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ASIC Seeks Better Disclosure in Remuneration Reports.

31 March, 2012

 

Legal News & Analysis – Asia Pacific – Australia – Regulatory & Compliance

 

The Australian Securities and Investments Commission has released the results of its review of remuneration reports for the last financial year.  
 
How does it affect you?
 
  • The introduction of the 'two strikes' rule last year has brought the remuneration report into sharper focus.
  • All listed companies should assess their disclosure regarding remuneration arrangements, to avoid receiving a strike on the 2012 remuneration report.
  • This particularly applies to those companies that received a 'first strike' on their remuneration report resolution at the 2011 annual general meeting (AGM).
 
Findings
 
On 29 February 2012, the Australian Securities and Investments Commission (ASIC) released the findings of its review of 50 remuneration reports drawn from ASX 300 companies for the year ended 30 June 2011. ASIC noted that, while there has been an improved level of remuneration report disclosure from certain companies following ASIC's review last year of 2010 remuneration reports, some companies still need to provide more disclosure under section 300A of the Corporations Act 2001 (Cth).
 
ASIC has provided the following examples of the disclosures included in the better remuneration reports this year, in each of the four areas ASIC has highlighted previously.
 
Policy on the nature and amount of remuneration of key management personnel
 
  • Disclosure of the benchmark used to reference remuneration;
  • discussion of why the remuneration mix was appropriate in the particular company's circumstances; and
  • explanation of the factors that directors considered in determining the amount of remuneration to be paid.
 
Non-financial performance conditions in short-term incentive plans
 
  • Description of the particular non-financial performance conditions;
  • the weight to be given to that performance condition if it is one of many conditions;
  • how performance against non-financial performance conditions would be measured; and
  • how management performed against each non-financial performance condition.
 
Why performance conditions have been chosen
  • Explanation of reasons for choosing each performance condition in both short- and long-term incentive plans; and
  • the link between particular performance conditions and the company's circumstances, strategy or priorities.
 
Terms of incentive plans
 
  • Explanation of key terms and conditions relevant to the shareholder's assessment of the operation of the incentive plan beyond those prescribed in the regulations;
  • disclosure of any discretions granted to the board under the terms of the incentive plan, including the circumstances in which the discretion may be exercised; and
  • whether the terms of any share plan provide for dividends to be paid to executives on unvested shares.
 
 
'Two strikes' rule
 
As summarised in our Focus, 'Two-strikes' rule part of executive remuneration shake-up, the 'two-strikes' rule was introduced in amendments to the Corporations Act by the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act 2011 (Cth), which commenced on 1 July 2011. Under the new provisions, the non-binding resolution required to be put to shareholders at a listed company's AGM on the remuneration report has been supplemented with a 'two strikes and re-election' process. A strike occurs where a company's remuneration report receives a 'no' vote of 25 per cent or more of the votes cast on the advisory resolution that the remuneration report be adopted.
 
Where a company receives 'strikes' on its remuneration report resolution at two consecutive AGMs, it is then required, by s250V of the Corporations Act, to put a 'spill resolution' to shareholders at the second AGM. A spill resolution is passed if 50 per cent or more of eligible votes cast are in favour. If a spill resolution is passed, the entire board (excluding the managing director) must stand for re-election at a later extraordinary general meeting, which is required to be held within 90 days. The directors required to stand for re-election are those individuals who were directors at the same time the directors resolved to put the directors' report to the most recent AGM.
 
Implications for companies with a first strike
 
Those companies that have received a 'first strike' at the recent AGM will, in the coming months, need to plan and prepare to:
 
  • consider the specific reasons for the strike, and work to head off a second strike at the 2012 AGM by engaging with relevant stakeholders (including shareholders, proxy advisers and shareholders' associations) regarding the level of disclosure in the 2012 remuneration report (particularly in the context of ASIC's comments in February);
  • consider the consequences of a second strike and the likelihood of a spill resolution being passed (based on shareholder support – the advisory resolution and the spill resolution having different thresholds); and
  • plan for the possibility of a board spill and its impact on the stability of the company, the process for a board spill meeting and, most importantly, board succession plans.
 
 
Process for 2012 AGM
 
Where a company has received a first strike, the Corporations Act requires the company's 2012 remuneration report to contain an explanation of the board's proposed action in response, or, if the board does not propose any action, the board's reasons for inaction, in relation to 'comments' made on the remuneration report that received the strike.
 
The 2012 Notice of Meeting must contain an explanation of the implications of a 'second strike' and the board spill process. Both the Notice of Meeting and the proxy form will need to include the possible spill resolution and explain voting eligibility for the different resolutions.
 
A vehicle for communication
 
With the introduction of the 'two strikes' process, and the elevation of the remuneration resolution from being purely advisory to providing for greater consequences, we are also seeing the utility of the remuneration report evolve. As a part of the increased engagement between companies and stakeholders on remuneration practices, the remuneration report can be an effective vehicle for communication of the company's remuneration approach. Aspects of the improved disclosure that ASIC has suggested this week can only serve to facilitate this engagement.

 

 

For further information, please contact:

 

Vijay Cugati, Partner, Allens Arthur Robinson

vijay.cugati@aar.com.au
 
Kate Towey, Allens Arthur Robinson
kate.towney@aar.com.au
 
 

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