The Government has today responded to the Productivity Commission's (PC's) final report on Australia's director and executive remuneration framework.
The Government supports nearly all of the PC's recommendations, including the "two strikes" proposal, and has decided to further strengthen several of the recommendations by expanding their scope and enforceability.
The Government will also consider an additional proposal, not identified by the PC, to clawback bonuses paid to directors and executives in the event of a material misstatement in the company's financial statements.
The inquiry was commissioned in March last year and final PC report was released on 4 January 2010. The Government commends the PC for its comprehensive report and the thorough and consultative approach used in the review process.
The Government understands why there is anger and concern in the community about the most excessive instances of executive pay, and recognises the importance of putting in place policies that promote transparent, accountable and responsible remuneration practices. That is why the Rudd Government has taken, and will continue to take, tougher action on the regulation of executive pay than any previous government.
The Government will introduce legislation to implement many of the PC's recommendations, including the "two strikes" proposal, which will strengthen the non-binding vote on remuneration and set out consequences where companies do not adequately respond to shareholder concerns on remuneration issues.
Legislation giving effect to the reforms will be introduced this year, following public consultation on an exposure draft.
The Government will also undertake consultation on the proposal to clawback bonuses paid to directors and executives in the event of a material misstatement of a company's financial statements.
This proposal is aimed at ensuring that, to the extent that pay packets are inflated by incorrect information, that money is returned to shareholders. A discussion paper will be released in coming months.
These are important reforms that will improve Australia's remuneration framework by encouraging shareholder engagement, tackling conflicts of interests, improving disclosure requirements and improving the design of remuneration policies. These reforms will also ensure that Australia's regulation of director and executive remuneration remains at the forefront of international best practice.
These reforms complement other recent Government initiatives to strengthen Australia's remuneration framework, such as recent reforms to empower shareholders to reject excessive termination benefits or "golden handshake" payments given to company directors and executives.
Australia has also played a key role in developing new global standards on pay in the financial sector. These standards are being implemented by the Australian Prudential Regulation Authority and took effect from 1 April 2010.
A summary of the Government's response to the PC report is at the Attachment.
16 April 2010
Attachment
The Productivity Commission's recommendations
and the Government's response
Table 1 - Summary of Government response
| Rec | Summary of recommendation | Summary of Government response |
|---|---|---|
| 1 | Any declaration of 'no vacancy' at an AGM to be agreed to by shareholders. Boards to retain flexibility to make required appointments during the year with shareholder approval at next AGM. | Support. |
| 2 | The ASX Corporate Governance Council's principles should provide, on an 'if not why not' basis, that remuneration committees should comprise at least three members, all non-executive directors, with a majority and the chair independent, and companies should have a charter setting out procedures for non-committee members attending meetings. | Support in‑principle. |
| 3 | The ASX listing rules should prohibit executives in ASX300 companies from sitting on remuneration committees. | Support in‑principle. |
| 4 | Prohibit key management personnel that hold shares from voting on their own remuneration arrangements. | Support with additional strengthening. |
| 5 | Prohibit key management personnel from hedging unvested equity remuneration or vested equity subject to holding locks. | Support with additional strengthening. |
| 6 | Prohibit key management personnel from voting undirected proxies on remuneration resolutions. | Support. |
| 7 | Require proxy holders to cast all their directed proxies on remuneration reports. | Support with additional strengthening. |
| 8 | Remuneration reports should include a plain English summary of remuneration policies and report actual remuneration received and total company shareholdings of individuals in the report. Establish an expert panel to advise on Corporations Act architecture to support changes. | Support, with: - CAMAC to act as expert panel; and - additional referrals. |
| 9 | Confine remuneration disclosures to key management personnel. | Support with further streamlining. |
| 10 | The ASX Corporate Governance Council's principles should provide, on an 'if not, why not' basis that companies should disclose executive remuneration advisers, who appointed them, who they reported to and the nature of any other work undertaken for the company. | Support. To be implemented through legislation. |
| 11 | Where an ASX300 company engages remuneration consultants, the consultant's services should be commissioned by, and their advice provided directly to, the remuneration committee or board, with accompanying disclosure in the remuneration report. | Support. To be implemented through legislation. |
| 12 | Institutional investors should voluntarily disclose how they have voted on remuneration reports (and other remuneration-related issues). ASIC should monitor progress in relation to superannuation funds regulated under the Superannuation Industry (Supervision) Act 1993. | Support in-principle. |
| 13 | Remove the cessation of employment trigger for taxation of equity or rights that qualify for tax deferral and are subject to risk of forfeiture. | Not support. |
| 14 | ASIC should issue a public confirmation to companies that electronic voting is legally permissible without the need for constitutional amendments. | Support in‑principle. |
| 15 | Two strikes and re-election resolution process: 25 per cent 'no' vote on remuneration report triggers reporting obligation on how concerns addressed, and subsequent 'no' vote of 25 per cent activates a resolution for elected directors to submit for re-election within 90 days. | 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 requisite changes. | Support. |
| 17 | Review within five years to consider: the effectiveness and efficiency of the reforms, including to termination payments and employee share schemes, and the regulatory architecture. | Support. |
| Claw back | 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. |
Table 2 - Summary of differences between the PC report and the Government response
| Rec | Summary of difference (if any) | Explanation for the difference |
|---|---|---|
| 4 | Prohibition to be expanded to “closely related parties” of key management personnel. Key management personnel would continue to be able to vote directed proxies. | The expansion to closely related parties is designed to further strengthen the regulatory framework by ensuring that related parties are not utilised to circumvent the intention of the prohibition and affect the outcome of remuneration-related resolutions. |
| 5 | Prohibition to be expanded to “closely related parties” of key management personnel. | The expansion to closely related parties is designed to further strengthen the regulatory framework by ensuring that management and shareholders' interests are aligned and that related parties are not utilised to circumvent the intention of the prohibition. |
| 7 | Recommendation to be extended to cover all resolutions, not just those related to remuneration. | 'Cherry-picking' should be prohibited for all resolutions, not just those related to remuneration because shareholders should be able to expect that the voting system in which they participate is effective and representative of their intentions. |
| 8 | The Government plans to use the Corporations and Markets Advisory Committee (CAMAC) as its expert panel to advise on legislative changes, rather than establish a new panel. The Government will also ask CAMAC to make recommendations on how the incentive components of executive pay could be simplified. | CAMAC is an established body, compromised of a range of experts who are well-placed to provide advice on the legislation. Establishing a new stand-alone panel would involve unnecessary expense. The additional request to identify ways to improve the incentive components of executive pay is intended to simplify overly complex remuneration arrangements. |
| 9 | Recommendation to be extended to remove the requirement to include separate disclosures on the officers of a parent entity. | The recommendation has been extended to remove the requirement for executives of the parent entity to ensure that there is no doubling of information in the remuneration report. This extension will simplify the remuneration report, reduce compliance burden and reduce the complexity of disclosures. |
| 10 | Disclosures to be included in the Corporations Act and strengthened to include additional disclosures (such as the fees paid to remuneration consultants). | Implementation through legislation will strengthen the enforceability of the requirement and ensure that there is transparency with the use of remuneration consultants. The additional disclosures will deliver greater transparency for shareholders and better enable them to assess potential conflicts of interests with the use of consultants. |
| 11 | Requirements to be included in the Corporations Act and expanded to all listed companies that engage remuneration consultants (not only ASX 300 companies). | Implementation through legislation will strengthen the enforceability of the requirement and ensure that there is transparency with the use of remuneration consultants. The extension to all listed companies that engage a remuneration consultant will further ensure transparency and accountability in relation to remuneration consultants. |
| 13 | Australian Government does not support the recommendation. | Cessation of employment as a deferred employee share scheme taxing point has been a feature of the law since 1995. Removing this would increase the concessionality of schemes, providing a disproportionately large benefit to higher-income employees. It would reduce the integrity of the tax system, make it more difficult for the Australian Tax Office to ensure the correct amount of tax was paid, and would have a significant cost to Australian Government revenue. |
| Claw back | New proposal to be considered in a discussion paper. Proposal would require a director or executive to repay to the company any bonuses calculated on the basis of financial information that subsequently turned out to be materially misstated. | The Australian Government believes that the introduction of a 'clawback' provision warrants further analysis, as it would help strengthen the ability of shareholders to recover overpaid bonuses that have occurred as a result of materially misstated financial statements. |