In the aftermath of the economic uncertainty caused by the Global Final Crisis there has been increased calls from both the public and private sector for transparency and accountability on behalf of directors and executives in respect of the remuneration they receive as a result of their position.  

The Labor Government consequently enacted the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Bill 2011 (Cth) (Bill) which received royal assent on 27 June 2011. The Bill will generally apply from 1 July 2011, with some provisions to commence on 1 August 2011.

The purpose of the Bill is to improve the transparency, disclosure and accountability of the remuneration process of executives and directors.

What are the changes?

The key changes/implementations under the Bill include:

  • the implementation of the ‘two-strikes’ test regarding the remuneration report;  
  • process of voting on remuneration matters;  
  • new rules regarding the engagement of remuneration consultants; and  
  • a prohibition on the hedging of incentive remuneration.  

Two-Strikes Test

Under the Bill, a ‘two-strikes’ test has been implemented in respect of the adoption of the remuneration report (Report).  

Shareholders of listed companies will be required to vote on whether the entire board (with the exclusion of the managing director) should submit for reelection in the event that ‘two strikes’ occur in respect of the adoption of the Report.  

The ‘first strike’ will occur where at least 25% of the votes cast at an annual general meeting (AGM) are against the adoption of the Report.

The ‘second strike’ will occur if at the AGM immediately following the ‘first strike’ the Report receives a ‘no’ vote of at least 25% or more of the votes cast at the meeting.  

If a ‘second strike’ occurs, it will be necessary for a ‘spill resolution’ to occur (at the same AGM the second strike was received) to determine whether the directors in office should be re-elected at the ‘spill meeting’ of the company’s members. A ‘spill meeting’ is held in the event that 50% or more of members voting in the ‘spill resolution’ are in favor of a ‘spill’.  

The directors in place at the time of the ‘second-strike’ (with the exception of the managing director) will cease to hold office immediately before the end of the ‘spill meeting’.

Resolutions to appoint people to the ‘vacated’ positions will be put to a vote at the ‘spill meeting’ which must be held within 90 days of the delivery of the ‘second strike’. If the ‘spill meeting’ does not occur in the 90 day time frame, each person who is a director at the end of the 90 day period will have committed an offence.

Voting on remuneration matters

The Bill provides that ‘key management personnel’ whose remuneration details are included in the Report must not vote on the Report, nor can a closely related party (eg, family members or companies controlled by the key management personnel) of the key management personnel. This change will apply from 1 August 2011.

Additionally, the Bill also contains a prohibition on key management personnel and their closely related parties voting undirected proxies on all remuneration associated resolutions except in circumstances involving an undirected proxy being given to a member of key management personnel who is to chair the AGM. However, in order for this exception to apply, the appointment must expressly authorise the chair to exercise the proxy even if the resolution is connected with the remuneration of a member of the key management personnel.  

However, it should be recognised that the prohibition on key management personnel or closely related members voting on remuneration resolutions may pose difficulties for smaller companies who do not have a wider shareholder base. For example, where a founder holds 50% of the shares and holds a Board or senior executive position they will not be entitled to vote on the Report or the spill vote. Therefore only 25% of the remaining shareholders (eg, 12.5% of the total shareholders) will be required to vote against the Report in 2 consecutive AGM’s for a spill meeting to occur.  

Remuneration consultants

Remuneration consultants (Consultants) are typically engaged by boards to assist in advising them on remuneration arrangements, pay structures etc.

Until the commencement of the Bill, the Corporations Act 2001 (Cth) (Act) did not cover the engagement of remuneration consultants.  

Under the Bill the board or remuneration committee of a company which is also a disclosing entity must now sign off on the engagement of the Consultant.

The Consultant must only give advice to the remuneration committee or non-executive directors of the company. Consultants are only permitted to provide recommendations to executive directors if all directors of the company are executive directors.

Additionally, if the Consultant makes a recommendation in relation to any key management personnel, the directors’ report of the disclosing entity must reflect the nature of this recommendation (although not the content).  

Hedging of incentive remuneration

The Bill also contains a prohibition on the hedging of unvested incentive remuneration and of vested entitlements which remain subject to a holding lock to a member of the key management personnel (or a closely related party) of a company that is a disclosing entity.

The prohibition applies to hedging of entitlements made on or after 1 July 2011 (irrespective of whether the remuneration relates to services provided prior to this date).

What steps should companies take?

There are a number of steps that companies should take in order to avoid potential problems arising from the changes in the law relating to executive and director remuneration, including:  

  • Reviewing the outcome from the 2010 AGM in respect of the adoption of the Report. In the event that a high proportion of shareholders were against the report, it may be necessary for the company to consider what steps may be taken in order to avoid a ‘first strike occurring’ at the next AGM.  
  • Ensure that the notice of the AGM and ancillary material adequately explain to shareholders the operation of the ‘two-strike’ rule and the potential implications that this may have on the company.  
  • Consider whether it is beneficial for the company to determine the views of shareholders prior to the AGM on remuneration issues to avoid problems arising.  
  • Review remuneration packages of key management personnel to ensure that they do not breach any prohibitions on the hedging of entitlements.  
  • Ensure that the proxy forms provided to members prior to the AGM alert members to the restrictions in respect of proxy voting.  
  • Ensure that remuneration consultants are only engaged by, and report back to, authorised committee members or non-executive directors.  

If you are a concerned how the changes contained in the Bill may impact upon your duties and obligations, we can assist.