As reported in media, CAMAC is to workshop alternative approaches to remuneration. Almost in concert, the rest of the world is also amending reporting requirements. The latest proposals come from the Canadians, who released their own proposed changes on 18 November. The Canadian changes have been driven, to an extent, by changes in US reporting requirements.
While Australia’s reporting requirements already cover much of what is being proposed in the US and Canada, there are still aspects of the changes that Australia should look to in finalising its own changes to the Corporations Act.
The executive compensation changes proposed by the Canadian Securities Administrators (the CSA) include:
- Explicit disclosure when companies are relying on an exemption to avoid having to reveal details of performance hurdles for executive pay;
- Disclosure of whether the board considered potential risks associated with compensation practices;
- Disclosure of policies permitting executives to use financial instruments to hedge against losses in their shares;
- Disclosure of all fees paid to compensation consultants for other types of work provided to the company; and
- Disclosure of details of the methodology used to calculate the value of stock option grants.
These are more fully explained below, while the detail can be found HERE
1. Serious prejudice exemption in relation to the disclosure of performance goals or similar conditions
Unlike Australia’s s300A of the Corporations Act, the Canadians provide an exemption from the requirement to disclose specific performance goals or similar conditions on the basis that disclosure would “seriously prejudice the interests of the company”. However, Canadian reviews have shown that it is difficult to recognize when the company is relying on this exemption.
It is proposed to require the company to explicitly state that it is relying on the exemption and explain why disclosing the relevant performance goals or similar conditions would seriously prejudice the company’s interests.
While Australia currently allows an exemption on similar grounds for other aspects of company reports in s299(1)e, there is no exemption from disclosing performance requirements. Despite this, most companies do not disclose bonus requirements. Australia could consider formally recognising this widespread non-compliance with a “prejudicial” exemption, as the Canadians and Americans do, combined with a fuller explanation of non-reporting along the lines suggested by the Canadians.
2. Risk management in relation to the company’s compensation policies and practices
From 2010 the US has required disclosure of company compensation policies and practices for all employees if those policies and practices create risks that are reasonably likely to have a material adverse effect on the company. This requirement was introduced in response to concerns that, at some companies, compensation policies have become disconnected from long-term company performance and create incentives that influence behaviour inconsistent with the overall interests of the company. Such misalignment has been cited as one of the many factors that contributed to the GFC.
Australia’s APRA has already tackled this with additional regulations for financial services companies, and does not require public disclosure. See HERE
The Canadians propose to amend their reporting requirements to require companies to disclose whether the board of directors considered the implications of the risks associated with the company’s compensation policies and practices.
Where a company completes a risk analysis, it must discuss and analyze its broader compensation policies and overall actual compensation practices for executive officers, and at business units, if risks arising from those compensation policies or practices are reasonably likely to have a material effect on the company. More specifically, a company would be required to disclose: (i) the nature and extent of the board’s role in the risk oversight of compensation policies and practices; (ii) any practices used to identify and mitigate compensation policies and practices that could potentially encourage a named executive officer or individual at a principal business unit or division to take inappropriate or excessive risks; and (iii) the identified risks arising from the policies and practices that are reasonably likely to have a material adverse effect on the company.
3. Disclosure Regarding Executive Officer and Director Hedging
The Canadians will require companies to disclose whether any named executive officer or director is permitted to purchase financial instruments (such as prepaid variable forward contracts, equity swaps, collars, or units of exchange funds) that are designed to hedge or offset a decrease in the market value of equity securities granted as compensation or held, directly or indirectly, by the executive or director.
Australia already has similar provisions.
4. Disclosure of fees paid to compensation advisers
In response to the perception that there may be a conflict of interest when compensation consultants advising the board on executive compensation also provide additional services to the company, such as human resource, actuarial or benefit administration services, the 2010 US SEC Amendments introduced new rules requiring disclosure of the fees paid to compensation consultants and their affiliates
Guerdon Associates has followed these developments closely, including the findings by a US Congressional Committee (see HERE), and recommendations by the Australian Productivity Commission for similar disclosure in Australia (see HERE)
The Canadians propose to expand current disclosures about compensation advisers retained by the company (which include a description of the advisor’s mandate and any other work performed for the company) by requiring a breakdown of all fees paid to compensation advisers for each service provided.
However, as we noted in our submission to the Productivity Commission (see HERE), boards also receive conflicted advice from management. Hence, it would be better to require boards to identify sources of conflict from all advisers on remuneration, whether internal or external, and to explain how the board manages these conflicts.
To ensure your board does not receive conflicted advice, see our checklist HERE© Guerdon Associates 2023 Back to all articles