What is an executive remuneration hedge, and when is it illegal?
30/05/2011
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The government has, apparently inadvertently, come up with a convincing argument against its black letter law approach to regulating the governance of executive remuneration, and in favour of a principles-based approach. 

Treasury has released what it calls an “Explanatory Commentary” seeking feedback and comments on the regulations to be made pursuant to the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Bill 2011. 

Regulations are to be made in relation to:

1.     The particular kinds of advice that are not ‘remuneration recommendations’ (under reg 1.2.01).  Treasury has not provided a draft regulation for comment, but is seeking comments on “…any types of recommendations or advice that should, or should not, be considered as a remuneration recommendation for insertion into the regulations.”

2.     Arrangements that are, and are not, to be treated as arrangements that have the effect of limiting KMP exposure to risk relating to an element of their incentive remuneration (for the purposes of section 206J of the Bill, under sub-regulations 2D.7.01(1) and 2D.7.01(2)).  

Sub-regulation 2D.7.01(1) currently incorporates two arrangements Treasury believes should be treated as limiting KMP risk exposure:

·       A put option on incentive remuneration; and

·       An income protection insurance contract in which the insurable risk event affects the financial value of remuneration or equity or an equity-related instrument for the KMP

Comments are sought on whether further clarification is required for the terms ‘put option’ and ‘equity’.  Comments are also sought on other arrangements that should be treated as a hedging arrangement and included under subregulation 2D.7.01(1).

Subregulation 2D.7.01(2) currently incorporates two arrangements Treasury believes should not be treated as limiting KMP risk exposure:

·       An income protection insurance contract in which the insurable risk event is the death, incapacity or illness of any of the key management personnel; and

·       A foreign currency risk arrangement.

Comments are sought on whether further clarification is needed in relation to foreign currency risk arrangements and whether there are any foreign currency arrangements that should be treated as a hedging arrangement and included under subregulation 2D.7.01(1).

Comments are also sought on other arrangements that should not be treated as a hedging arrangement and included under subregulation 2D.7.01(2).

Don’t blink.  Comments are sought by 9 June 2011.

It would be simpler just to rely on the principle stated in section 206J, prohibiting arrangements that would have the effect of limiting the exposure of a member of KMP or a closely related party of such a member to “risk relating to al element of the member’s remuneration that:

(a)      Has not vested in the member, or

(b)     Has vested in the member but remains subject to a holding lock.”

The narrow definition of ‘remuneration recommendation’ arguably undermines any potentially positive contribution the remuneration consultant disclosure rules could make to Australian corporate governance.

For the masochistically inclined, the Explanatory Commentary can be found HERE.

© Guerdon Associates 2021
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