The measures announced by the Federal Government in response to the Productivity Commission’s executive remuneration inquiry will add more unnecessary regulation and have unintended consequences which could disrupt companies, the Australian Institute of Company Directors said today.
There were significant problems with a number of the measures, many of which go beyond the recommendations made by the Commission, Australian Institute of Company Directors Chief Executive, John Colvin, said.
“We remain unconvinced that a legislated “two strikes” rule, requiring a board re-election resolution to be put to shareholders if two consecutive remuneration reports received “no” votes above 25 per cent, is workable, warranted or desirable, particularly as there is already a provision in the Corporations Act for a board spill at any time,” Mr Colvin said.
The decision to stop boards from being able to declare “no vacancy” where the existing board has less than the maximum number of directors authorised by shareholders will also have adverse unintended consequences and will more likely hinder, rather than promote, greater board diversity.
Mr Colvin criticised the decision to prohibit all directors from voting undirected proxies on remuneration reports and related resolutions, saying that the chairman of a board should not be precluded from voting proxies on behalf of shareholders in the usual way, which is well understood.
“We are also extremely disappointed that the Government has rejected the Commission’s recommendation to remove the current taxation impediment to deferred equity incentive pay, to allow deferral of equity incentives beyond the point where an executive ceases employment,” Mr Colvin said.
“This widely supported change would have removed this barrier to deferred remuneration and so would encourage longer term alignment of shareholder and executive interests.
“The decision by the Government is, frankly, baffling. Its reasons for failing to act on this very positive recommendation in the Productivity Commission report are far from convincing.”
Mr Colvin also questioned the need for legislation making it mandatory for all companies to disclose their executive remuneration advisers and who appointed them and fees paid, going beyond the “comply or explain” approach recommended by the Productivity Commission.
And, he warned that the devil was in the detail of the Government’s new proposal for a clawback of executive and director bonuses based on financial information which was subsequently found to be materially misstated, a proposal which was not recommended by the Commission nor canvassed with business before it was announced.
Mr Colvin, however, welcomed the proposal to make remuneration reports reflect actual remuneration received and the appointment of CAMAC as an expert panel to advise on changes. The Australian Institute of Company Directors will be proposing significant reforms of the law governing remuneration reports in the near future.
Mr Colvin also said that, rather than the proposed review of the changes after five years, the Government should include sunset clauses in all its legislation.
“The Government should not be rushing into introducing legislative changes arising from the Commission’s inquiry,” he said.
“In several instances it has gone well beyond what the Productivity Commission recommended, rejecting a ‘comply or explain’ approach implemented through ASX Corporate Governance Council guidelines and opting instead for further new black letter law.”
“This is going too far. It adds yet more law and regulation which is disproportionate to the problem and is inconsistent with Australia’s very high international reputation on corporate governance.”
“It should be remembered that the Productivity Commission’s report provided strong support for our view that there are no fundamental problems with the governance framework for executive remuneration in Australia and found that simply adding more prescriptive black-letter law is not the answer to problems that may exist,” he said.
“However, now that the Government has decided to legislate, sufficient time should be allowed for consultation with business to identify and mitigate likely unintended consequences.”
“We also look forward to participating in the consultations on the Government’s ‘clawback’ proposal, and to hear the Government’s rational for such a change.”
“How will ‘materially misstated’ be defined? Accounting standards aren’t always black and white. How far back in time would the clawback extend and how would it be estimated,” Mr Colvin said.
“What can be clawed back and how does this fit with the Government’s refusal to allow long term incentives to have the proper tax treatment?”
“This will interfere with contractual arrangements which may provide a competitive advantage to companies.”
“It may well have unintended consequences, with companies less likely to relate remuneration to reported profit and potentially encouraging higher base pay to compensate for any potential clawback.”
“I would query the necessity of such a provision and whether there is evidence of widespread wrong doing to justify it.”
Mr Colvin noted that the introduction of a “board spill” mechanism tied specifically to remuneration reports could undermine corporate performance and board stability in a number of ways, including:
- boards spending a disproportionate amount of time and effort on remuneration matters, to the detriment of other important issues;
- disruption to the company’s activities in the lead up to a “second strike” or the period between a vote taken to have a board spill and the subsequent re-election process; and
- the possibility that directors will see the passing of a “re-election resolution” as a vote of no confidence and decide not to continue on the board, leaving a vacuum or resulting in new board members without the necessary skill and training.
The change to the Corporations Act restricting the ability of boards to declare “no vacancy” will also have practical problems and unintended adverse consequences.
This is because boards could ask shareholders to reduce the maximum size to match the current board size, impeding their ability to adapt quickly to meet changing strategic and skill needs and to capitalise on opportunities to appoint exceptional candidates other than by filling casual vacancies.
“Not only will this hinder board performance more generally but the reduced flexibility in making board appointments is likely to be an obstacle to greater diversity, not encourage it,” Mr Colvin said.
“We wholeheartedly agree with the need for greater diversity on some boards. The Commission’s recommendation was well-intentioned, but the mechanism being adopted is likely to be counterproductive to other initiatives aimed more directly at increasing board diversity.”
Steve Burrell, General Manager Communications and Public Affairs, (02) 8248 6627 or 0407 708 485
on Productivity Commission Discussion Draft on Executive Remuneration (6 November 2009)
to Productivity Commission on remuneration inquiry (29 May 2009)
The Australian Institute of Company Directors provides education, information and advocacy for company directors Australia wide, with offices in each state to cater for 26,000 members. Our members work in diverse corporations such as small-to-medium enterprises, the ASX200 corporations, public sector organisations, not-for-profit companies, large private companies and smaller private family concerns.