ASX 100 companies tend to be relatively large. Most, but not all, serve a primarily domestic market, and enjoy high market share. Within these, and much to the Productivity Commission’s chagrin, some share the market in an oligopoly, and have created a reasonable economic moat that repels potential competitors. Many are masters of branding and reputation, leveraging a dominant market presence and “Australian ownership” for a degree of rent seeking that protects their share and value from effective competition. These are the tall poppies that politicians and voters tend to provide ongoing support. Until, that is, someone messes up. They fail to live up to their brand promise. They are caught non-complying. They price gouge. Or someone down the line presses the red button.
Media cannot let go, politicians see opportunity, short sellers sniff blood, incentives are due to vest, a remuneration report is about ready, and AGM notice of meeting is soon due.
What does the board and board remuneration committee do?
Here is a check list.
- Establish facts ASAP. What happened? How did it happen? Have customers, community, employees or suppliers suffered? Can it be rectified? Can harm caused be remediated? Is the cost material?
- Stop harm. Acknowledge concern and rectification to all stakeholders.
- Map accountability (see HERE). Banks under the recently superseded BEAR regime have accountability maps whereby executive accountability for outcomes and processes can be identified. This will be inherited in the new FAR legislation (see HERE) covering insurers and superannuation funds. Other industries can follow suit. However, be aware that accountability mapping is not kind to matrix management systems that facilitate collaboration, shared accountability and agility. So not for everyone.
- Undertake due process to identify culpability.
- Review in period annual incentive plans due for payment. Check offer letters and plan rules. These should permit sufficient board discretion to:
- Defer payment
- Provide for payment in all equity but defer
- Payment as usual in cash, with an amount that can be deferred and subject a later decision to lapse (aka malus).
- Decide on either a, b or c
- Check the extent that annual incentives from prior years are due to vest. Check offer letters and plan rules. These should permit sufficient board discretion to:
- Lapse all or part of the deferred amount
- Apply a holding lock to prevent sale
- Discuss with the executives concerned who have deferred incentives due to vest if they would agree to a variation to either defer vesting or submit to a holding lock.
- If due process has not been completed by the time disclosures are due, amend disclosures to incorporate the discretion or agreement to defer or not trade.
- Receive media advice whether to include executive pay process in media releases addressing the broader issue
- Review the company’s consequence management framework (see HERE)
- Consider if it is sufficient for addressing the issue. If not, amend and incorporate into any explanatory notes seeking new executive director grants.
- In conjunction with board risk, safety (as appropriate), technology (as appropriate) and audit committees finalise evidence, establish cause, accountability, and culpability. Decide on any in period annual incentive adjustments, malus for any deferred incentives, and/or clawback for any paid (and hopefully not yet traded) incentives, and/or termination of service.
- Consider and decide remediation.
- Engage stakeholders throughout the process. Advise all stakeholders of outcomes.