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Australia: Further Reform of Executive Remuneration Laws Proposed

(Feb. 28, 2012) On February 21, 2012, the Australian government announced that it would introduce further reforms aimed at strengthening Australia's legal framework related to executive remuneration. In particular, the reforms will include a requirement for listed companies “to disclose to shareholders through the remuneration report the steps they have taken to clawback bonuses and other remuneration where a material misstatement has occurred in relation to the company's financial statements.” Furthermore,

[i]f the company has not clawed back any remuneration, the board will be required to provide a detailed explanation to their shareholders. If shareholders are unhappy with the company's actions, they would be able to use their powers under the two-strikes rule to vote down the remuneration report and potentially spill the board [i.e., require that board members resign and stand for re-election]. (Press Release, Hon. David Bradbury MP, Reforms to Further Enhance Australia's Executive Remuneration Framework (Feb. 21, 2012).)

The government also intends to implement several of the recommendations made last year by the Corporations and Markets Advisory Committee (CAMAC). (CAMAC, Executive Remuneration (Apr. 2011).) The proposed changes arising from this report include:

improving disclosures contained in remuneration reports, by requiring more transparent disclosure of termination payments or 'golden handshake' payments. Unnecessary disclosure requirements will be removed to simplify remuneration reports, and clearer categorisation of pay will be introduced to better enable shareholders to understand the company's remuneration arrangements. (Press Release, supra.)

The government plans to release draft legislation for public consultation in the latter half of 2012. (Id.)

The government's latest proposals follow the June 2011 passage of the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act 2011 (COMLAW (last visited Feb. 27, 2012)) and associated regulations (Corporations Amendment Regulations 2011 (No. 2), COMLAW (last visited Feb. 27, 2012)). That Act amended the Corporations Act 2001 to include detailed provisions relating to the existing requirement for listed companies to put a remuneration report to a non-binding shareholder vote. (Corporations Act 2001, COMLAW (last visited Feb. 27, 2011).) The key measures in the 2011 bill, as stated in the Explanatory Memoranda, included:

· strengthening the nonbinding vote on the remuneration report, by requiring a vote for directors to stand for re-election if they do not adequately address shareholder concerns on remuneration issues over two consecutive years [the “two-strikes” rule];

· increasing transparency and accountability with respect to the use of remuneration consultants;

· addressing conflicts of interests that exist with directors and executives voting their shares on remuneration resolutions;

· ensuring that remuneration remains linked to performance by prohibiting hedging of incentive remuneration;

· requiring shareholder approval for declarations of 'no vacancy' at an annual general meeting (AGM);

· prohibiting proxy holders from 'cherry picking' the proxies they exercise, by requiring that any directed proxies that are not voted default to the Chair, who is required to vote the proxies as directed; and

· reducing the complexity of the remuneration report by confining disclosures in the report to the key management personnel (KMP). (Corporations Amendment (Improving Accountability on Director and Executive Remunerations) Bill 2011 – Explanatory Memorandum (last visited Feb. 27, 2012).)

These amendments implemented many of the recommendations arising from the Australian Productivity Commission's comprehensive review of Australia's executive remuneration framework, which was completed in December 2009. (Executive Remuneration, PRODUCTIVITY COMMISSION (last visited Feb. 24, 2012).) The proposal relating to the clawback of executive remuneration when financial statements have been materially misstated, which was not an option identified by the Productivity Commission, was subsequently the subject of a Treasury discussion paper released in December 2010. (Australian Government, The Clawback of Executive Remuneration Where Financial Statements Are Materially Misstated – Discussion Paper (Dec. 2010).)