Guerdon Associates’ submission to Treasury on executive pay

The Australian government released the Treasury’s exposure draft on executive pay legislation on 20 December 2010.  Submissions on the draft were required in barely the amount of time to sleep off the Christmas and New Year festivities, i.e. 20 January 2011.  Fortunately Guerdon Associates had the people on the ground to publish our assessment on our website within days (see HERE).


Guerdon Associates’ submission on the Exposure Draft – Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Bill 2011 was made to the Australian Treasury on Wednesday 19 January 2011, addressing the issues identified by us immediately after the government’s release.


There were a host of technical issues with the draft Bill.  The draft of our response tried to capture these.  But there were simply too many technical problems with the drafting, which we believed detracted from the main issues.  Assuming these would be captured by others, the version we submitted focused on:


·          The two strikes rule

·          Cherry picking

·          Remuneration advisers


Two strikes rule


We accepted that the government will introduce the two strikes rule despite objections from both directors represented by the AICD, proxy firms such as ISS, and institutional investors represented by ACSI.  It is, in effect, a fulfilment of the Australian Labor Party’s promise to voters, expressed in its mandate at the last two elections (see HERE and HERE).  It was the basis for somewhat leading terms of reference for the Productivity Commission’s inquiry into executive pay.  The PC’s response was to develop an intelligent mechanism to give the non-binding vote more teeth, while still being pragmatic enough to maintain the non-binding nature of the vote. 


Based on our assessment, we focussed on making the two strikes rule more workable and less open to abuse.  As it stands in the exposure draft, it is the tail wagging the dog.  That is, two consecutive “no” votes on the executive pay report from directors of just 25% could result in a motion in the spill of the board.  Shareholders with a majority of votes who are happy with remuneration governance, and have expressed this in their vote, are overlooked as directors are forced to respond to the needs of the minority.


Hence, to make this workable, Guerdon Associates suggested that this “no” vote requirement be at least 50%, not the 25% in the draft.


Cherry picking


The exposure draft would require all people appointed as proxies, whether they consent to the appointment or not, to turn up at the AGM and lodge directed votes.  Penalties apply if this is not done.


Some have suggested not objecting to this, as they would seek comfort in nominating a Ms. J. Gillard, care of The Lodge, Canberra, as their proxy for all directed votes.


Tempting as this was, we suggested that the wording be amended to require only those who turn up at the AGM to lodge their directed proxies.


In addition, we urged the government to consider legislation facilitating electronic vote lodgement to overcome cherry picking issues, as well as address a host of other issues with voting mechanisms that make the current process unreliable and labyrinthine.  This was, after all, a commendable Productivity Commission recommendation that has not yet been acted on by the government.


Remuneration advisers


We noted that while Guerdon Associates has no objection to the disclosure requirements of external remuneration consultants in principle, there were some practical difficulties.  One was that every adviser on matters that touched peripherally on KMP remuneration matters would have to disclose fees for this and every other piece of work done for directors and management, and the nature of this work. 


Our suggestion was that the government borrow from the UK, and require only disclosure of those that provide material advice.


This would also capture both internal and external advisers on KMP remuneration, and give due weight to the most conflicted source of advice to the board – management.


We also suggested that the government drop entirely its prescriptions for who is to commission work and how, and how the commissioned work was to be delivered.  This would allow a company and its board to manage their affairs as they see fit while ensuring that directors meet their fiduciary duties and remain accountable on remuneration matters through disclosure and the non-binding vote on the remuneration report.


Our submission can be seen HERE

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