THE proposed changes to executive remuneration laws took a step forward this week with the Productivity Commission releasing a draft report into the changes.
A leading lawyer has warned the newly released discussion draft is likley to see further regulation via amendments to the Corporations Act as well as the ASX listing rules.
Paul Quinn, executive partner at Allens Arthur Robinson in Melbourne, who heads up the corporate practice, said however that the recommendations are not likely to trigger amendments to the bill, which is in the second reading stage in the Senate.
Company boards and directors are now being warned to study up on the Discussion Draft on Executive Remuneration.
The draft report proposes 15 key reforms to address the accountability of boards, conflicts of interest and shareholder engagement on remuneration.
The inquiry's chairman, Gary Banks, observed that on the evidence, the strong growth in executive pay has had much to do with the growth and global reach of Australian companies themselves. “But there have also been episodes of excess and poor pay practices”.
Despite speculation that they would impose a salary cap for directors, Banks said the commission concluded that they would be unworkable and have harmful economic impacts.
Quinn said the draft did not find any general system failure in pay settings.
“However it did make recommendation for further regulatory and corporate governance reforms, really aimed to strengthen the integrity of pay settings by boards, and for boards to engage effectively with shareholders on remunerations,” Quinn told Boardroom Radio.
One central recommendation in the report is the two strike rule.
“If a remuneration report receives a no vote of 25 per cent or more then the board has to come back next year and respond to that criticism and if in the following year it gets a similar no vote than all directors are up for re-election,” said Quinn.
“Some of the other recommendations are more on integrity side and avoiding conflict of interest. It requires for an independent remuneration committee to be comprised of non-executive members exclusively.”
This means remuneration consultants would also have to report to boards independently of management, and prohibiting directors and executives voting their shares and any undirected proxies on remuneration issues.
Quinn added: “A number of changes proposed relates to tax issue- because there has been a significant tax issues.
The recommendation, to remove taxation point impediment to deferred equity, would remove the need for special tax rulings.
Quinn was not optimistic that the current bill would be amended, but he said it was likely there would be further regulation of executive pay through the Corporations Act and the ASX listing rules.
“Companies need to look at the 15 recommendations in a little detail. The remuneration checklist for boards or committees, what constitutes good remuneration practices, there is a bit of work there to be done to make sure companies are in position, if the recommendations are implemented, to implement it themselves.”
The Commission is holding public hearings on its Discussion Draft in late October – November, with its final report to Government by 19 December.
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