Life is getting more complicated for directors – in this article we have tried to make things a bit easier.
New legislation introducing a ‘two-strikes’ rule and making substantial changes to procedures associated with executive remuneration, board limits and determination of proxy votes received Royal Assent on 27 June 2011, just three days before it came into force on 1 July 2011.
We summarised the legislation HERE
Among the procedures associated with executive remuneration are obligations regarding the engagement of external remuneration advisers. We have provided a 4 step checklist below.
1. Directors must first approve the consultant
For consulting engagements commencing on or after 1 July 2011, before a listed company can execute a contract to engage a remuneration consultant, the directors of the remuneration committee or the Board must first have approved the consultant.
We expect that such approval can apply on an on-going basis, until the approval is withdrawn, in relation to an indefinite number of consulting engagements. The form of contracts is not specified in the legislation – contracts can be written, oral or implied by the actions of the parties.
Do not panic. We have drafted an engagement letter for you HERE
2. Provide an avenue to receive a remuneration recommendation
Remuneration consultants may only provide remuneration recommendations regarding key management personnel to the directors of a disclosing entity (except the executive directors), or the remuneration committee, or both.
Given that a large part of the Centro case (see HERE) revolved around the information received by directors via management, and the external experts that in effect reported via management, this is probably not a bad thing, if administratively annoying.
We suggest providing an email address to receive written advice in the engagement letter (see link above) where advice constitutes a “remuneration recommendation” (see below). Given the sensitivity of remuneration matters, it is important you also provide the external adviser with a contact telephone number.
‘Remuneration recommendation’ is broadly defined in the legislation, being a recommendation in relation to the remuneration of a member of key management personnel (subject to limited exceptions, including legal advice, accounting advice and actuarial advice) about either or both of:
• how much the remuneration should be; and
• what elements the remuneration should have.
Any person external to the company who makes a remuneration recommendation under a contract for services with the company will be a ‘remuneration consultant’ (subject to the exceptions for matters that, for example, constitute legal, accounting or actuarial advice).
Regulations are to be made to further clarify the meaning of ‘remuneration recommendation’.
3. Require that the advice is free from undue management influence
A “remuneration recommendation” must be accompanied by a declaration from the consultant providing it about whether the recommendation was made free from undue influence by the key management personnel to whom it relates.
This requirement is addressed in the suggested engagement letter (see link above).
4. Disclose that you are satisfied that undue influence was not exerted and why
The remuneration report must contain certain details relating to remuneration consultants.
Information about arrangements put in place by the Board to ensure that the remuneration recommendation was free from undue influence by the relevant members of key management personnel and a statement about whether the Board is satisfied that the remuneration recommendation was free from undue influence and the reasons for this must also be included.
Our suggested engagement letter (see above) requires that the consultant not work for management or, if they do, only after approval by the remuneration committee in relation to specified matters.
‘Key management personnel’ has the same definition as in the Corporations Act generally.
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