Lawyer Anthony Ford questions the various recommendations within the Productivity Commission’s review of executive remuneration.
Public concern regarding the rapid growth in executive pay relative to average Australian wages has been increasing over recent years. Following recent high paid executive failures such as MFS and Babcock & Brown, shareholders and the public have lost confidence in executive remuneration practices.
In response the Government announced last year that the Productivity Commission was being tasked with reviewing Australia’s current executive remuneration practices. This created an expectation of sweeping reforms designed to crackdown on poorly designed remuneration arrangements which promote excessive risk taking and which reward executives despite their poor results.
When the Productivity Commission released its draft report for public consultation late last year, it became apparent however that the Commission had chosen not to impose prescriptive pay constraints, instead preferring reforms which sought to strengthen corporate governance to improve how boards set remuneration and engage with shareholders.
The final report, which was released in January, contains few material changes from the consultation draft and as such has received a mixed reception. Some commentators have argued that it fails to address the core problem of corporate greed, while others claim it is well calibrated and strikes a workable balance between regulation and the freedom to exercise board discretion. This mixed reception is justified.
On one hand, the report does contain several recommendations which have the potential to improve several peripheral problems. However, the sum total of the proposed reforms will in reality have little or no material impact on actual executive remuneration practices.
For example, on the positive side, the report admirably recommends that remuneration committees should consist of at least a majority of independent directors (or complete independence for large companies). Thus reducing the actual and perceived ability for executive directors to determine their own pay.
On the other hand, the report contains several recommendations of questionable utility.
One example is the controversial and much publicised ‘two-strikes’ rule. This recommendation, when in draft form, essentially stated that a board would be forced into re-election if they received two consecutive no-votes of 25 per cent or more on a remuneration report.
However, under the weight of public opinion, the commission diluted the rule to a ‘three-strikes’ regime which now has the added requirement that immediately following the second AGM no-vote, the company must put a director re-election resolution to shareholders which, if supported by a majority of members, would force the directors who signed the directors’ report to face re-election at an EGM held within 90 days of the AGM. At the subsequent EGM, each of those directors could be voted from the board by a majority vote. Critics have correctly pointed out that historically shareholders are very reluctant to vote out a board, even following absolute failure.
Furthermore, the recommendation arguably adds little to shareholders given that they already have an avenue under the Corporations Act to propose a board spill with the support of five percent of votes or 100 shareholders.
Another questionable recommendation is that which suggests that remuneration reports should contain a plain English summary of remuneration policies, actual levels of remuneration received and the total company shareholdings for individuals named in the report. While clear reporting is always desirable, it remains to be seen how seriously companies will approach such a requirement, as well as how much shareholders will actually read, let alone benefit from further remuneration disclosure.
What is clear is that this type of recommendation will create further administrative work and costs for companies as they seek to comply with additional disclosure and governance obligations.
The Government has confirmed that it will respond to the recommendations contained in the report by March.
Anthony Ford is an associate in the corporate team at Hynes Lawyers, specialising in corporate law and franchising. Hynes Lawyers is a specialist corporate and property law firm, with offices in Brisbane, the Gold Coast and Sydney.