Examining MD-Consultant Relationships

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Under the current legislative framework, remuneration recommendations (as defined by the Corporations Act) concerning the key management personnel of a company must not be provided to an executive director of the company. Where such a remuneration recommendation is provided, the remuneration consultant must include with the recommendation a declaration about whether the recommendation is made free from undue influence by key management personnel to whom the recommendations relates.

An Executive Director (or any other member of management for that matter) is, however, permitted to request advice from a remuneration consultant not constituting a remuneration recommendation. The regulations provide that a recommendation provided in relation to a member of the key management personnel of the company (including the Executive Director) by an employee of the company will not constitute a relevant remuneration recommendation.

Accordingly, a recommendation requested by and provided to the Principal Executive of Human Resources (or another member of management) concerning the Managing Director of the same company will not constitute a relevant remuneration recommendation. Such a recommendation may ultimately be adopted by the Board despite the (Non-Executive) Directors not being involved in obtaining such advice. Further, the remuneration consultant is not required to declare that the recommendation has been provided free from undue influence by the Managing Director.

The above scenario is in conflict with the objectives and spirit of the legislation on two fronts. Firstly, the potential for a conflict of interests on the part of the Managing Director (and his direct reports) is real. Secondly, there is also the potential for a conflict of interests on the part of a remuneration consultant who derives significant other non-remuneration related advisory income from the company. This scenario allows the consultant to provide and charge for recommendations which is claimed to not constitute relevant remuneration recommendations and, accordingly, not subject to the required disclosures in the company’s annual report and the undue influence declaration.

Boards should carefully and proactively assess whether such recommendations requested by and provided to management under such a scenario actually constitute relevant remuneration recommendations. If so, such recommendations should be disclosed accordingly and the required undue influence declaration obtained. Should the recommendations constitute relevant remuneration recommendations, the consultant is also then required to disclose fees derived from the company attributable to other advisory services provided. This will ensure that any conflicts of interests on the part of management or the remuneration consultant are mitigated.

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