Executive pay inquiry will force nomination committee to come in from the cold – a checklist

We are expecting the government to accept many of the Australian Productivity Commission’s executive pay recommendations (see HERE).  These will require most ASX listed companies to change the way they oversee pay, disclose pay, and engage with shareholders.  But, in addition, there are significant changes to be wrought in the way boards approve, review, disclose, monitor and police the development and promotion of diversity and, specifically, women. 


For the first time, directors will be required to report on the nomination committee’s area of responsibility.


While the government has not met its deadline to respond to the Productivity Commission’s report by the end of the March, it is likely to respond during April.  Given the experience with share plan taxation and termination pay, the delay in response will be easily forgiven providing the government gets it right. 


In addition to the government response to the Productivity Commission recommendations, the Australian Securities Exchange (ASX) will be amending its listing rules, while the ASX Governance Council will also amend its “Governance Principles and Recommendations” that, under ASX listing rules, require companies to provide an “if not, why not” explanation if recommendations are not adopted. 


This article provides a checklist to minimise potential fallout in the new regulatory landscape.  But remuneration committee members can take heart – this checklist is for your colleagues on the nomination committee.


For members of a combined remuneration and nomination committee, we are sorry to advise that the increased workload you were expecting on the remuneration front will get a bit bigger because of your nomination responsibilities.


Three key Productivity Commission recommendations in this area and their implications are below.


1.     Removal of the “no vacancy” rule


Consider AGM approval for “no vacancy” and/or check fee pool headroom. The Productivity Commission has recommended the removal of the “no vacancy” rule. This will allow any vacant board seats to be filled by shareholder nominated and elected directors, even if the board believes that it has sufficient directors already and that a vacancy should be kept in reserve for contingencies. 


The Productivity Commission responded to research showing a lack of boardroom diversity and suggestions of the existence of a directors’ “club” (but with the latter based on little evidence other than the fact that a few hundred people run our few hundred companies). 


The impact of the no vacancy rule change will depend on the company.  For most free float companies we do not expect major change.  For others with large shareholders and no board representation the story may be quite different.


The board nomination committee may want to consider seeking shareholder approval at the next AGM to allow it to declare no vacancy to cope with contingencies, such as the possible need for the board to appoint a director in between AGMs.


We also suggest that remuneration committees review fee headroom.  Typically, we suggest that headroom in the fee pool be at least 20% to cope with contingencies that may arise with the removal of the no vacancy rule.  However, the required headroom will vary with each company’s circumstances.  For example, are some directors due to retire soon?  Are new directors coming on board within the next two years?


2.     “If not, why not” diversity progress reports


The nomination committee develop, monitor and report on a gender diversity policy.  The Productivity Commission bemoaned the lack of diversity on boards.  Fortunately it stopped short of suggesting quotas given reasonable assurance that the absence of diversity could be tackled in other ways.  In response, the ASX Corporate Governance Council proposes to expand its Principles and Recommendations to require listed entities to adopt and disclose (on an ‘if not, why not’ basis) in annual reports a diversity policy that includes measurable goals regarding gender representation (see HERE). 


New proposed recommendations include the requirement to establish a diversity policy, and report in the annual report on company achievements against the board’s gender goals and the proportion of women on the board, in senior management positions and across the organisation as a whole. 


In effect, this is the first requirement for the board nomination committee to produce a report similar to the remuneration committee’s obligation to present a remuneration report.


Nomination committees beware!  This may just be the start of a disclosure and shareholder engagement journey your colleagues on remuneration committees have been traveling these past 5 years.


3. Change the nomination committee charter and board assessment criteria


Another task for the nomination committee centres on amendments to its charter for more proactive diversity monitoring and a board assessment process that takes diversity into account.  While nomination committee members may be somewhat taken aback with all the attention they are getting from what is ostensibly a review of remuneration, this has been on the cards for some time.  The various governance agencies, some institutions and other stakeholder groups have had nomination committees in their sights for years.  They have reasoned that, as the primary task of the board is to hire and fire the CEO, why isn’t there more heat applied to the nomination committee to improve and disclose their processes.  The PC enquiry into executive remuneration was their opportunity to get the ball rolling. 


In support, the ASX Governance Council is also proposing that existing recommendations be amended as follows.


● Recommendation 2.4 be amended to encourage nomination committees to include in their charters a requirement to continuously review the proportion of women at all levels in the company. 


● Recommendation 2.5 be amended to require board performance reviews to consider diversity in addition to skills.  Boards should also be required to disclose the skills and diversity characteristics they look for in new board appointments.


Directors have several sources for assistance.  For example, the Australian Institute of Company Directors has an extensive program with which most boards could engage in (see HERE).  In addition, last week the Business Council of Australia released news of action to increase the availability of top level mentoring for women (see HERE).

© Guerdon Associates 2024
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