Executive remuneration legislation exposure draft and clawback discussion paper released

Just in time for Christmas, on 20 December 2010 the Australian Parliamentary Secretary to the Treasurer, the Hon David Bradbury, MP, released an exposure draft of legislation to implement the government’s response to the Productivity Commission’s executive remuneration reform recommendations.

Mr. Bradbury also released a Treasury discussion paper for consultation on a proposal (not recommended by the Productivity Commission) to ‘clawback’ remuneration paid to executives where a company’s financial statements are materially misstated. 

The government’s media release, exposure draft and explanatory memorandum and the clawback discussion paper are available HERE

The exposure draft bill

According to Mr. Bradbury, “[The exposure draft bill] measures are about giving more power to shareholders, as well as improving the transparency, disclosure and accountability of the remuneration process.”  They are due to come into effect from 1 July 2011.

‘Two strikes’ test on the remuneration report vote

Shareholders will be required to vote on whether to spill all board positions if the vote in favour of the remuneration report at two successive AGMs is 75% or less.  The “spill resolution” will be put at the second AGM and, if passed with 50% or more of the eligible votes cast, will require a meeting (the “spill meeting”) to elect directors to be held within 90 days (unless all of the directors other than the MD who were in office at the second AGM have been replaced on the board at that time).

The bill includes a mechanism to ensure that a minimum of 3 directors remain after the spill meeting.

Directors who survive the spill meeting serve for their original term of office, without extension.

Comment:  The outcome a case of the tail wagging the dog.  That is, a minority ownership can demand and receive changes to executive pay on which the majority is satisfied with. 

The simplest solution would be to require the minimum of “no” votes on the remuneration report to be lifted from the proposed 25% to 50%.

There are a host of technical issues in the legislation that make it unworkable in its current form, for example, in ensuring that there remain three board directors to comply with other areas of the Act, and not allowing for the nomination of alternative directors.  We would expect the draft to undergo significant revision to overcome just these technical issues.

Engagement of remuneration consultants

Section 300A is to be amended to require specified disclosures if a remuneration consultant provides advice on the remuneration of any KMP, including

§   The name of the consultant

§   The name of each director who executed the contract under which the consultant was engaged

§   The name of each person to whom the consultant directly gave the advice

§   A summary of the nature of the advice and the principles upon which it was prepared

§   The amount and nature of the consideration provided under the contract for the advice

§   The nature of any other work the consultant did for the company during the financial year, and the amount and nature of the consideration for any such work.

Only non-executive directors will be able to execute a contract to engage a remuneration consultant (although a contravention of this requirement does not affect the validity of the contract).

Remuneration consultants will be required to provide their advice directly to the directors of the company or the remuneration committee (excluding executive directors unless all of the directors are executive directors).

It will be a strict liability criminal offence for a remuneration consultant to provide their advice to a ‘prohibited person’ (which apparently includes the company secretary or GMHR preparing papers for board and committee meetings). 

Comment: Any additional disclosure should aid transparency, identify conflicts of interest, not create the prospect of commercial harm, and provide insight into how these conflicts are managed.

The draft legislation falls down on all these aspects

Remuneration advisers as defined will encompass peripheral advisers on general remuneration matters that may also touch on KMP remuneration, such a advice on the value of employee share options, job banding and evaluation, superannuation, share plan rules, employee contracts, employee benefit taxation and accounting treatments.   For some companies this will be a long list.  Such advisers will not be keen to have their fee details for other work published.  The problem can be resolved by borrowing from the UK regulation to require the disclosure of individuals who provided material advice only.

The requirement to disclose the nature of advice and the principles underlying it will add more bulk to a large report.  Some of it may prove embarrassing e.g. KMP termination payment advice for someone who does not know they are to be terminated!  As with the disclosure of performance requirements, there is no escape clause for companies to not disclose the nature of advice if this would cause commercial harm.

The disclosure is limited to external advisers.  It does not require disclosure of the most conflicted advisers – management.  Under UK standards the disclosure requirements relate to all who provided the remuneration committee with material advice, irrespective of whether the adviser is internal or external. 

There is no disclosure on how the board manages conflicts of interest associated with the advice received.  Surely this is the most important consideration.   It is missing.

The prescriptions for how external remuneration advice services are to be contracted, who can contract the service, and how that service is to be delivered are surely the most intrusive, prescriptive and inflexible in the Corporations Act.  Nowhere else are prescriptions for how services be contracted and managed, even for far more material issues, such as capital restructures and issues, mergers and acquisitions, or even audit services.  Hence not only does the current legislation require shareholder judgment on how a board carried out their remuneration accountability, but the changes go half way to telling the board how to manage it as well.

The solution is simple – remove all prescription and let board manage remuneration, including advice received, as they see fit to meet their fiduciary obligations, improve disclosure on how this was managed, and retain accountability through the vote.

No hedging by KMP

KMP and their closely related parties will be prohibited from hedging the KMP’s unvested equity remuneration and vested equity subject to a holding lock.

No vacancy rule

The ‘no vacancy’ rule allows a board to declare that it has no vacant positions even though the maximum number of directors allowed by the company’s constitution has not been reached. 


Under the new provisions, public companies will be required to obtain the approval of shareholders for a declaration that there are no vacant board positions, should the number of board positions filled be less than the maximum number specified in the company’s constitution. If agreed, the declaration lasts until the following AGM. Any appointment of a director made while the declaration is in place must be confirmed by a resolution of members at the following AGM, or the appointment lapses at the conclusion of that


KMP voting on remuneration matters

Key Management Personnel and their closely related parties will be prohibited from voting on the remuneration report or from exercising undirected proxies on a resolution directly or indirectly connected with KMP remuneration.

Comment: Directors are currently required not to be self-serving.  It concerns us that shareholders who want their vote to count, and have appointed directors to be their proxy, vote in the shareholders’ interests and want to rely on the director’s judgment are denied this right.

 ‘Cherry picking’

All proxy holders will be required to vote all of their directed proxies on all resolutions (currently proxy holders other than the chairman can elect not to exercise directed proxies that do not support their own position).

Comment:  This requires all proxy holders to vote, even if their appointment is unknown to them, and/or they have not given their consent to be a proxy.  This is unworkable.

If the government thinks otherwise then perhaps shareholders should nominate Julia Eileen Gillard, c/o The Lodge, Canberra, ACT as their proxy.

Only KMP to be disclosed

Under the new law, remuneration disclosures will only be required for the KMP of the consolidated entity, and not also for the 5 most highly remunerated officers (if different).

The government has indicated that consultation on the exposure draft will continue until 20 January 2011 and that it intends to introduce the bill into Parliament in the first half of 2011.

The clawback discussion paper

The government is seeking comment on whether a clawback requirement should be introduced in Australia and, if so, how it should be implemented. 


As currently proposed by the government, clawback would involve the creation of an obligation for directors and executives to repay to the company any remuneration that is based on financial information that turns out to be materially misstated. This may be a recovery of remuneration already paid to the executive, or a cancellation of an outstanding but unvested and unpaid future award. The corporate regulator would also have the power to commence legal action in order to recover these funds.


Closing date for submissions on the clawback discussion paper is 30 March 2011.

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