New US remuneration consultant independence standards – useful as a checklist for Australian boards
13/11/2012
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The regulation of listed company remuneration continues to evolve around the world. In the US, the NYSE and NASDAQ have recently proposed listing standards regarding compensation committee and adviser independence. These are mainly principle based rules, and contrast with Australia’s clumsy black letter law. As such, they provide a useful guide for Australian board remuneration committees concerned with ensuring effective governance, rather than just complying with Australian laws that appear to have missed the point in regard to board adviser independence and governance.

The useful guidelines for Australian remuneration committees are provided by the factors identified in the regulations for assessing compensation consultant independence:

  • The provision of other services to the issuer by the adviser 
  • The amount of fees received from the issuer by the adviser, as a percentage of the total revenue of the adviser 
  • The policies and procedures of the adviser that are designed to prevent conflicts of interest 
  • Any business or personal relationship of the adviser with a member of the compensation committee 
  • Any stock of the issuer owned by the adviser 
  • Any business or personal relationship of the adviser with an executive officer of the issuer.

In common with Australian law, the US changes stop short of requiring independence, but do require assessment and disclosure of compensation advisers, with the intention of inspiring investor confidence in the pay advice the directors receive.

The oter similarities to Australian law in the proposed changes require NYSE and NASDAQ listed companies to:

  • Have sole authority to retain compensation advisers
  • Be responsible for the appointment, compensation and oversight of adviser work
  • Be provided with adequate funding for such services.

In Australia, provisions relating to remuneration consultant engagement were introduced into the Corporations Act from 1 July 2011, with the aim of improving the transparency and accountability of boards regarding director and executive remuneration, thereby helping “shareholders assess the independence of the advice that remuneration consultants provide to boards and their remuneration committees”. The Australian provisions include the following:

  • Remuneration consultants must be approved by the board or remuneration committee prior to engagement
  • Remuneration consultants must provide remuneration recommendations to a non-executive director or the remuneration committee – it is a strict liability criminal offence to provide a remuneration recommendation to a company executive
  • The remuneration consultant and the board must make separate declarations that a remuneration recommendation is made free from undue influence by the KMP to whom the recommendation relates
  • Companies that are a disclosing entity are required to disclose details relating to the use of remuneration consultants in the annual remuneration report.

The new US standards come in response to the new rules announced by the SEC in June 2012 governing the use of compensation advisers and the independence and the role of the compensation committee. As we noted in June, the US stock exchanges had 120 days from publication of the SEC’s rules to propose their new listing standards, which must be approved by the SEC within one year of the new rules becoming effective – see our description of the SEC’s rules HERE.  NYSE-listed companies are required to comply with the new rules starting 1 January 2013; NASDAQ listed companies must comply immediately upon adoption of the new standards.

The NYSE proposal can be found HERE, and the NASDAQ proposals can be found HERE.

© Guerdon Associates 2021
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