New executive remuneration laws give more power to shareholders

Executive pay remains a contentious issue for shareholders of organisations and the broader community.

Links can be drawn between the ‘Occupy Movement’ (which has sprung up in locations around the world, protesting social and economic inequality, corporate greed and corruption) and the substantial difference between the national average wage and what Key Management Personnel (KMP) are paid.

There is no shortage of examples where the public and shareholders have been at odds with Boards’ interpretation of fair pay.

Look at the recent pay rise of Alan Joyce, CEO of Qantas, which was questioned widely in the media and public circles. It practically coincided with the industrial dispute that cost the business millions.

Remuneration and an individual’s value to an organisation is determined by a complex interaction of factors.

However, the new remuneration laws that came into effect in Australia on July 1 this year give shareholders (of listed companies and some other specified organisations) considerably more power when it comes to executive pay.

What the new legislation means
The Corporations Act Amendment – ‘Improving Accountability on Director & Executive Remuneration’ (2011) will be particularly useful to shareholders, and follows the lead of  countries such as Sweden, Norway and the United Kingdom that have responded to concerns about executive pay levels.

Contravention of the Act will be a strict liability offense – meaning no explanations, defence or mitigating factors will be accepted, and executives and consultants will face stiff penalties for breaching the Act.

The major bite in the new law is the “two strikes” rule where if 25% or more of shareholders oppose the adoption of the remuneration report in two successive votes, the Board can be forcibly disbanded and elections held.

Companies are already taking advantage of the legislation. In an article on ‘The Conversation’, author Julie Walker reports that ‘Homewares company GUD Holdings has already been hit with a protest vote from 42% of shareholders over the company’s remuneration report, under the new legislation introduced in July’.

Major changes to the executive remuneration legislation are:

  • The engagement of remuneration consultants must be made directly by the Board or Remuneration Committee to avoid potential conflict of interest.
  • The remuneration report and decisions related to KMP is the domain of Non-Executive Directors or the Remuneration Committee; NOT company management.
  • The Board must include a statement in the Annual Report to the effect that they are satisfied recommendations have been made free from undue influence. The remuneration consultant must also issue a declaration to the same effect.

Breach implications
Breaches of these provisions will result in fines being imposed on the company (60 penalty units at $550 per unit) or the individual remuneration consultant (60 penalty units at $110 per unit).

These new laws and penalties give shareholders substantially more teeth when it comes to executive remuneration.

Transparent advice will be critical if Boards are to maintain harmonious relationships with their shareholders.

Listed companies should immediately review their remuneration practices and implement new procedures to ensure compliance with the new legal requirements.

Vantage Performance is one of Australia’s leading business transformation and turnaround management firms – solving complex problems for businesses experiencing major change.

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