The Government has released the final Productivity Commission report on executive remuneration.

The Government will now consider the Commission’s recommendations; it intends to respond during the first quarter of 2010

The Commission concluded that capping pay or introducing a binding shareholder vote on it would be impractical and costly.

Instead, the Commission has recommended that the corporate governance framework should be strengthened by:

• removing conflicts of interest, through independent remuneration committees and improved processes for use of remuneration consultants;
• promoting board accountability and shareholder engagement, through enhanced pay disclosure and strengthening the consequences for those boards that are unresponsive to shareholders’ ‘say on pay’.

The Commission has specifically proposed that:

• Companies be required to explain in the remuneration report their response to a ‘no’ vote of 25 per cent or more the previous year.
• Where there is a second consecutive vote against the remuneration report of 25 per cent or more, a separate ‘re-election’ resolution would be put automatically at that annual general meeting (and included in voting papers circulated prior to the meeting), to the effect that all elected directors who signed the directors’ report for that year face re-election at an extraordinary general meeting (to be held within 90 days). To pass, this re-election resolution would require a majority of eligible votes cast.

Other recommendations include:

• For the election of directors at a general meeting, where the board seeks to declare no vacancies and the number of directors is less than the constitutional maximum, approval should be sought from shareholders by way of an ordinary resolution at that general meeting. Boards would retain their powers to appoint directors and fill or leave vacant casual vacancies throughout the year. This recommendation would be effected through amendments to the Corporations Act 2001 and relevant regulations.
• The Corporations Act 2001 should specify that company executives identified as key management personnel and all directors be prohibited from voting their shares on remuneration reports and any resolutions related to those reports.
• The Corporations Act 2001 should be amended to require proxy holders, except in exceptional circumstances, to cast all of their directed proxies on remuneration reports and any resolutions related to those reports.
• The Australian Securities and Investments Commission should issue a public confirmation to companies that electronic voting is legally permissible without the need for constitutional amendments — as recommended in 2008 by the Parliamentary Joint Committee on Corporations and Financial Services.