AICD welcomes improvement in two strikes policy

The Australian Institute of Company Directors (AICD) has welcomed the change to the Productivity Commission’s proposed “two strikes” policy on remuneration report votes, but warned against hastily introducing legislation for a director “re-election resolution”.

Responding to the Commission’s Executive Remuneration in Australia Inquiry Report, AICD said that the “two strikes” policy, while a considerable improvement (on the proposal in the discussion draft, released last September), required further assessment and debate.

Re-affirming the comments made following the release of the draft report, AICD again commended the Productivity Commission for its Inquiry and final report.

“The Commission’s report is well-balanced, thorough and considered. The Commission has done a very good job in the time it had available,” AICD’s Chief Executive Officer, John Colvin said.

“We support the majority of the final recommendations either in full or in part, and are pleased that the Commission has agreed with some of our concerns regarding the original recommendations and has attempted to address these,” he said.

AICD welcomed the Commission’s recognition of the central role of the board in setting executive remuneration and the high regard in which Australia’s corporate governance framework is held internationally. It also praised the Commission for its extensive referencing of existing research and good practice guidance, including a number of AICD submissions and policy papers.

“The Productivity Commission’s report provides strong support that there are no fundamental problems with the framework of governance of executive remuneration in Australia,” Mr Colvin said.

“The Commission’s analysis has found that further prescriptive black-letter law, such as binding votes and salary caps, is not the answer,” he said.

AICD said the Government’s decision to refer a review of remuneration to the Productivity Commission had created the context for a sensible and rational debate. The next step in the process would be a matter of fine-tuning potential reforms.

“Reforms should not be rushed through without sufficient consultation and further consideration of the inter-dependencies,” Mr Colvin said.

While AICD considers the two strikes’ recommendation to be an improvement on the original proposal, it remains unconvinced of the necessity of introducing legislation for a re-election resolution.

“Industry-led, good practice guidance and the Commission’s other recommendations should be given time to work. Boards are already consulting with their shareholders when they receive a high percentage of votes against their remuneration reports,” Mr Colvin said.

Also of remaining concern to AICD is the recommendation to require, in effect, shareholder approval of board “no vacancy” declarations.

“AICD wholeheartedly agrees with the need for greater diversity on some boards. The no vacancy recommendation is well-intentioned, but the mechanism suggested may be counterproductive to other initiatives underway that are aimed more directly at increasing diversity on boards,” Mr Colvin said.

On 24 November 2009, AICD announced a range of new measures to help focus on the value of a diverse board, which was shortly followed by new proposals from the ASX Corporate Governance Council to expand its principles and recommendations on diversity.

“There is widespread recognition of the need for a concerted focus on board diversity. As the concept has been embraced, direct market-led initiatives are likely to be much more effective in this area.”

“It remains a fundamental principle that shareholders elect directors to govern their organisations. Boards need to be able to determine their own governance processes. They should retain the power to expand and contract as company circumstances require and to resolve issues in the best interests of the company to minimise potential dysfunction in some areas,” Mr Colvin said.

If legislative changes are to be progressed however, AICD stressed the importance of taking into account the Commission’s revised recommendations and the need to provide further opportunity for stakeholder review and comment on the drafting.

Media Contacts:
Juliet Chandler, Communications Advisor, (02) 8248 6624 or 0412 580 402
Katrin Stephens, Communications Coordinator, (02) 8248 6612

Australian Institute of Company Directors (AICD) provides education, information and advocacy for company directors Australia wide, with offices in each state to cater for 25,000 members. AICD members work in diverse corporations such as small-to-medium enterprises, the ASX Top 200 corporations, public sector organisations, not-for-profit companies, large private companies and smaller private family concerns.