The Corporations Act was amended in 2011 to improve the accountability of Director and executive remuneration.
The amendments were introduced specifically to increase transparency for shareholders and facilitate the independence of remuneration consultants.
A remuneration recommendation is defined as a recommendation concerning either the amount of KMP remuneration or the elements of the remuneration package (or both).
If a remuneration recommendation relating to key management personnel (KMP) is provided to the Board, the nature and cost of such a recommendation has to be disclosed in the company’s annual report. The nature and cost of other services provided by the remuneration consultant also have to be disclosed.
Seeking remuneration recommendations facilitates shareholders being fully informed on what advice was obtained, how much was paid for such advice and who provided the advice.
The remuneration consultant must declare whether the recommendation is free from any ‘undue influence’ by the KMP to whom the recommendation related. The transparency of these disclosures facilitates an assessment of the independence of the advice provided.
Recent corporate governance failures amongst some of Australia’s largest companies have reinforced the importance of transparency and independence in Board decision making.
Boards should seek remuneration recommendations in respect of KMP remuneration matters. If the annual report discloses that general advice and/or market data was obtained instead, it indicates that the strict transparency and independence guidelines were not met in respect of any advice provided to the Board to facilitate the relevant decision making.
Shareholders have every right to question whether decisions based on the latter were made subject to real or potential conflicts of interest. Boards should be mindful of the risks of making such decisions without the benefit of remuneration recommendations from the company’s remuneration consultant.
In this context, we observe what may also be a preferred position of some consultants, which is to not be engaged by the Board to provide KMP remuneration recommendations but solely information and broad policy advice.
Key questions for Boards to consider
- Are we currently seeking remuneration recommendations in respect of our KMP remuneration decision making? If not, why not?
- Have we previously been provided with advice that really constituted remuneration recommendations but were not disclosed as such?
- Why do some remuneration advisors insist on providing general advice and/or market data but are reluctant to provide remuneration recommendations?
- How would seeking remuneration recommendations facilitate shareholder alignment and mitigate future shareholder objection in respect of KMP remuneration?