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