More changes to pay regulation – parliamentary committee makes recommendations
01/08/2008
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The Parliamentary Joint Committee on Corporations and Financial Services has inquired into the engagement and participation of shareholders in the corporate governance of companies in its report titled Better Shareholders – Better Company: Shareholder Engagement and Participation in Australia (see HERE).

Within their report are recommendations in relation to executive pay regulation.

The terms of reference of the committee were to ‘inquire and report on the engagement and participation of shareholders in the corporate governance of the companies in which they are part-owners’, with particular reference to:

• barriers to the effective engagement of all shareholders in the governance of companies;
• whether institutional shareholders are adequately engaged, or able to participate, in the relevant corporate affairs of the companies in which they invest;
• best practice in corporate governance mechanisms, including the election of directors, voting arrangements and the conduct of annual general meetings;
• the effectiveness of existing mechanisms for communicating and getting feedback from shareholders;
• the particular needs of shareholders who may have limited knowledge of corporate and financial matters; and
• the need for any legislative or regulatory change.’

The committee received 45 submissions, including from ASX Limited and industry bodies such as the Business Council of Australia, the Australian Institute of Company Directors, the Australian Council of Super Investors and Chartered Secretaries Australia.

The Committee noted the absence of disclosure regarding the terms of the external management agreements, such as the remuneration paid or voting entitlements issued to external managers. The Committee recommended that these issues should be addressed by the government examining the on-market exemption to Listing Rule 10.14 and the disclosure requirements pertaining to external management agreements as part of its green paper review of corporate governance regulations. 

Voting on remuneration

As a result of the CLERP 9 reforms to the Corporations Act, shareholders can now engage with directors on their remuneration by participating in a non-binding vote on the directors’ remuneration report.  The main concern heard by the Committee was that shareholder directors being able to vote on their own remuneration, particularly where they have substantial holdings, might undermine this initiative.

Accordingly, in recommendation 20, the Committee said that the government should amend the Corporations Act to exclude shareholder directors from voting on their own remuneration packages either directly or by directing proxies.

The Committee also acknowledged concerns regarding the October 2005 amendment to ASX Listing Rule 10.14, which allows companies to grant shares as part of a director’s remuneration package without shareholder approval if the shares are purchased on market. In relation to ASX Listing Rule 10.14, the Committee noted that the on market exemption is reasonable having regard to the rule’s objective to prevent shareholder value being diluted by share issues to directors. In this, at least, the committee came to the same view as Guerdon Associates, expressed by us back in 2006 when we noted that the ASX Corporate Governance Council was considering an ambiguous amendment to its principles (see HERE). 

The Committee also reviewed the lack of transparency regarding external management agreements.  This is an arrangement whereby a listed company outsources the management of the company to another company employing the executives.  This arrangement has been used by a small minority of companies and industries (for example, it is a common arrangement in the gaming industry).  The arrangements are usually less than transparent, and can be subject to abuse (one of the most egregious was experienced by shareholders of AIG – see HERE). 

In Australia, the primary criticism is the lack of transparency where listed vehicles are managed by an investment bank for a significant fee.

Postponing votes until after the AGM

Interestingly, the Committee also examined the declining trend in attendances at AGMs.  There have been concerns that shareholders’ voting decisions are not being based on the information conveyed at AGMs, which frequently includes more fulsome explanations of remuneration arrangements than has been provided in remuneration reports.

Chartered Secretaries Australia proposed that, in order to allow investors a reasonable opportunity to consider their voting position, the informative and deliberative functions of AGMs should be separated by opening voting on resolutions at the AGM and allowing shareholders to vote for some time after the AGM had closed.

The Committee agreed that shareholders would be better placed to make informed voting decisions by allowing them to vote in this manner. Accordingly, the Committee recommended that the government should consult with industry on the implementation of postponed voting after the close of company AGMs. Adopting the suggestions made by Chartered Secretaries Australia, the Committee considered that postponed voting could be mandated through provisions in the Corporations Act or, alternatively, included in the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations on an ‘if not, why not’ basis.

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