New measures governing executive remuneration and board composition, contained in draft legislation released by the Federal Government, will add more unnecessary regulation and have damaging unintended consequences, the Australian Institute of Company Directors said today.
It said there are significant problems with a number of the measures and looked forward to working with the Government to address those concerns as the legislation is finalised.
However, it questioned the short time being made available to business to comment on the draft legislation, particularly given this will include the Christmas-New Year holiday period.
“Now that the Government is proceeding with legislation, a sufficient period of time should be allowed for consultation with business to assist in identifying and mitigating likely unintended consequences,” a spokesman said.
The Institute also called on the Government to include sunset clauses in the legislation, rather than the proposed review of the changes after five years.
It said the draft legislation only added more law and regulation which is disproportionate to the extent of any problem in Australia.
It noted that the Productivity Commission’s report into executive remuneration provided strong support for the view that there are no fundamental problems with the governance framework for executive remuneration and found that simply adding more prescriptive black-letter law is not the answer to problems that may exist.
“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,” the spokesman said.
The measure 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 practical problems and adverse unintended consequences.
While well intended, it will more likely hinder, rather than promote, greater board diversity 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 appointments is likely to be an obstacle to greater diversity, not encourage it.
The Australian Institute of Company Directors is also considering the Government’s discussion paper on the proposed clawback of executive and director bonuses and looked forward to responding in that consultation process.
However, it queried the necessity of such a provision and whether there is evidence of widespread wrongdoing to justify it. It also noted that the proposal may have unintended consequences.
The Australian Institute of Company Directors remains extremely disappointed that the Government has not included in its proposed executive remuneration changes the Productivity 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.
This widely supported change would have removed this barrier to deferred remuneration and so would encourage longer term alignment of shareholder and executive interests.
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Steve Burrell, General Manager Communications and Public Affairs
(02) 8248 6627 or 0407 708 485
Michelle Wood, Media and Government Relations Advisor
(02) 8248 6786 or 0466 655 115
The Australian Institute of Company Directors provides education, information and advocacy for company directors Australia wide, with offices in each state to cater for 28,000 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.