At last month’s Guerdon Associates/CGI Glass Lewis remuneration forum for directors and institutional investors, participants had a clear message:  remuneration reports are hard to understand.  The Minister for Superannuation and Corporate Law, Nick Sherry, wants more disclosure.  He said investors want to know more.  They don’t.  They just want to understand more.  There is a difference.

In a speech (see here) to ASIC’s Summer School delivered by Treasury Secretary Ken Henry for Superannuation and Corporate Law Minister Nick Sherry, it was announced that Treasury is “reviewing executive remuneration”.  Specifically, Mr. Henry (on behalf of Mr. Sherry) said (with Guerdon Associates’ emphasis underlined): 

“As you are aware, executive remuneration is an issue that generates much public and media interest.  You would also be aware that investors — and the broader community — are demanding to know more about executive remuneration.  

“While the Government does not seek to intervene in setting remuneration levels — a task that is best left with management — it believes that executive remuneration should be linked to company performance. 

“The Government is also committed to promoting greater transparency and accountability with respect to executive remuneration packages.”

We followed up with Treasury and can confirm that there are disclosure requirements changes afoot.  Realistically, it will take several months for Treasury to develop its thoughts on these matters before beginning the consultation process with interested parties.  As a result, we do not expect stakeholders to be asked for comment until at least towards the end of 2008.  We will endeavor to be an active participant in this process, and would welcome your input.

Mr. Sherry’s views are consistent with the Australian Labor Party’s platform that was developed and released prior to the 2007 election.  Specifically, in a section of the platform addressing corporate governance, it said that if elected the government would require that:

• Performance-based executive remuneration arrangements are genuinely linked to performance;
• There is consideration of the role of the remuneration consultancy industry in the setting of executive remuneration;
• Directors are accountable to shareholders for the level of remuneration received by directors and senior management;
• Companies fully disclose the remuneration of directors and senior management in a comprehensive and comprehensible manner;
• The Corporations Act is amended to enhance the disclosure and regulation of options, termination payments and equity value protection schemes;
• Non-recourse loans to directors and senior management are prohibited

The platform, including other commitments to governance reforms, can be found here.

Based on these statements, those that follow executive remuneration issues closely can probably make a good guess at the eventual nature of the amendments.  We have already addressed the underlying issues in various news articles over the years. 

In addition, the recent furore over directors’ margin loans secured against company stock may result in a greater disclosure burden. 

Do not hesitate to call us if you want to know more.

The reluctance of governments to reduce disclosure requirements is probably why the last government’s attempt at “simplification” (see here) only resulted in the replacement of one nonsensical disclosure requirement with another.  We hope that Labor will do a better job than their predecessors this time around.

While it is likely this review will lead to additional executive remuneration disclosure requirements, there may be a bright side.  Political sensitivities make it difficult for the government to reduce executive remuneration disclosure requirements but it may be easier to rationalise (i.e. delete) some of the more nonsensical elements of Corporations Act 300A (and there is no shortage of these!) if other requirements are being added.  So while the net outcome would not be a reduction in disclosure requirements, it could possibly be an improvement for both companies and investors in both understandability and compliance.  

It is not, as Mr. Sherry said, that investors want to know more.  Instead, they want to understand more.  But to be fair, that sentiment is also expressed in the Labor Party platform.

The outcomes from the review will be at least 12 months away.  We will keep you posted.

The review will also cover director liability (a.k.a. the “business judgment” rule).  This is welcomed.  As it is, current director remuneration levels do not provide an adequate counterweight to reputational risk and financial risk.  On balance this makes directors more risk averse than reasonable investors would like (i.e. investors who have diversified their risk).  An effort to reduce at least the financial liability will contribute greatly, we believe, to boards being able to consider more entrepreneurial activities for better shareholder returns.  As Mr. Sherry (via Mr. Henry) said:

“The Minister believes that it is important that this project looks beyond the Corporations Act to examine issues such as the emerging trend for other legislation to impose personal liability on company officers for corporate fault. It is important that corporate law reflect modern thinking about the use of criminal, civil and administrative sanctions for misconduct, while also permitting flexibility in decision-making. The Minister has indicated to Treasury that this is a high priority project.”

The speech also highlighted corporate sustainability reporting as another key area that the Government has identified.

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