On 4 January 2010, the Australian Productivity Commission released its inquiry report on executive remuneration in Australia. The Australian Government commissioned the Report due to concern over excessive remuneration practices in Australia. The Government highlighted the importance of ensuring that executive remuneration is not structured to promote excessive risk-taking and corporate greed. The Report noted a widespread community perception that some executives were being highly paid irrespective of performance and in many cases were being rewarded for failure or good fortune beyond their control.
The Report recommends changes to the Australian Corporations Act (Cth) 2001 (Corporations Act) and to the Australian Stock Exchange (ASX) Listing Rules to reform the shareholder approval process for executive remuneration. Currently, listed bodies and unlisted “Disclosing Entities” must provide a Remuneration Report to shareholders as part of the Directors’ Report. Generally, an entity is a Disclosing Entity if securities in the body are listed on a prescribed financial market or are widely-held. Listed companies must propose a resolution at their AGM to adopt the Remuneration Report. The voting on the resolution is non-binding and “advisory only”. It does not need to be acted on by the company or the directors.
The report recommends a process where:
- “Disclosing Entities” must present a remuneration report to be voted on in the same manner as currently required.
- Entities receiving a ‘no’ vote of 25 per cent or more in the previous year must explain in their next remuneration report their response to the ‘no’ vote.
- If the entity receives a ‘no’ vote of 25 per cent or more in the second year, then a separate ‘re-election’ resolution is automatically put to the Annual General Meeting (AGM). The ‘re-election’ resolution has the effect that all elected directors who signed the remuneration report face re-election at an extraordinary general meeting which must be held within 90 days. The ‘re-election’ resolution requires a 50 per cent majority to be passed.
- The ‘re-election’ resolution is to be included in the voting papers sent to shareholders prior to the AGM.
This recommendation is likely to be controversial. Other recommendations of the report that may be more favourably received include:
- Amending the ASX Listing Rules for ASX300 companies, so that executives are prohibited from being part of the remuneration committees.
- Amending the Corporations Act to prohibit executives and directors from voting their shares on all remuneration reports and related resolutions.
- Amending the Corporations Act and the ASX Listing Rules to prohibit key management personnel and directors from voting undirected proxies on all remuneration reports and related resolutions.
- Amending the Corporations Act to prohibit executives from hedging unvested equity remuneration or any vested equity that is subject to a holding lock.
- Amending the Corporations Act to require proxy holders to cast all their directed proxies on remuneration reports.
- Amending taxation legislation so that equity based payments are taxed at the earlier of the date when ownership of, and free title in, the equity is transferred to employee, or seven years after the employee acquires the equity.
- Requiring institutional investors to disclose how they vote on remuneration reports.
The Report also noted the changes made to the Corporations Act in November 2009 in relation to termination payments for disclosing entities. Those amendments apply in relation to retirement from an office, or employment, held under an agreement entered into, renewed, extended or varied on or after 24 November 2009. The amendments require termination payments in excess of one year’s average base salary to be approved by shareholders. The Report recommended that these changes remain in place and the position be reviewed in future years.