New rules on remuneration for directors and executives came into force at the start of the financial year, introducing substantial changes to how company directors and executives are held accountable and can be remunerated.Marcus Ohm from HLB Mann Judd explains four issues you now need to consider.
New rules on remuneration for directors and executives came into force at the start of the financial year, introducing substantial changes to how company directors and executives are held accountable and can be remunerated
Some of the changes will not affect companies until their next annual general meeting (AGM) when a Remuneration Report is tabled, however others may have a more immediate impact.
The four main areas covered in the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act 2011 are:
1. The two strikes rule
The most high profile of the changes is the introduction of a 'two strikes rule' for listed companies regarding voting on Remuneration Reports.
Under the previous rules, share-holders could vote on Remuneration Reports at a company's AGM but the vote was non-binding – that is, the board did not need to act on it.
Now, if a Remuneration Report receives a 'no' vote at two successive AGMs, a spill resolution will immediately be triggered, requiring shareholders to vote on whether a spill meeting should be held.
If this resolution is passed, all directors (with the exception of the managing director) will need to stand for re-election at a meeting that must be held within 90 days.
Shareholders can make their own nominations for election to the Board at the spill meeting.
2. Restricted voting ability
Key management personnel (or closely related parties such as spouses or family trusts) are now prohibited from directing proxies on any motion related to their remuneration. Furthermore, they may not vote on the Remuneration Report itself.
One exception to this is that the chair of the meeting is allowed to direct proxies as long as the shareholder has 'expressly authorised the chair to exercise the proxy'.
3. Remuneration consultants
If listed companies want to appoint a remuneration consultant (who can advise on the way that employees are rewarded) this must first be approved by the board or remuneration committee.
In addition, remuneration consultants may only report to the non-executive directors and/or the remuneration committee.
A declaration is now required by the remuneration consultant that any recommendations made are free from any undue influence by management.
Finally, the Remuneration Report must record how the remuneration recommendations have been kept free from undue influence and include a statement about whether the board is satisfied that the remuneration recommendation is free from such influence and reasons why this is the case.
4. Incentive remuneration
Directors and executives of listed companies are no longer allowed to enter into any arrangements that will limit their exposure to changes in the value of their incentive remuneration such as shares and options.
In essence, this is to ensure that key management personnel cannot separate their fortunes from those of the company.
Marcus Ohm is a partner with accountants and business and financial advisers HLB Mann Judd Perth