To ensure that Australia’s remuneration framework promotes responsible remuneration practices that are in line with community expectations, the government has released a discussion paper on a further proposal to clawback remuneration where a company’s financial statements are materially misstated.

Introduction

In December last year, the Government released a discussion paper as a first step in the public consultation process to canvass the introduction of a clawback provision.

Overview of existing framework

Under the current legislative regime, there is no requirement that provides for the clawing back of remuneration in the event of a financial misstatement.  

Instead, the onus is placed on shareholders to commence legal proceedings in an attempt to recover overpaid remuneration amounts. This process is often costly and onerous for both the shareholders and the company, and, for that reason, may not produce optimal results.  

Proposed amendments

If the Government introduces a clawback provision, an obligation will be created for directors and other executives to repay to the company any remuneration that is based on materially misstated financial information. This may involve the recoupment of remuneration previously paid to the executive, or the termination of an outstanding but unvested and unpaid future award.  

Conclusion

Material misstatements in a company’s financial statements can arise either through deliberate misconduct or unintentional error, and may be significant enough to influence the decision making of investors and other stakeholders when considering remuneration issues. In those circumstances, mechanisms to facilitate the recovery of amounts paid to executives are clearly in the best interests of shareholders. However, it may be appropriate commercial practice for a company itself to negotiate such an outcome and clearly articulate its own remuneration philosophy as opposed to a adopting an inflexible legislative approach.

Interested parties were invited to comment on the discussion paper and provide their views in order to assist the Federal Treasury and the Federal Government with their deliberations. Submissions on this paper closed on 30 March 2011.  

The Government has stated it will consider all submissions and respond before 30 June 2011.