focus on the engagement of external remuneration consultants and list some key issues that companies should consider now.

External Remuneration Consultants

Summary

Since the Exposure Draft legislation was first introduced, the most significant revisions made in the Bill relate to provisions that govern the engagement of external remuneration consultants.

While the new laws do not mandate the engagement of an external remuneration consultant, they set out procedures for when such a consultant is actually engaged in relation to key management personnel (KMP) remuneration issues. Essentially, where a consultant is engaged to provide a 'remuneration recommendation' (i.e. in relation to amounts or elements of KMP remuneration), the consultant must only provide the advice directly to the Board or Remuneration Committee. However, those recommendations may be forwarded by the Board or Remuneration Committee to other persons, including to Management and Human Resources.

The remuneration consultant must be approved by the Board or the Remuneration Committee before the company enters into a contract with that consultant. However, the contract may be executed by any authorised signatory (rather than only by a non-executive director, as was originally contemplated in the Exposure Draft).

In addition, the Board will need to state (in the remuneration report) whether it is satisfied that the consultant's recommendation was made free from 'undue influence' by the relevant KMP (and provide details around the processes in place to ensure there has not been undue influence). Further, remuneration consultants need to make a declaration that there has not been 'undue influence' by the relevant KMP.

The Bill also sets out specific exclusions from remuneration recommendations, including advice about the operation of the law and the provision of facts and of information of a general nature relevant to all employees of the company.

Issues to Consider Now

The actual impact on current practices will vary significantly between companies, depending on the interaction between the Board, Remuneration Committee, Management and external remuneration consultants.

As a preliminary step, companies should consider how the Board, Remuneration Committee and Management currently use external advisers (and how it proposes to within the revised legislative framework), which will assist in framing the protocols for engagement and interaction and flagging where changes may be required to current practices.

As such, there are some threshold issues that should be considered, including:

  • what circumstances does the Board or Remuneration Committee currently seek external advice?
  • is an external opinion regarding the amount or elements of KMP remuneration sought (or is just supporting market data needed)?
  • which remuneration related tasks currently undertaken require a 'remuneration recommendation' (if any)? 

Such questions will assist in determining when to engage a remuneration consultant (if at all), how to engage and interact with a consultant and what internal process/document trail is required to ensure compliance.

Other Key Changes

The other key changes contained in the Bill that will also require change to current practices include:

  • 'Two-strikes test': If a company receives 25% or more votes against adoption of its remuneration report at two consecutive AGMs, the company is required to put a 'spill resolution' (an ordinary resolution to call a 'spill meeting') to the shareholders at the second annual general meeting (AGM). If the 'spill resolution' is passed (by at least 50%), the company must call the 'spill meeting' within 90 days of the second AGM. All of the company's directors (other than the managing director) who held office when the second year's Directors' Report was made will cease to hold office immediately before the spill meeting and stand for re-election.
  • The proposal also includes requirement for additional disclosure in the subsequent remuneration report where the company received a 'no' vote of 25% or more - setting out whether shareholders' views have been taken into account (and if not, why);
  • KMP voting exclusion: KMP and their close associates are prohibited from voting in their capacity as shareholders on the resolution regarding the remuneration report or the spill motion at the second AGM and as proxy holder for undirected proxies on resolutions relating to their remuneration;
  • Inclusion in remuneration report: Remuneration disclosures will only be required for KMP (i.e. companies will no longer need to separately include the top 5 most highly remunerated executives, if different);
  • 'No vacancy' rule: If the number of Board members is less than the maximum permitted in the company's constitution, shareholder approval (by ordinary resolution at a general meeting) will now be required to declare a 'no vacancy'. This means the Board can no longer declare a 'no vacancy' (which would have normally resulted in an outside nominee having to contest the position of an incumbent director)and, if the number of directors currently in office is less than the constitutional maximum, any candidate must be put to shareholders for election in their own right.

Download the Bill

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).

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