With Australian companies scurrying to comply with major new requirements imposed by the two-strikes law and other pay-related taxation and termination payments changes, boards may consider that the major governance initiatives are complete.
This is not so.
The government is yet to respond to the CAMAC review of executive pay disclosures (see HERE) Importantly, there is also the prospect that the government picks up on ideas formulated elsewhere as the global push to improve governance of executive pay grinds on. Countries in Europe have had binding shareholder votes on the executive remuneration agenda for several years. Since 2004, The Netherlands has required the remuneration policy to be adopted ex ante by shareholders (the policy deals with the categories, maximum amounts and criteria for future remuneration, rather than with the individual pay of each executive director within that policy, which is typically determined by the company’s supervisory board). More recently, Sweden has introduced a requirement for the remuneration policy to be submitted for approval to the AGM ex ante (see the response to the EC’s April 2011 Green Paper ‘The EU Corporate Governance Framework’, by a group of European company law experts, which is available HERE).
UK companies (including, of course Australian dual listed companies) could face a binding vote on executive pay under new proposals outlined by the government on the 20th of September 2011. Vince Cable, the Liberal-Democrat UK business secretary, has launched a consultation paper on executive pay that questions whether the non-binding votes companies currently undertake are a strong enough incentive to link pay and performance. The paper, which is open for responses until November 25, states some shareholders believe a binding vote would encourage shareholders to be more active and prompt companies to take the issue more seriously.
“If introducing a binding vote, its legal status would need to be established, including what expectations this would place on a company to revise its remuneration proposals in the event of a vote against, and whether revised proposals would then need to be verified by a second shareholder vote,” states the paper.
The consultation document also acknowledges, however, that many shareholders and other stakeholders view a binding vote as a bad idea. Critics argue it would be costly and inconvenient, could run into legal problems and is unnecessary as shareholders that want to take concrete action can already vote against the chair of the remuneration committee.
The proposal is part of a wide range of ideas set out by Cable in two consultation papers covering executive pay and narrative reporting. Some other suggestions are already present in Australian reports, such as measures to improve reporting on remuneration, including requiring companies to provide information on the link between the performance of companies and the earnings of top executives. Other suggestions have also been dealt with in Australia:
- Whether to require the total figure for each board director’s remuneration to be published, including basic salary, bonuses, share schemes and pensions and how this should be calculated. The recent CAMAC review of executive pay reporting specifically recommended that the accounting basis for determining equity value in remuneration disclosures be discontinued (see HERE)
- In line with proposals for large banks, whether to disclose the highest earners in a company below board level, for example those earning above a defined threshold of total pay, or a defined number of top earners who have significant influence over how a company is run or those who have the ability to take significant risk. Recent changes to the Australian Corporations Act removed the requirement to report the five highest paid in addition to Key Management Personnel pay (see HERE)
The UK paper also asks whether it should make remuneration committees more diverse, and whether the ratio between the CEO’s pay and median earnings in a company should be published.
The consultation proposes to simplify annual reporting requirements into two separate documents. A Strategic Report will provide information on financial results, the company’s business model and strategy, risks, remuneration and environmental and social issues.
It also considers whether companies should have to publish the number of women who hold executive positions.
The Annual Directors’ Statement will provide more detailed information, and will be published online. The aim of these proposals on reporting is to streamline bloated annual reports. The average length of an annual report is now almost 100 pages, even longer for FTSE 100 companies. It is claimed that changing the way companies do their annual reports will provide investors with better information on how well businesses are performing and what their directors are being paid, which should increase transparency and reduce the burden on businesses, freeing them up to concentrate on growing and focusing on the long term.
See the UK discussion paper HERE.
The consultation period is more reasonable than that allowed by the Australian government for the two strikes law, which was over the Christmas and New Year break in 2010/2011. The deadline for all relevant parties to contribute their views on the discussion paper is 25th November 2011.© Guerdon Associates 2022 Back to all articles