As you would be aware, in March 2009 the Productivity Commission was asked by the Federal Government to report on the framework and structures around the remuneration of directors and executives of disclosing entities regulated under the Corporations Act 2001 (Cth) (Act). A draft report was released in September 2009. The Productivity Commission’s Final Report into Director and Executive Remuneration (Report)1 was released by the Federal Government on 4 January 2010.
The Report contains 17 recommendations covering areas such as remuneration principles and disclosures, shareholder engagement and conflicts of interest. In the main these recommendations reflect those contained in the draft report, including the draft recommendations to restrict remuneration report disclosures to key management personnel and to simplify the remuneration report, and the draft recommendation that cessation of employment be removed as a taxing point for deferred equity subject to forfeiture.
Key changes since the draft report
- Two-strikes plus a resolution to ‘spill’ the board (recommendation 15) – Significantly, in the Report the Productivity Commission has diluted the draft report’s two-strikes proposal under which two consecutive ‘no’ votes equal to or greater than 25% on a company’s remuneration report would trigger an automatic re-election of directors. The final ‘two strikes’ recommendation includes an extra hurdle which means that if two consecutive ‘no’ votes of 25% or more are received, a separate re-election resolution is activated to the effect that all elected directors who signed the directors’ report for that year must stand for re-election at an extraordinary general meeting, which must be held within 90 days. Set out below is a diagram, extracted from the Report, which illustrates the process.
- Declarations of ‘no vacancy’ must be approved by shareholders (recommendation 1) – The Productivity Commission has also retained its draft recommendation that shareholders must approve a declaration of ‘no vacancy’ on a company board at a general meeting. This recommendation is a response to criticism that boards use the ‘no vacancy’ rule to exclude outsiders, perpetuating a ‘boys’ club’ environment. However, the recommendation has been criticised by business groups who state that boards are best placed to decided how many members are needed to work efficiently and that resolutions such as these will distract boards from their most important role, which is protecting the company’s financial health and growth prospects. The Report also specifically supports the ASX Corporate Governance Council’s ‘if not, why not’ (finding 1).
- Recommendations 16 and 17 are new and relate to implementation of the Report. They respectively propose that:
- Recommendations 2 and 3 on conflict of interest matters, and recommendations 10 and 11 relating to remuneration advisers be implemented by legislation if the ASX and the ASX Corporate Governance Council do not make the requisite changes, and
- the reforms flowing from the Report be reviewed within 5 years.
The full list of final recommendations is set out below.
The Government has indicated that it is considering the Report and will respond ‘later in the new year’.
Two strikes plus a resolution to ‘spill’ the board2
Please click here to view diagrams and flowchart.