Board remuneration committee and board checklist to deal with new executive remuneration laws
28/02/2011
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The Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Bill 2011 was only introduced into federal parliament on 23 February 2011, and may or may not emerge from the parliamentary process in its current form.  But it is worth considering how boards would need to respond to its current provisions, if only because these provisions apply to remuneration report votes on or after 1 July 2011. 

We suggest that the actions required of boards will include:

1.      Identify external remuneration advisers who advise on remuneration levels and remuneration “elements”, for KMP, whether or not the advice is considered material.  Because additional black letter law is still to come to define remuneration “elements”, include advisers who advise on:

·          The extent of fixed pay and incentive pay

·          Retention pay

·          Performance measures and vesting scales

·          Payment vehicles

·          Recruitment sign-ons

·          Expatriate allowances

2.      Establish a process for the board or remuneration committee to approve consultants before entering consultancy contracts on KMP remuneration

3.      Identify external remuneration advisers who do not provide ‘remuneration recommendations’ (as defined in the new law).  Examples include:

·          Advice on the reasonableness of remuneration to comply with s211 of the Corporations Act

·          Advice on the tax effectiveness of share plans and pay packages

·          Advice on the extent to which terminations payments require shareholder approval

·          Advisers on remuneration resolution shareholder communications and proxy solicitation

·          Providers of survey data for KMP pay adjustments

·          Pay vehicle valuers who advise on the number of options and share rights to grant

·          External performance testers for relative TSR and the like.

Once identified, consider establishing a governance protocol to recognise that management’s use of these providers could constitute a conflict of interest, and that it may materially impact KMP pay outcomes and shareholder value.  The protocol may merely require that management recommendations to the board based on advice from these providers:

·          Acknowledge the input from the providers

·          Identify the fees paid to the providers for this work and other work commissioned by management, and

·          That the board’s independent adviser reviews the work.

4.      Engage an approved independent adviser. Make sure there is a signed engagement letter that states:

·          That advice must only be commissioned by a non- executive director

·          That advice be delivered to a non-executive director

·          That advice not be provided to KMP

·          That any work commissioned by management, including non-remuneration work, not be accepted by the adviser

·          That the consultant is required to acknowledge in writing that management has not had any undue influence on recommendations delivered to directors

·          The basis of fees, invoicing and payment.

5.      Amend proxy forms to allow directed proxies to revert to the chairman

6.      Include a resolution to acknowledge no vacancy to fill board vacancies.  Provide that the constitution allows for this.

7.      Establish a shareholder follow up process after each AGM to identify reasons for remuneration report “no” votes.  Consider these, and resolve to address them if found to be valid.  Report on outcomes of research and actions in the following year’s remuneration report

8.      If the prior year’s remuneration report resolution received a 25% or higher “no” vote, include a resolution to spill the board in the AGM notice of meeting in the event that the “no” vote on the current year’s remuneration report is also 25% or higher.

9.      Establish a procedure for all KMP to declare that they and their closely related parties have not entered into a hedging arrangement for unvested equity, or equity subject to a holding lock

10.   Ensure that a procedure is in place to count and not accept undirected proxy votes cast by KMP on remuneration resolutions, unless that person is the chairman and has been authorised by the shareholder to vote the proxy on remuneration resolutions

11.   Ensure the necessary disclosure is made in the remuneration report on all of the above matters.

© Guerdon Associates 2021
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