The Gillard Government will be introducing reforms to further strengthen Australia's executive remuneration framework, said Parliamentary Secretary to the Treasurer, David Bradbury.
This next phase of reforms has been developed after extensive consultation on a proposal for 'clawback' and will also implement several recommendations made by the Corporations and Markets Advisory Committee (CAMAC) to improve disclosure in remuneration reports.
Under these reforms, the Gillard Government will progress amendments to the Corporations Act 2001 to require listed companies to disclose to shareholders through the remuneration report the steps they have taken to clawback bonuses and other remuneration where a material misstatement has occurred in relation to the company's financial statements.
If the company has not clawed back any remuneration, the board will be required to provide a detailed explanation to their shareholders. If shareholders are unhappy with the company's actions, they would be able to use their powers under the two-strikes rule to vote down the remuneration report and potentially spill the board.
"As owners of a company, shareholders expect executives to be rewarded according to the performance of a company," said Mr Bradbury.
"These reforms put the onus on listed companies to make sure they have provisions to clawback bonuses and other pay from executives if there has been a material misstatement of a company's financial statements.
"If they don't, they run the risk of shareholders recording a 'strike' against them at their annual general meeting when they vote on the remuneration report and potentially voting to spill the board and force fresh elections of directors.
"Clawback provisions in executive contracts are already being adopted by many listed companies and these reforms will ensure that shareholders are able to have a say about the efficacy of those provisions."
"This reform builds on the additional powers we have provided to shareholders to have a say over the level and composition of executive pay.
"These include the new two-strikes rule which came into force on 1 July 2011 and give shareholders the power to vote to spill a board and force fresh elections if there have been 'no' votes of 25 per cent or more recorded against the remuneration report at two consecutive annual general meetings.
"The Gillard Government's reforms are intended to drive a culture of change in the boardroom and ensure that boards are held accountable to shareholders for the decisions they make on the level and composition of executive pay.
"Importantly, these reforms make sure that executive pay remains closely linked to the performance of a company."
In response to CAMAC's 2011 report on executive remuneration, the Government will be improving disclosures contained in remuneration reports, by requiring more transparent disclosure of termination payments or 'golden handshake' payments. Unnecessary disclosure requirements will be removed to simplify remuneration reports, and clearer categorisation of pay will be introduced to better enable shareholders to understand the company's remuneration arrangements.
Other proposed reforms to the executive remuneration framework announced today include:
- relieving certain unlisted entities from the obligation to prepare a remuneration report, which will significantly reduce the regulatory burden on companies that are not subject to the 'two-strikes' mechanism; and
- inserting disclosure requirements relating to related party transactions into the Corporations Regulations, as these disclosure requirements will be removed from the accounting standards from 1 July 2013.
"Concerns about executive pay have recently prompted action in other jurisdictions, such as the United Kingdom," said Mr Bradbury.
"The Gillard Government's evidence-based reforms improve accountability and transparency while preserving our international competitiveness. They provide a balanced and sensible template for other jurisdictions who want to improve governance in their executive remuneration frameworks and give shareholders more power to have a say."
Further details of the Government's response to CAMAC's 2011 report on executive remuneration are available in the attachment.
Draft legislation to enact these reforms is expected to be released for public consultation in the latter half of 2012.
21 February 2012
ATTACHMENT: Government response to CAMAC's 2011 report on executive remuneration
CAMAC Recommendation |
Response |
Reason for response |
1. Remuneration governance framework – s 300A should require companies to set out in their remuneration report a general description of their remuneration governance framework. |
Supported |
Disclosure of this information will benefit shareholders. Further consultation would be appropriate on the precise details that would be required to be disclosed. These details could be drafted to avoid duplication and overlap with existing disclosure requirements. |
2. Relationship between remuneration policy and corporate performance –s 300A(1AA) and (1AB), which require additional details for the link between remuneration policy and corporate performance, should be repealed as it is unduly prescriptive. |
Not supported |
The details required by s 300A(1AA) and (1AB) are fundamental to assessing company performance, and should not be removed. |
3. Performance conditions - A company should be permitted to exclude from its remuneration report commercially price‑sensitive information, contingent upon the satisfaction of certain criteria. |
Not supported |
The current framework, which requires a detailed summary, provides sufficient flexibility for companies to withhold any commercially sensitive information. In addition, an explicit exemption may result in a lower level of engagement with shareholders, particularly if companies assert that they are not required to disclose the information. |
4. Application of accounting standards – s 300A(1)(e)(ii) should be amended to remove the reference to the accounting standards. That is, CAMAC recommends removing the requirement for key items, such as options granted to key management personnel, to be calculated in accordance with accounting standards, as the application of accounting methodology to the remuneration report can confuse and mislead shareholders without providing useful information. Instead, CAMAC recommends that companies be permitted to use their own valuation methodology, which they must disclose in the remuneration report. |
Not supported |
If the remuneration report is not prepared in accordance with the accounting standards, shareholders will not be able to make meaningful comparisons between remuneration reports, given that there will be no requirement for the numerical values to be calculated on the same basis. In addition, this recommendation could adversely affect the integrity of information provided in the remuneration report. |
5. Role of the external auditor – s 308(3C) should include a requirement for the external auditor to give an opinion on the accuracy of calculations in a remuneration report. |
Not supported |
This recommendation would result in a lesser level of assurance than is currently provided on the remuneration report. In any event, this recommendation is no longer required if recommendation 4 is not implemented. |
6. Valuing future-vesting equity-based remuneration – Corporations Regulation 2M.3.03 should be amended to require a company to disclose, in the financial year in which future-vesting equity‑based remuneration was granted, (i) the methodology used to value that remuneration, and (ii) the number of securities granted as a result of the application of that valuation methodology. |
Not supported |
Consistent with the proposed response to Recommendation 4, information contained in the remuneration report should be disclosed in accordance with the accounting standards. Allowing companies to decide on the valuation method may limit comparability between remuneration reports, given that there will be no requirement for numerical values to be calculated on the same basis. In addition, this recommendation could adversely affect eh integrity of information provided in the remuneration report. |
7. Options – s 300A should be amended to require that the remuneration report disclose any options that have lapsed in the current financial year and indicate the year(s) in which they were granted. There should be no obligation to include a value for the lapsed options. The obligation in s 300A(1)(e)(vi) to disclose the percentage of the value of remuneration that consists of options should be repealed as it can be deduced from information already required by Corporations Regulation 2M.3.03. |
Supported
Supported |
The value of lapsed options is of limited use to shareholders.
This proposal will simplify the legislative framework without substantially diluting the information available to shareholders. |
8. Benefits on termination – s 300A(1)(e)(vii) should be amended to require the disclosure of all payments (including entitlement payments, severance payments and post‑severance payments) for key management personnel upon their retirement from the company, regardless of whether those payments were provided under a contract of employment. |
Supported |
These disclosures will provide greater transparency on the amount and composition of termination payments disclosed in the remuneration report. |
9. Remuneration outcomes – There should be a requirement that the remuneration report disclose, for each key management personnel, crystallised past pay, present pay and future pay. |
Supported |
Presenting information in this way will assist shareholders to clearly distinguish between present pay, and pay that has been received due to past pay having crystallised. The Government intends to consult on the precise details that would be required to be disclosed under each of these categories. As part of this process, the Government also intends to consult on the need for disclosure of dividends on unvested shares paid to key management personnel. |