Productivity Commission investigation into executive pay

The Australian Productivity Commission has been asked to undertake a public inquiry into the regulatory framework around remuneration of directors and executives of companies regulated under the Corporations Act.

The Commission has an enormous task in investigating executive pay. Unfortunately, while it is likely to receive thousands of submissions, it may receive too few from some key stakeholders.

Specifically, the Commission is requested to consider:

  • trends in director and executive remuneration in Australia and internationally
  • the effectiveness of the existing framework for the oversight, accountability and transparency of director and executive remuneration practices
  • the role of institutional and retail shareholders in the development, setting, reporting and consideration of remuneration practices
  • any mechanisms that would better align the interests of boards and executives with those of shareholders and the wider community
  • the effectiveness of the international responses to remuneration issues arising from the global financial crisis.

The Commission is to make recommendations on how the existing framework governing remuneration practices in Australia could be improved.

Among the larger companies there will be no executives that we know of making submissions because of their conflicts of interest.

Non-executive directors, the key element in the pay setting process, are not making individual or company submissions, with a few exceptions. The big Australian banks will be among the exceptions, given what some would argue is the unjustifiable heat they are under as a result of the financial crisis.

But what of other companies?

Any regulations outside of APRA will impact all companies. Should industrial company boards be required to comply with regulation that may be better directed to offshore banks, but not them?

While various umbrella organisations, such as the AICD and BCA, will be making submissions, the timing could not be worse for NEDs. This is among the busiest times of year for NEDs, given planning for the new fiscal year. The other busiest time is at annual report and AGM time, which (as luck would have it) is when the Commission is having final hearings before finalising its report.

This timing is also the worst possible for other key stakeholders – the proxy advisory firms and institutional investors.

This is a pity.

Guerdon Associates will be making a submission. However, given that remuneration consulting firms can be seen as having vested interests in the inquiry’s outcomes, our approach will differ from others in this space. We know that among all the major stakeholders there is already a great deal of consensus. In addition, diverse stakeholders can all provide different, yet equally valuable, perspectives based on their expertise and experience. For this reason Guerdon Associates is making a joint submission with a party not engaged in the specific field of board and executive remuneration consulting – proxy adviser CGI Glass Lewis. Watch our newsletter next month for our initial and joint submission.

However, if you want to find out more of what the Productivity Commission thinks about executive pay before it publishes its interim report, ask its chairman the question on June 3 in Sydney or June 4 in Melbourne.

Productivity Commission Chairman, Gary Banks, who is heading the executive pay inquiry, will outline the Commission’s approach and some of the threshold issues, ahead of the first round of public hearings in June. The Financial Services Institute of Australasia’s Executive Remuneration panel will give you the opportunity to discuss:

  • Rethinking senior executive remuneration-better aligning the interests of executives and shareholders
  • Optional salary cuts – has CBA paved the way for more to follow?
  • Regulation – benchmarking nationally and globally
  • How to fairly attract, retain and appropriately reward executives
  • Focus on the financial services industry – does this differ from other industries/sectors?
  • Changes to the Corporations Act 2001…
  • Should Australia establish good practice guidelines?
  • Will Government take a greater role in regulating remuneration?
  • What is the appropriate response to executive remuneration – black letter law or principles?
  • Structure of remuneration packages – short-termism and mid-term incentives –
  • What is the role of the fund manager in executive remuneration?
  • Concerns with the superannuation industry – what role does the shareholder play?

Guerdon Associates’ Michael Robinson and Paul Riggs will appear on the same panel as Mr. Banks in Sydney and Melbourne, respectively.

More information on Finsia’s sessions can be found HERE.

Information on the Productivity Commission’s executive pay investigation, including the terms of reference and how to lodge a submission, can be found HERE.

© Guerdon Associates 2024
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