On 21 February 2012 the Australian Government announced the latest in its long line of reforms concerning executive remuneration. The amendments follow a recent consultation on a clawback proposal and will also implement a number of recommendations of the Corporations and Markets Advisory Committee (CAMAC) into remuneration disclosure. They will operate as follows.
- Listed companies will be required to disclose to shareholders in its remuneration report the steps taken to clawback bonuses or other remuneration where there has been a material misstatement in relation to a company's financial statements.
- A "material misstatement" will occur where there has been an omission or misstatement of an item in a financial statement which could individually or collectively influence the economic decisions that users make on the basis of the financial statement in which it appears.
- The company will have discretion whether or not to utilise these clawback measures where a material misstatement has occurred. However, if they do not, they will be required to give a detailed report to shareholders regarding why no action was taken.
- Practically, this means that companies will need to implement clawback provisions in executive agreements that allow them to clawback executive remuneration where there has been material misstatement regarding the companies financial statement.
The reforms are intended to operate in conjunction with the recent two-strikes amendments. If shareholders are dissatisfied with the clawback they can vote down the remuneration report. If "no" votes of 25% or more are gathered at two consecutive AGMs this can lead to a spill of the board, requiring new elections.
Other aspects of the proposed reforms include the following changes (expanded in the table below) which comprise the Government's response to the CAMAC report on remuneration disclosure.
- Relieving certain unlisted entities from the obligation to prepare a remuneration report.
- Inserting disclosure requirements regarding related party transactions (which are to be removed from accounting standards as of 1 July 2013) into the Corporations Regulations.
- Implementing a limited number of recommendations from the CAMAC's 2011 report on executive remuneration.
Summary of proposed amendments
Section300A of the Corporations Act2001 (Cth) (Act) to require companies to set out in their remuneration report a general description of their remuneration governance framework.
|Disclosure of this information will benefit shareholders. Further consultation would be appropriate on the precise details that would be required to be disclosed. These details could be drafted to avoid duplication and overlap with existing disclosure requirements.|
|Options Section300A of the Act to
be amended to require that the remuneration report disclose any
options that have lapsed in the current financial year and indicate
the year(s) in which they were granted. There will be no obligation
to include a value for the lapsed options.
The obligation in section300A(1)(e)(vi) of the Act to disclose the percentage of the value of remuneration that consists of options to be repealed as it is already covered in information already required by Corporations Regulation2M.3.03.
|The value of lapsed options is of limited use to
This will simplify the legislative framework without substantially diluting the information available to shareholders.
|Benefits on termination Section300A(1)(e)(vii) of the Act to be amended to require the disclosure of all payments (including entitlement payments, severance payments and post-severance payments) for key management personnel upon their retirement from the company, regardless of whether those payments were provided under a contract of employment.||This disclosure will provide greater transparency on the amount and composition of termination payments disclosed in the remuneration report.|
|Remuneration outcomes A requirement that the remuneration report disclose, for each key management personnel, crystallised past pay, present pay and future pay.||Presenting information in this way will assist shareholders to clearly distinguish between present pay, and pay that has been received due to past pay having crystallised. The Government intends to consult on the precise details that would be required to be disclosed under each of these categories. As part of this process, the Government also intends to consult on the need for disclosure of dividends on unvested shares paid to key management personnel.|
Source – Parliamentary Secretary media release
Likely impact of the proposed amendments
Although some of the proposed changes will reduce compliance requirements, many will add significantly to the already onerous obligations surrounding disclosure and executive remuneration.
The proposed clawback reforms will require companies to introduce clawback provisions into their executive agreements. However, it is pleasing to see that there will be some degree of discretion afforded to companies regarding clawbacks, rather than regulators being vested with the power to initiate clawback proceedings.
With the final wording of the proposed amendments yet to be released, there is considerable uncertainty surrounding these provisions, how they will operate and what it will mean for companies, directors and shareholders. Is this the end of the road for changes to executive remuneration? We think not.
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.