On 20 June 2011 the Senate passed the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Bill 2011 (Bill).
The new law will, subject to the Bill receiving royal assent, take effect from 1 July 2011.
Checklist of key action items
Some key action items for boards to consider in light of the new law are:
- new explanations of voting on a remuneration report in 2011 notices of AGMs
- monitoring shareholder votes on remuneration reports and a board's proposed response
- review of the content and level of disclosure in a 2011 remuneration report
- review of terms of engagement of any remuneration consultant and approval process of any consultancy contract
- review of board, remuneration committee and corporate governance policies and procedures regarding director and executive remuneration
- removal of any policies that permitted hedging of incentive remuneration and review of the terms of incentive remuneration packages such as performance shares and performance options and share trading policies
- review of any current board appointments made where a "no vacancy" declaration had been made and any board number limits
- review of proxy appointments and greater scrutiny of the exercise of directed and undirected proxy votes, especially where key management personnel are proxy holders and in relation to remuneration related resolutions.
A summary of some of the key amendments introduced by the new law is set out below.
The "two-strikes" test
Under the new law, a "two-strikes and re-election" process has been introduced for the non-binding shareholder vote on the remuneration report of listed companies and operates as follows:
- if a listed company's remuneration report receives a "no" vote of 25% or more after 1 July 2011 (the "first strike"), the company's subsequent remuneration report must set out the board's proposed action in response to the "no" vote or an explanation of why no action has taken place
- if the company's subsequent remuneration report receives a "no" vote of 25% or more (the "second strike"), a "spill resolution" (to determine whether the directors will need to stand for re-election) 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
- if the "spill resolution" is passed with more than 50% of eligible votes cast, then 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 applies 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.
The new law requires that the board or remuneration committee approve the engagement of a remuneration consultant and the remuneration consultant must report to the non-executive directors (unless all directors are executive directors) or the remuneration committee (unless the company does not have a remuneration committee), rather than the company's executives.
Prohibition against KMP voting on remuneration matters
Under the new law, KMP and their closely related parties are prohibited from voting on the non-binding shareholder vote on the remuneration report and on any spill resolution. Further, KMP and their closely related parties are prohibited from voting undirected proxies on all remuneration-related resolutions.
Prohibition against hedging of incentive remuneration
Under the new law, KMP of disclosing entities and the KMPs closely related parties are prohibited from hedging their incentive remuneration (ie KMP can't enter into an arrangement with anyone if it has the effect of limiting the KMP's exposure to risk relating to an element of the KMP's remuneration that is unvested (due to time or other conditions) or is vested but remains subject to a holding lock). As a result of this new prohibition, previous disclosure requirements regarding hedging policies are redundant and are no longer required.
Persons required to be named in the remuneration report
Under the new law, remuneration disclosures are only required for the KMP of the consolidated entity (and not for the KMP and the five most highly remunerated officers (if different) in relation to both the parent entity and the consolidated entity).
No vacancy rule
Under the new law, shareholder approval (either at an EGM or extraordinary general meeting) of public companies is required to make a declaration that there are no vacant board positions, should the number of board positions filled be less than the maximum number specified in a company's constitution. The need for shareholder approval applies regardless of whether the board limit is the subject of a new resolution or the decreasing of a lower maximum. If agreed, the declaration is in force until the following AGM.
Directed and undirected proxy votes and cherry picking
Under the new law, non-chair proxy holders must cast all of their directed proxies on all resolutions as directed if they vote. If a nominated proxy does not vote, the proxy will automatically default to the chair, who has a duty to vote all directed proxies. This ensures that directed proxies are counted as the shareholder intends.
Previously, a chair holding any directed proxies had to vote on all of them. However, non-chair proxy holders could chose ("cherry-pick") which proxies to vote. This gave non-chair proxy holders the ability to choose to exercise only those votes that supported their position, and to not exercise votes that did not accord with their views on a resolution.
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.