The Government has released the exposure draft of the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Bill 2011. If passed the Bill will implement the Government’s response to the recommendations made by the Productivity Commission in its inquiry into executive remuneration in Australia.

Consultation on the Bill will continue until 20 January 2011. The Government intends to introduce the Bill into Parliament in the first half of 2011 with an expected start date of 1 July 2011.

As part of its response to the Productivity Commission’s inquiry, the Government is also releasing a Treasury discussion paper for consultation on a proposal to ‘clawback’ remuneration paid to executives where the company’s financial statements are materially misstated. The Treasury discussion paper on the additional ‘clawback’ proposal will be open for public consultation until 30 March 2011.

Director and Executive Remuneration Bill

The key measures include:

• for listed companies, strengthening the non-binding vote on the remuneration report, by requiring a vote for directors to stand for re-election if a board proceeds with its remuneration proposals despite the company’s remuneration report receivings a ‘no’ vote of 25 per cent or more of its shareholders at two consecutive annual general meetings (the ‘two-strikes’ rule). Where this occurs, shareholders will vote at the second AGM to determine whether the directors will need to stand for re-election within 90 days. If this resolution passes with 50 per cent or more of eligible votes cast, then the ‘spill meeting’ will take place within 90 days. The re-election resolution will be triggered where both strikes occur after 1 July 2011;
• companies that are a disclosing entity will be required to disclose details in the remuneration report relating to the use of remuneration consultants. In addition, remuneration consultants are required to be engaged by non-executive directors, and must report to non-executive directors or the remuneration committee, rather than company executives. The proposed measures relating to the advice from remuneration consultants apply to advice given under contracts executed on or after commencement (1 July 2011);
• for listed companies, key management personnel (KMP and their closely related parties will be prohibited from participating in the non-binding vote. In addition, KMP and their closely related parties will be prohibited from voting undirected proxies on all remuneration related resolutions. The proposed prohibition on KMP (and their closely related parties) voting undirected proxies in remuneration related resolutions applies in relation to voting on or after commencement (1 July 2011), irrespective of whether the matter that is the subject of the resolution relates to a time before, on or after 1 July 2011.
• KMP and their closely related parties will be prohibited from hedging the KMP’s incentive remuneration. The proposed prohibition on hedging applies to entry into arrangements on or after commencement (1 July 2011), irrespective of whether the remuneration was for services rendered before, on or after 1 July 2011.
• Public companies will be required to obtain the approval of its members for a declaration that there are no vacant board positions, should the number of board positions filled be less than the maximum number specified in the company’s constitution ( “no vacancy” rule). If agreed, the declaration lasts until the following AGM. Any appointment of a director made while the declaration is in place must be confirmed by a resolution of members at the following AGM, or the appointment lapses at the conclusion of that AGM. The provisions will apply in relation to the setting of board limits on or after the date commencement (1 July 2011).
• For all companies, proxy holders (including the Chair) will be required to cast all of their directed proxies on all resolutions. The new provision will apply to polls demanded on or after the commencement of the provision, whether the proxy was appointed before, on or after that commencement (1 July 2011).
• For groups, under the new law, remuneration disclosures will only be required for the KMP of the consolidated entity. The proposed measure applies in relation to remuneration reports for financial years starting on or after commencement (1 July 2011).