Australian government indicates more regulation on executive pay, and takes a swipe at proxy firms
28/10/2011
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The Hon David Bradbury MP is Parliamentary Secretary to the Treasurer, and responsible for the recent two-strikes rule that provides the opportunity for a minority of shareholders to trigger a resolution for a new board election if they do not like executive pay (see HERE).  He also commissioned a CAMAC review of executive pay reporting and a Treasury review of executive pay clawback feasibility. These have followed new Australian government laws regarding termination payment restrictions and share plan taxation.

During a speech delivered on 19 October 2011, Mr Bradbury indicated that additional regulation on executive pay matters is not likely to cease.  The government will respond to CAMAC recommendations to simplify remuneration reports, with Mr Bradbury noting that:

Our guiding principle in our response will be that simplification of remuneration reports should not lead to a diminution of the richness of information that is provided to shareholders.”

The timing of any changes will most likely coincide with changes to accounting standards on executive pay reporting (see HERE).  However, Mr Bradbury, in a speech the following day (see HERE), indicated that Australia will be a proponent of an international integrated reporting regime that will include remuneration (see the International Integrated Reporting Council discussion paper HERE.  If you have input, Australia’s submissions are being coordinated by the Financial Reporting Council).  So either this will delay things, or result in more uncertainty and changes down the track.

Probably the most difficult area to regulate is clawback of pay after it has been paid.  Mr Bradbury recognised this:

“The Government is also considering the submissions made to its proposal for a process to allow the “clawback” of remuneration in the event of a material misstatement in the financial statements.

There is currently no requirement that provides for clawing back bonuses or other remuneration in the event of a material misstatement by the company.

It is legitimate to question whether directors and executives should be entitled to keep remuneration which was based on materially erroneous financial information.

And similar questions have been asked globally.

The new global standards on pay in the financial sector require that any unvested performance-based component of remuneration must be able to be reduced or eliminated if long-term performance objectives are not realised.

The Government publicly consulted on the proposal of clawback earlier this year.  A number of submissions to this consultation process highlighted concerns with the workability of a legislative approach to clawing back remuneration.”

Mr Bradbury also criticised proxy advisers:

At the same time, boards who seek to engage with their shareholders, in good faith, should not be frustrated by proxy advisers standing between them and their shareholders. In this regard, I note that there has been some recent commentary suggesting that some proxy advisers have shown an unwillingness to respond to the shareholder engagement approaches of some companies. While proxy advisers have an important role to play in advising shareholders, under the new executive remuneration changes they are expected to avail themselves of the information they need to properly advise shareholders on remuneration matters.”

The role of a proxy adviser is a difficult balance.  They advise their clients based on disclosures made to all shareholders.  If the disclosure raises questions that may result in a “no” vote recommendation, we understand that they will seek clarification from the company on the disclosures made.  If a company fails to respond in time for the proxy firm to meet its obligations to clients, the proxy firm will tend to rely on its assessment of the compliance of the written disclosures with their governance guidelines.  But proxy firms are unlikely to have time to respond to unbidden requests to see them during proxy season.  The best time for this is during the “quiet” times outside of the proxy season.

We also have not heard of an instance of a proxy firm standing between a company and its shareholders.  Well managed companies engage with their major shareholders on a regular basis.  However, major shareholders will also have resourcing issues which may restrict company engagement during the proxy season.

Mr Bradbury, somewhat cryptically, said that:

The Government will also be monitoring the changes that companies choose to make to improve their communication with shareholders as a result of the two-strikes test.“

Mr Bradbury’s speech can be found HERE

© Guerdon Associates 2021
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