What the CPA saga has taught: a checklist on remuneration and governance in private organisations
05/07/2017
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ASX-listed company directors well know what is expected of them in disclosing the details of the company’s executive remuneration. Those directors are in many cases office holders of not-for-profit (NFP) companies, private companies and other unlisted entities with various stakeholder groups. Given the widely-publicised travails of CPA Australia over recent months, directors of these entities can be excused for spending some extra time thinking about their governance, disclosure obligations and wondering what might be coming down the pipeline.

If self-regulation of remuneration is not working the government may feel compelled to to do it for you.

In fact, this has already been proposed in the UK. The UK government’s November 2016 green paper on Corporate Governance Reform proposed, among other things, increased disclosure and corporate governance requirements for large, privately-held companies (see HERE). However, if looking for precedent, it is unlikely these reforms will proceed in the UK, given that they were omitted in the recent Queen’s speech outlining the narrowly re-elected government’s agenda.

Australia’s Corporations Act 2001 and Regulations provide the prescriptive rules and principles for the detailed disclosure of remuneration of key management personnel (KMP) in ASX-listed companies. However, unlisted public companies, large and small private companies, NFP entities and other member organisations operating in Australia are not subject to these same rules of disclosure. As we have recently seen there appears a need for better transparency.

Directors of these organisations will want to understand, firstly, their legal obligations, and, secondly, what are appropriate standards of governance in such organisations. Section 202A of the Corporations Act requires the directors’ remuneration of a company other than a public company to be determined by a resolution of the board. This is a replaceable rule that means the company’s constituent documents can provide the basis. If you are a director of such an organisation you will, firstly, want to check the entity’s constitution or other constituent documents. They usually provide requirements for director and executive remuneration governance and disclosure.

The Corporations Act also provides that a minimum of 100 members or members with at least 5% of the votes can direct the company to disclose all details of the remuneration paid to each director. This is the reason remuneration at the CPA was disclosed.

So, what are the lessons thus far from the CPA saga? Here is a checklist for your NFP or other unlisted organisation’s board to consider.

  • What does the Constitution say on remuneration governance and disclosure?
  • Has the board considered adopting the ASX Corporate Governance Council Principles and Recommendations?
  • Do the Board, Remuneration Committee and Audit Committee Charters reflect the company’s current size, operations and modern governance standards?
  • Have you followed these standards in setting executive remuneration?
  • Are you satisfied that on any member review of director, CEO and other executive remuneration, there will be no concerns with the level and structure of the remuneration?
  • Are you satisfied that the benchmarking work properly sized executive positions, and that the sample comparator group is the likely source from which to recruit and to which the company may lose its executives? Are the constituents in the comparator group clearly comparable?
  • Has the board reviewed a draft disclosure of the remuneration of the CEO and other KMP in preparation for meeting any calls for disclosure? Did it provide an adequate and valid basis for how remuneration was set?
  • What percentage increases have there been in aggregate remuneration and individual executive remuneration over the last five years? Are these more or less than market increases and likely to be in accord with member expectations?
  • What are the processes and procedures for setting executive remuneration? Are there checks and balances in the procedures that operate to identify the potential for anomalous outcomes? Does the board seek independent advice, or rely solely on management advice regarding their own pay?
  • What are the performance measures for the CEO and the executive team?
  • Do the CEO and the executive team have a variable pay opportunity? Is that the right structure for your organisation? Why?
  • What are the processes and procedures for the setting of the CEO’s objectives and annual performance review?
  • Has the board carried out a board evaluation and effectiveness review? Was it on a self-assessment basis or externally facilitated?
  • Have the results of the prior board evaluation been acted upon?

This is only a short list as there are many more questions a director could ask of the governance procedures. The answers will tell you if it is time to re-focus.

© Guerdon Associates 2021
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