On 25 May, the Corporations and Markets Advisory Committee (CAMAC) released its report on simplifying incentive remuneration and remuneration disclosure. 

 

In a nutshell, CAMAC recommends some refining amendments to the corporations legislation, (principally section 300A and regulation 2M.3.03) but concludes that ‘now is not the time’ to make major changes given the pending two strikes rule.

The report reasons the two strikes rule is likely to trigger changes to remuneration practice, so once those changes have crystallised it may be appropriate to reconsider replacing the current regime with a non-prescriptive reporting approach.

 

On balance, the CAMAC response was pragmatic, given that boards of directors have been reeling from almost continuous volleys of changes to laws and regulations impacting pay, distracting them from overseeing the running of their businesses.

 

CAMAC was responding to a request from the federal government for advice on:

 

1.     Revising the remuneration setting framework to simplify the incentive components of executive remuneration; and

 

2.     Reducing the complexity of executive remuneration reports.

 

On the first issue, CAMAC considered that incentives are ultimately matters for companies to determine for themselves, and that close prescription of those arrangements and policies will not necessarily improve shareholder outcomes.

 

CAMAC was of the view that boards of companies, assisted by their remuneration committees and, in some instances, external remuneration consultants, are best placed to determine the particular remuneration arrangements for each of their key management personnel that would promote the interests of the company and its shareholders. 

 

CAMAC’s conclusions on this issue reflected the general view of the parties who presented submissions to the inquiry, including Guerdon Associates, representing a broad cross-section of the commercial community.

 

This is a sensible and pragmatic position to take, which recognises that it is impossible for the government to prescribe the structure of executive remuneration.

 

On the second issue, CAMAC took the view that it is not appropriate to make substantial changes to the disclosure of executive remuneration, given the imminent introduction of the ‘2 strikes’ rule for voting on the remuneration report and that remuneration reporting practices are likely to evolve significantly over the next few years in response to that rule.  A move to a non-prescriptive approach to disclosure could be considered once the 2 strikes rule has been in operation for some time.

 

However, CAMAC emphasises that meaningful and complete disclosure to shareholders of the nature of those arrangements and policies is likely to improve shareholder understanding and acceptance of executive remuneration.  To this end, CAMAC has broadly recommended removing the current requirement of disclosure in accordance with relevant accounting standards.  CAMAC also recommends amendment to section 300A to permit companies to exclude commercially sensitive information concerning a performance condition from their report, provided that the exclusion is disclosed and a general description of the excluded information is provided (possibly based on the existing provisions in subsection 299(3), suggested by Guerdon Associates in comparison of Australian requirements with US and Canadian requirements – see HERE).

 

Specifically CAMAC recommended amendments to section 300A and regulation 2M.3.03 to:

 

·       require companies to give a general description of their remuneration governance framework

·       permit companies to withhold commercially sensitive information concerning a performance condition, provided that they disclose that fact and set out a general description of the omitted information

·       remove the requirement to use accounting standards methodology in remuneration reports

·       require the disclosure of all termination payments, identifying entitlement payments (amounts paid on termination that reflect statutory and other accumulated payments), severance payments (amounts paid specifically for termination, including gratuitous and discretionary payments) and post‑severance arrangements

·       require disclosure, for each executive, of crystallized past pay (remuneration granted at some previous time and paid in the current financial year), present pay (remuneration granted and paid in the current financial year) and future pay (remuneration that is deferred to some future period).

 

Our view is that these are generally sensible recommendations.  It will be interesting to see how companies respond to the exemption from disclosing commercially sensitive information on performance conditions.  Very few companies have complied with their current obligation to disclose performance conditions, and ASIC has never followed up on this. Our own advice to CAMAC was that the exemption be consistent with s299(3) of the Corporations Act, which talks of disclosures being “unreasonably prejudicial” to the company, or that there be a reference to “commercial harm”, as opposed to commercial sensitivity.  The former is more open to objective testing, as applied in the US regulations.

 

Removing the obligation to disclose options grants in accordance with the accounting standards has the potential to remove a lot of the confusion with current disclosures, but runs the risk that it will be more difficult to compare arrangements if companies use different methodologies for valuing equity.  If this comes to pass in the next government round of pay regulation changes, we suggest companies tread carefully.  The likelihood is that proxy advisers, institutional investors and other governance stakeholders will look at how companies describe these in the remuneration report with the accounting values in the financial report.

 

The full CAMAC report is available HERE

 

What if CAMAC went the whole way and recommended major change to “simplify” reporting?  To cover for this possibility and make for truly simplified reporting requirement, Guerdon Associates submission to the CAMAC on a simplified section 300A, developed in association with Allens Arthur Robinson, is available HERE

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