Contributions to this article by Louisa Blackwood, Senior Associate.

In response to community concerns and the Productivity Commissions' recent inquiry into executive remuneration, the Government has introduced the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Bill 2011 (Bill).

The Bill takes effect from 1 July 2011.

A summary of some of the key amendments introduced by the Bill are set out below.

Prohibition against hedging of incentive remuneration

Under the current law, key management personnel (ie persons with authority and responsibility for planning, directing and controlling the activities of a company) (KMP) can hedge their exposure to incentive remuneration. In 2007, the Corporations Act 2001 (Cth) (Act) was amended to require companies to disclose their hedging policy and how they enforce their hedging policy.

As a result of the Bill, KMP will no longer be able to hedge their incentive remuneration. As a result of this prohibition, the current disclosure requirements regarding hedging policies will become redundant and will no longer be required.

The 'two-strikes' test

Under the new law, a 'two-strikes and re-election' process will be introduced for the non-binding shareholder vote on the remuneration report and will operate as follows:

  • if a company's remuneration report receives a 'no' vote of 25% or more, the company's subsequent remuneration report must set out the board's proposed action in response to the 'no' vote
  • if the company's subsequent remuneration report receives a 'no' vote of 25% or more, a spill resolution must be put to shareholders at the same annual general meeting (AGM) (note that notice of the spill resolution must be included with the notice of AGM to ensure that notice is given if the 'second strike' is triggered)
  • the spill meeting must be held within 90 days.

At the spill meeting, individuals who were directors when the directors' report was considered at the company's most recent AGM will be required to stand for re-election (other than the managing director, who is permitted to hold office indefinitely without being re-elected under the ASX Listing Rules).

The new law will apply to resolutions on the remuneration report that are passed after 1 July 2011. Accordingly, a spill resolution will be triggered if both strikes occur after 1 July 2011.

Prohibition against KMP voting on remuneration matters

Under the Bill, KMP who are shareholders will be prohibited from voting on the non-binding shareholder vote on the remuneration report and on any spill resolution. Further, KMP may only vote undirected proxies on remuneration-related resolutions if they are the chair of the meeting and the relevant shareholder has expressly given their consent for the chair to exercise their proxy.

Remuneration consultants

The Bill introduces a requirement that the board or remuneration committee approve the engagement of a remuneration consultant. Remuneration consultants will also be required to report to the non-executive directors or the remuneration committee, rather than the company's executives (unless all directors are executive directors).

A consultant who makes a remuneration recommendation in relation to the KMP of a disclosing entity must also include a declaration in their recommendation that it was made free from any undue influence by the KMP to whom the recommendation relates.

A disclosing entity will also need to set out certain details regarding the consultant in its remuneration report, for example:

  • the consideration paid for the remuneration recommendation
  • a statement that the board is satisfied that the consultant's recommendation was made free from any undue influence from KMP
  • details of any other advice provided by the consultant to the company in the relevant financial year.

Persons required to be named in the remuneration report

Currently, the Act requires the remuneration details of KMP and the five most highly remunerated officers (if different) to be disclosed in the remuneration report of both a parent entity and the consolidated entity.

Under the new law, remuneration disclosures will only be required for the KMP of the consolidated entity.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.