The government is proceeding with legislation to provide a ‘two strikes’ rule on executive remuneration and to regulate the engagement of remuneration consultants. The legislation has been passed by the Senate and is likely to be in force by July 1, 2011. This article outlines the current state of the journey and also presents the government’s perspective on the need for this legislation in particular as it relates to the control of remuneration consultants.
The Current State of the Legislation
The Bill amending the Corporations Act was passed by the Senate on 20th June 2011 and is ready for the Governor General’s Assent.
The Bill will make amendments to the Corporations Act 2001 in several areas:
- Strengthening the non-binding vote – the two strikes test
- Improving accountability on the use of remuneration consultants
- Prohibiting key management personnel from voting on remuneration matters
- Prohibiting hedging of incentive remuneration
- No vacancy rule
- Cherry picking of proxy votes
- Persons required to be named in the remuneration report.
The Government amended the Bill to delay the application of three measures contained in the Bill from July 1 to August 1. These measures are:
- The prohibition on key management personnel and their closely related parties from voting their shares in the non-binding vote at a company’s annual general meeting on adoption of the remuneration report about the remuneration of key management personnel
- The prohibition of key management personnel and their closely related parties exercising undirected proxies on remuneration related resolutions and
- The measure to prevent ‘cherry picking’ i.e. the measure to require proxies to vote in the way specified by appointments.
The Opposition moved amendments to the Bill in regard to the two strikes rule but those amendments were not passed.
Andrew Leigh, Labor MP for the Canberra seat of Fraser focussed on the need for this legislation when he spoke in parliament about it on March 24:
‘With the legislation put to the House today, we will be empowering individual shareholders so that they have the muscle to take the fight to the institutional and directors’ associates. We are putting forward the ‘two strikes’ rule, where shareholders will be empowered to vote out a company’s directors if the remuneration report receives a consecutive no vote from a quarter or more shareholders at two annual general meetings.
This bill also focuses on an issue around the independence of remuneration consultants. We need to create opportunities for remuneration consultants to bring the best objective advice as to appropriate remuneration to the company. It should be the case that remuneration consultants are able to confidently go to a company and suggest that the remuneration is too high, not competitive or inappropriately structured. This ought to happen in more than a trivial number of cases, and I doubt that it presently happens in many cases.
The bill also contains measures to require boards or remuneration committees to approve the engagement of a remuneration consultant. Those consultants will be required to declare that their recommendations are free from undue influence, and they will have to provide their advice to non-executive directors or the remuneration committee rather than directly to company executives, who are themselves, of course, affected by the report.
In addition, boards will be required to provide an independence declaration stating whether, in their view, the remuneration consultant’s recommendations are free from undue influence. The board will then have to mention their reasons for reaching this view. The company will need to disclose in its remuneration report key details regarding the consultants, such as who the consultants were, the amount they were paid, and the other services that the consultant provides to the company.’