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Chapter 14 - Directors’ Remuneration
Whether listed companies’ annual reports should include further and more
detailed particulars relating to the remuneration of directors and executive
officers
14.1
New section 300A of the Corporations Law,
inserted by the Company Law Review Act 1998, requires listed companies
to include in the annual directors’ report for the financial year further
material than previously required to be disclosed about the remuneration of
directors and executive officers. The requirement applies to listed companies
reporting for financial years ending on or after 1 July 1998.
14.2
Specifically, the new section requires
disclosure under three categories:
- discussion of broad policy for determining the nature and amount of
emoluments of board members and senior executives of the company;
- discussion of the relationship between such policy and the company’s
performance; and
- details of the nature and amount of each element of the emolument of
each director and each of the 5 named officers of the company receiving the
highest emolument.
14.3
The requirement for the disclosure of
information applies to companies that are incorporated in Australia and
included in an official list of the Australian Stock Exchange (ASX). It also
applies despite anything in the company’s constitution.[1]
14.4 Section 300(1) (d)of the Corporations
Law also requires the directors’ annual report to disclose details of options
that are:
- granted over unissued shares or unissued
interests during or since the end of the year; and
- granted to
any of the directors or any of the 5 most highly remunerated officers of the
company; and
- granted to them as part of their remuneration;
14.5 A large number of submissions
supported either in whole or in part further disclosure relating to the remuneration
of directors and executive officers. However, it should be noted that the
disclosure requirements under paragraphs (a) and (b) of section 300A received
considerably more support than paragraph (c). Several organisations, companies,
professional bodies, and individuals who supported the disclosure of
remuneration policies and discussion of the linkage between remuneration and a
company’s performance, opposed the disclosure of the amounts received by
directors and senior executives by name in the annual report.[2]
Arguments in favour of the new disclosure requirements in paragraphs (a),
(b), and (c)
Capping senior executive
remuneration
14.2
The Australian Investors Association Ltd (AIA)
supported the new disclosure requirements to the extent that these were not
inconsistent with the AIA/ASA policy statement on limiting chief executive
salaries. The AIA policy favours full disclosure of the total remuneration
package for each director and the five highest paid executive officers. The
policy also comments on the actual levels of executive remuneration claiming
that a salary of $3million per annum is excessive for the chief executive of
any Australian company. The annual salary component of the chief executive’s
remuneration package should be less than $2m with the balance being made up of
options. According to the AIA, the price and exercise rights of options should
“link the fortunes of the CEO with those of the shareholders and executive
options should be issued in accordance with the AIA/ASA policy.”[3]
Disclosure of directors’
remuneration is in the interests of good corporate governance
14.3
The Investment & Financial Services
Association Ltd (IFSA) supported the disclosure requirements on the basis that
disclosure of directors’ remuneration is an established aspect of international
best practice in corporate governance:
It derives from the fundamental concept that company management
and board are the agents of the investors who own the company and are selected
to plan and run the company for their owner principals. In order for those
principals to assess the performance of their agents and, in particular, to
evaluate the cost of the agents to the owners vis-a-vis the contribution of
those agents to improving the value of the owners’ investment, it is necessary
for the owners to know the various components of that cost. These components
include all forms of monetary remuneration and, if applicable, equity dilution
through share or option schemes.[4]
14.4
IFSA noted that a disclosure regime has found
favour in the US and the UK. In the US, the Securities and Exchange Commission
requires the company’s remuneration committee to report annually to
shareholders on the company’s remuneration policy and to disclose by name the
company’s chief executive and the 4 most highly compensated executives together
with the disclosure in tabular form of all amounts received by each officer. In
the UK, the Code of Best Practice on remuneration, based on the Greenbury
Committee Report on Directors’ Remuneration is mandated under the London Stock
Exchange Listing Rules for UK companies listed on that exchange.[5] A similar trend was developing
in Australia and IFSA referred to Guideline 10 of its Guide for Investment
Managers and Corporations. The Guideline contains a recommendation that
companies disclose in their annual reports the “policies on and quantum and
components of remuneration for all directors and each of the 5 highest paid
executives. The disclosure should be made in one section of the annual report
in tabular form with appropriate explanatory notes”.[6]
14.5
It was claimed that this kind of disclosure
promoted accountability and fairness. In addition, it provided shareholders
with information about the quantum and components of the remuneration package
for comparison against the company’s performance and the stated polices of the
board. IFSA submitted a paper it commissioned on the level of disclosure of
directors’ remuneration by Australian companies to the PJSC for its
consideration. The paper authored by Ms Jennifer Hill, Associate Professor at
the University of Sydney Law School reviewed the disclosure arrangements at the
time.[7]
It found that the disclosure requirements were outdated and did not “provide
information on a number of important matters, such as the composition of
remuneration and value of shares and options used as incentive remuneration”.[8]
Current disclosure arrangements
inadequate
14.6
The Group of 100 Inc contended that the previous
provisions for disclosure relating to remuneration were inadequate and that
shareholders have a legitimate interest in this information:
The Group of 100 considers that the present requirements
included in AASB 1017 “Related Party Transactions” and AASB 1034 “Disclosure of
Information in Financial Reports” do not provide useful information to users
because it is not clear what purpose the disclosures are intended to serve. We
believe that the shareholders in a company have a legitimate concern and,
consistent with current community expectations regarding corporate governance,
are entitled to expect information about the remuneration of directors and
senior executives.[9]
14.7
The Group of 100 supported the principle of
disclosure but submitted that the inclusion of the new requirements without a
due process was inappropriate.
Difficulty in valuing share option
schemes
14.8
The Accounting Association of Australia and New
Zealand (AAANZ) supported more extensive disclosure of directors’ remuneration
and attributed the past less-than-full disclosure to the inability of directors
to value financial instruments such as share options. The AAANZ submitted that
a requirement to disclose and discuss remuneration policies would prompt
company boards to consider more effectively the issues underlying their
executive remuneration decisions:
There should be a requirement that companies disclose either the
fair value of share options (and any other derivative instrument that forms
part of the executives’ remuneration packages), or else disclose enough
information to enable a professionally qualified analyst to place a
sufficiently precise value on them. These valuations would need to reflect ...
the factors that make executive share options less valuable than call options
traded in public markets.[10]
14.9
The AAANZ noted that Accounting Standard AASB
1033 “Presentation and Disclosure of Financial Instruments” already requires
disclosure of the net fair value of financial instruments. It argued that
difficulties in valuing executive share options should not prevent disclosure
of their fair value. Further, a statement of the board’s remuneration policy
would "assist shareholders to understand better how they can gain from a
closer alignment of their interests with those of the executives, as can be
achieved by the use of share option plans.”[11]
14.10
Similarly, IFSA noted that the use of shares and
share option schemes as part of the remuneration package should align the
interests of executives with those of shareholders “through direct equity
participation in the future of the company”. In addition, the disclosure of
these financial instruments was essential because:
... shareholders need adequate disclosure to ensure that they are
receiving due reward for the dilution that equity participation entails.
Present and past practice has seen these schemes used in a variety of ways and
shareholders need to be given the information to enable them to understand the
policy objective of these schemes.[12]
Disclosure requirement will show
who are the key decision-makers
14.11
According to RewardSolve Consulting Pty Ltd
(RewardSolve), the new disclosure requirement will establish “an unequivocal
standard for disclosing director and senior executive remuneration”. Previously
the disclosure regime could result in misleading information being disclosed as
companies could decide who is reported or not reported. In particular, the requirement
to disclose the remuneration of managers who earn in excess of the $100,000
threshold may not identify the key decision makers in the company:
In many organisations senior professional or technical staff
(who do not have a direct impact on setting the company’s direction or
affecting the bottom line performance) may still be covered by awards, can fall
into the $100,000 plus net when the full value of their remuneration is
calculated. Given that scenario, I believe that one unintended consequence is that
who is actually disclosed in the annual report becomes a highly discretionary
activity by the company. Companies make their own interpretation of who is to
be disclosed and therefore this is not consistent across all companies.[13]
14.12
RewardSolve supported the introduction of
uniform disclosure requirements to ensure consistency of reporting across all
companies but recommended that disclosure should be required from two levels of
management below the chief executive or managing director:
Disclosure of remuneration from these top two levels and the
CEO/MD will capture the strategic management ranks...It is well known that anyone
who is really going to make an impact on the direction and performance of a
company will come out of these two top levels of management.[14]
Public interest outweighs privacy
considerations
14.13
The principal argument against the disclosure
requirement in paragraph (c) of section 300A is that the naming of directors or
senior executives is an invasion of privacy (see below at paragraphs 14.31 to
14.35). The Australian Law Reform Commission (ALRC) supported full disclosure
noting that the distinction between public office holders and senior executives
of publicly owned companies was no longer relevant:
Although disclosure in some cases might be seen by some to
involve an invasion of privacy, the increasing diversity of ownership of listed
companies, together with ongoing corporatisation and listing of major
government enterprises, suggests that former privacy distinctions between
senior public office holders and senior officers of publicly owned and listed
companies no longer have any real substance, particularly when considered
against the public interest in full disclosure to investors.[15]
14.14
Similarly, the West Australia Joint Legislative
Review Committee of the Australian Society of Certified Practising Accountants,
the Institute of Chartered Accountants in Australia and the Chartered Institute
of Company Secretaries supported the disclosure requirement on the basis that
it conforms with disclosure requirements in other countries such the US and the
UK. The Review Committee submitted that members have a right to know whether
they are receiving 'fair value for money'. In regard to the privacy issue, the
Review Committee noted:
We do not accept the argument put by some that this disclosure
will expose the recipients of the emoluments to terrorist attack. There is no
evidence, of which we are aware, that links such financial reporting with
terrorism. Also, any director is entitled under s.242AA(2) to have their
residential address withheld from the register if they have done the same under
the Electoral Act 1918.[16]
Suggested amendments to section
300A
14.15
Arthur Anderson supported the new disclosure
requirements in principle but recommended amending section 300A so that there
is consistency between the executives included in the banded information
required under the Accounting Standard AASB 1034 and the disclosures required
under section 300A. Arthur Anderson advised that AASB 1034 requires banded
disclosures of executive officers of ‘entities’ controlled by the company whose
remuneration is $100,000 per annum or more but excluding amounts paid where the
executive officer worked wholly or mainly overseas. However, section 300A
requires the disclosure in respect of the directors and executive officers of
the ‘company’. Arthur Anderson advised that the inconsistency is significant
because the highest paid executives in an ‘entity’ are not always employees of
the listed parent ‘company’:
Thus where a listed company is a controlling entity the five
highest paid executives covered by the new director’s report disclosure
requirements may not be necessarily the five highest paid executives included
in the AASB 1034 banded disclosures.[17]
14.16
Freehill Hollingdale and Page advised that the
disclosure requirements have created a degree of uncertainty because of the
inconsistency between the Law and the relevant accounting standards, and
recommended the following amendments:
- Where disclosures are required in the directors’ report under
section 300(2) they need not be included in that report where the details are
contained elsewhere in the company's annual financial report. This should apply
to disclosures under section 300A so that the disclosures about the 5 highest
paid executive officers will appear in the same note as the ‘bands’ disclosure
of income of all executives;
- The word ‘emoluments’ should be changed to ‘remuneration’ of each
director and officer, adopting the definition used in Accounting Standards AASB
1017 and AASB 1034 for the disclosure of remuneration of directors and
executive officers in “bands”;
- The requirement should be to disclose details of the “5 named
officers receiving the highest income” as required by AASB 1034, so that there
is consistency throughout the reporting requirements.[18]
Duplication of accounting standards
14.17
While supporting more extensive disclosure of
the remuneration of directors and executive officers, a number of submissions
argued that it was more appropriate for this requirement to be dealt with by
the relevant accounting standards.[19]
It was stated that the Law merely duplicated the disclosures already required
in Accounting Standards AASB 1017 and AASB 1034 and the lack of clarity in the
drafting of section 300A contributed to uncertainty about the reporting
requirement. The PJSC was also told that the inclusion of new section 300A was
contrary to the objective of the Company Law Review Act, which is to remove
detailed accounting requirements from the Law. Ernst & Young submitted
that:
The inclusion of such requirements in the Accounting Standards
in preference to the Law would mean that the disclosures would be made in the
notes to the financial statements and not in the Directors’ report. The notes
to the financial statements are subject to the auditor’s report, whereas the
Directors’ report is not. This means that information in the Directors’ Report
is subject to a lower level of independent assurance than is information in the
notes to the financial statements.[20]
14.18
The Accounting Bodies expressed support for the
disclosure requirements and advised the PJSC that the Australian Accounting
Standards Board (AASB) has undertaken to revise the related party disclosure
standard and the financial reporting standard to reflect the provisions in new
section 300A.[21]
The Accounting Bodies emphasised that the new accounting standard will also
conform with international accounting standards:
Mr Parker-There are two accounting standards that deal with the issue
of related parties and executive remuneration: AASB I017 deals with the
disclosure of related party relationships; AASB I034, disclosure of financial
information, deals with the disclosure, amongst other things, of executive
remuneration. The related party standard deals with disclosure of directors'
remuneration. Basically, these standards in part apply what was previously in
schedule 7 of the Corporations Law, so that has been picked up and put in an
accounting standard, AASB I034. Those accounting standards are shortly going to
be revised to have an exposure draft out on directors' and executives'
remuneration based upon the changes made to the Corporations Law. So what the
accounting standard is doing is implementing the requirements of the
Corporations Law.
What we are
concerned about is that the requirements of the Corporations Law itself might
conflict with what the standard setters consider to be an ideal standard. For
example, you might use terminology in the Corporations Law that would not be
used in the accounting standard. What we would like to see is the board develop
an accounting standard on directors' and executives' remuneration. And if the
board feels-the board being the AASB-that there are changes
necessary to the Corporations Law, because the board cannot issue a standard in
conflict with the Corporations Law, then the law would be amended so that we do
have a top quality accounting standard on this issue.
CHAIR-So the accounting standard requires the disclosure of
individual remuneration, or is it still the old provision?
Mr Parker-It is still the old provision.
CHAIR-For bands of remuneration?
Mr Parker-Yes.
CHAIR-So the law now goes further than that?
Mr Parker-Yes, it does. The standard setters want to, if you like, flesh out
what the requirements of the law are in an accounting standard.
CHAIR-Our purpose is to review the law as it stands, particularly
some of the amendments that were not in the original drafted legislation. What
is the view of the accounting bodies with regard to that more stringent
requirement for disclosure?
Mr Meade-I
think the accounting bodies would certainly support the more stringent
requirements. Once again, that is bringing it into line as well with
requirements in major overseas jurisdictions, where disclosure is required by
an individual director and disclosure is required of the senior executives in
an organisation. We would support that. As I mentioned in the opening address,
the unfortunate thing is that we need to clarify some of the matters which
remain uncertain and unclear as a result of the wording contained in the law as
it currently stands. We would certainly hope that those matters would be able
to be resolved, certainly when the accounting standards are revised on this
particular matter.[22]
Monitoring of compliance
14.19
In November 1998, the Australian Securities and
Investment Commission (ASIC) released Practice Note 68 to give some guidance on
the application of new section 300A. The ASIC Note states that its policies are
to be taken as ‘interim guidance’ while this area of the Law is reviewed by the
PJSC. The ASIC also undertook a survey of annual reports with balancing dates
from 1 July to 31 December 1998 to assess the extent of compliance with the
Law. Almost all the companies surveyed complied with the new requirements,
although there were a number of cases where the value of options granted to
directors and officers were not included in emoluments.[23]
14.20
At its hearing in Sydney on 17 August 1999, Ms
Jillian Segal, a Commissioner of the ASIC, told the PJSC that compliance with
the disclosure requirements was “very good” with the exception of the
disclosure of the valuation of options.[24]
The reason for this was that companies did not necessarily agree with the ASIC
policy as stated in the Practice Note that the Law required disclosure of the
valuation of options as part of the emoluments.[25] Ms Segal advised the PJSC that
the ASIC would continue to monitor compliance with section 300A in the next
reporting period and would enforce disclosure of a value for options granted.[26]
Unintended consequence
14.21
The PJSC was told that the disclosure
requirement in paragraph (c) of section 300A could be problematic for companies
with highly paid technical staff who are not executive officers or for
companies with a small workforce. Paragraph (c) requires the disclosure of the
remuneration of “each of the 5 named officers of the company receiving the
highest emolument”. The PJSC was told that exploration companies routinely
remunerate senior geologists at different levels based on various performance
factors. As one of the 5 company officers receiving the highest income, the
geologists’ salary would need to be included in the disclosure even though they
may not have participated in the management of the company. The Association of
Mining and Exploration Companies Inc (AMEC) argued that in the case of
exploration companies that are yet to generate income the requirement “is
unsuitable and could be inadvertently misconstrued by members of the public
unfamiliar with the operation of an exploration company.”[27] The public disclosure of the salaries
of company staff also has the potential to cause significant organisational
difficulties.
14.22
The Australian Institute of Company Directors
(AICD) submitted that the disclosure requirement could result in the salaries
of non-managerial staff being disclosed.[28]
This would be problematic even on a small scale as some junior exploration
companies employed only a handful of permanent staff. As Mr Laurie Factor,
Senior Lecturer at the School of Business Law, Curtin University explained to
the PJSC:
We have a great number of small junior explorers, some of which
actually do not even run to five employees. I know that might seem strange, but
everyone is on contract drilling holes out in wherever, and back here in town
we have got the standard three directors. Quite often they are executives of
the company as well-geologists, whatever. Maybe there is one that is
independent. And they might have an office manager and a receptionist. That
receptionist is going to actually figure in the top five, because the way it is
drafted it says ‘officers’. That attracts the definition in 82A, which includes
employees. It needs at minimum to be given the term ‘executive officer’ and put
into that category within section 9, an executive officer being someone
involved in the management of the company.[29]
Listed managed investment schemes
14.23
Several submissions pointed out that section
300A only applies to a company that is incorporated in Australia and is
included in an official list of the ASX.[30]
As a consequence registered managed investment schemes which are listed such as
listed trusts are not required to make the disclosure in their annual
directors’ report. Ernst & Young noted the inconsistency in reporting
requirements “despite the general applicability of other directors’ report disclosure
requirements to registered schemes. It is uncertain whether the omission of
listed registered schemes was intentional as there does not appear to be a
strong reason for this distinction from the disclosure requirements of listed
companies.”[31]
The ASX submitted that “if disclosure of directors’ remuneration is accepted as
desirable, it is not clear to us why it is limited to listed entities.”[32]
Arguments against the new disclosure requirements in paragraphs (a), (b),
and (c)
Current disclosure arrangements are
adequate
14.24
A number of submissions stated that the new
disclosure requirement was unnecessary because the disclosure arrangements
prior to the enactment of section 300A were adequate. Allen Allen & Hemsley
submitted that the previous requirements concerning remuneration required
companies to report the number of officers of the company receiving
remuneration in specified “bands”. This information was more than adequate to
enable shareholders to assess whether senior officers were paid an appropriate
level of remuneration to senior officers.[33]
In addition, shareholders of listed companies already have the power under the
ASX Listing Rules to approve the aggregate remuneration payable to
non-executive directors of the company:
Those directors must be paid within the aggregate limit fixed by
shareholders. Beyond that, shareholders have no power to fix the remuneration
payable to individual non-executive directors and the disclosure of the manner
in which the aggregate amount is divided amongst non-executive directors serves
no useful purpose.[34]
14.25
Suncorp-Metway Ltd argued that there is already
sufficient disclosure to enable the financial impact of remuneration payments
to be ascertained by shareholders.[35]
Similarly, Bristile Ltd noted that current requirements are adequate as they
ensure that the community and shareholders are aware of the value of the total
remuneration being earned by a listed company’s executives.[36]
Arguments against the disclosure
required under paragraph (a) and (b)
14.26
The AICD opposed the inclusion of a statement
which discussed board policy for determining remuneration as this kind of
statement was already required under ASX Listing Rule 4.10.3 and paragraph 5 of
Appendix 4A. Although the AICD described the requirement in paragraph (a) of
section 300A as “straight forward”, the requirement would only produce general
statements. A more useful disclosure would be a discussion of how remuneration
is structured to encourage performance maximisation for the benefit of
shareholders.[37]
The AICD listed the reasons for its opposition to the requirement for a
discussion of the relationship between the board’s remuneration policy and the
performance of the company, noting that a company’s performance may be affected
by factors outside directors’ control.[38]
Arguments against disclosure by
name of remuneration of directors and executive officers
Invasion of privacy
14.27
The most frequent objection to the disclosure of
remuneration details required by section 300A and the naming of individual
executives is that such disclosure constitutes an invasion of privacy of the
individuals concerned.[39]
The following objections were made to the disclosure requirement:
- The details to be disclosed are not material to investors and
reveals private matters for those concerned;[40]
- The disclosure of this information serves no useful purpose but
to satisfy the prurient curiosity of certain sections of the business community
and the investing public;[41]
- The naming of executives is an invasion of privacy and may expose
the named officers to extortion attempts and other criminal acts;[42]
14.28
According to Arnold Bloch Leibler, the
disclosure conflicts with some well established privacy principles:
The requirement to disclose emoluments would conflict with a
number of the privacy principles which are enshrined in the National Principles
for the Fair Handling of Personal Information issued by the Federal Privacy
Commissioner in February 1998 and which are proposed to be included in the Data
Protection Bill which the Victorian Government intends to introduce later in
the year.[43]
14.29
Arnold Bloch Leibler suggested that an
alternative to the disclosure by name of the company’s five most highly
remunerated officers would be to have the discussion of the board’s policy
included in the annual report without the disclosure of the precise amounts and
the names of individual officers. This compromise would enable shareholders to
continue to have information regarding changes in emoluments by segments,
representing threshold remuneration levels without the need for the names of
officers to be disclosed.[44]
14.30
Freehill Hollingdale and Page submitted that the
previous “band” disclosures provided sufficient disclosure for corporate
regulation purposes, whereas the new requirement ignores the privacy of an
individual’s financial affairs:
We suggest that there is no additional corporate governance
benefit to shareholders in knowing precisely which director or officer is
receiving which remuneration. The requirement that emoluments be disclosed in a
public document in the manner contemplated by the recent amendments does not
pay due regard to the interests of the persons concerned in having their
financial details kept private.[45]
14.31
AMEC advised that the requirement constitutes an
invasion of privacy particularly as it relates to the naming of individuals who
are not directors:
Given their role as directors of listed companies, company
directors accept the need to make public details of their remuneration
packages. The same treatment should not apply to non-directors whose role
within a company does not demand the same level of public scrutiny.[46]
Drafting of section 300A is unclear
14.32
Several submissions told the PJSC that the
drafting of section 300A failed to take account of words and phrases used in
provisions in the Law and the accounting standards.[47] Ernst & Young noted the
following uncertainties and deficiencies in section 300A:
- The meaning of 'emolument’ is uncertain given the use of the more
common word ‘remuneration’ in the accounting standards AASB 1017 and AASB 1034.
Discrepancies may arise in reporting as a consequence of these different terms
which have different meanings;
- It is uncertain as to whether the term ‘emolument’ can be applied
to non-directors;
- It is uncertain as to whether the words 'director' and 'officer'
in section 300A have the same meaning as the term ‘executive officer’ in the
accounting standard AASB 1034;
- It is uncertain as to whether the disclosure relates to the
‘company’ or the group of companies comprising an economic entity;
- It is unclear as to whether disclosure under the accounting
standards is sufficient or whether disclosure has to be duplicated in the
directors’ annual report; and
- There is an apparent inconsistency between which officers have to
be named under section 300(1)(d) and section 300A(1):
Subsection 300(1)(d) requires all companies ... to disclose
details in the director’s report of options granted to any of the “directors
or any of the 5 most highly remunerated officers as “part of
their remuneration”. The differences in the Law in the definition of
“emolument” versus “remuneration” mean that the bases upon which
officers are ranked for the purposes of section 300A versus section 300(1)(d)
may be different to each other. Therefore, “the 5 most highly remunerated
officers” under section 300(1)(d) may not be the same people as the “the
5 named officers of the company receiving the highest emolument” under
section 300A(1), leading to disclosure of different options details under one
section compared to the other.[48]
14.33
The AICD also provided the PJSC with details of
apparent inconsistencies between the drafting of section 300A and those in
accounting standards AASB 1017 and AASB 1034. In addition, the AICD referred to
an inconsistency between section 300A and section 300(l)(d) which requires the
disclosure of options granted to directors or to the 5 most highly remunerated
officers in the company. According to the AICD these inconsistencies and
conflicts could result in totals of emoluments differing between the directors’
report and financial report and the salaries of non-managerial staff being
disclosed. [49]
Current arrangements for fixing
remuneration and appointing executive officers
14.34
Caltex Australia Ltd pointed out that
shareholders are not involved in the appointment and the negotiation of terms
and conditions of service of executive officers. The appointment, employment
conditions and, if necessary, the removal of executive officers is the
responsibility of the board of directors. Caltex Australia Ltd suggested:
It is presumably intended that by disclosing this information
highly paid executives of poorly performing companies would be “shamed” into
resigning or reducing their remuneration.
They cannot be removed by shareholders, who have no power to do
so. Further, the disclosure of remuneration is unlikely to be determinative of
the longevity of under-performing executives in any event.[50]
14.35
Mr John Wilkin submitted that shareholders
should know or have the means of knowing what a director will receive but not
the individual amounts earned by the five highest paid executive officers. The
rationale for this is that shareholders vote for and elect directors and each
director is severally liable and responsible to the board. The case of
executive officers is different, however, because the board is responsible for
the remuneration of executive officers.[51]
14.36
It was argued that the question of remuneration
is one that is determined by the directors of the company and is, in the final
analysis, one of the “day to day” management issues for which the directors are
responsible:
In deciding on the relevant remuneration policy, the directors
will need to have regard to the fiduciary obligations that they owe to the
company. A discussion of the broad policy of the directors in regard to
remuneration may assist shareholders in understanding how the directors have
discharged their fiduciary obligations and whether shareholders should continue
to entrust the management of the company’s affairs in the hands of the
incumbent directors.[52]
14.37
GIO Australia Holdings Ltd (GIO) opposed the
disclosure of the salaries of executive officers on the basis that executive
officers are not appointed by and not accountable to shareholders and that
disclosure of salaries in these circumstances is therefore an invasion of
privacy.[53]
14.38
Mr JA Sutton told the PJSC that remuneration is
a management matter and shareholders should trust the directors to appoint
officers who will pursue the objective of maximising the wealth of the company.
According to Mr Sutton, any improper conduct can be dealt with at a general
meeting and the privacy of individuals should be respected.[54]
Repeal of section 300A
14.39
Ernst & Young noted that section 300A was
included in a late amendment to the Company Law Review Bill. As a result of the
drafting of the section the disclosure requirements have lead to
inconsistencies in the Law and unintended consequences.[55] It was argued that section
300A should be repealed and replaced by the AASB accounting standard on
directors’ and executives’ remuneration when this will be issued next year. Ernst
& Young submitted a survey of listed companies’ compliance with section
300A to the PJSC for its consideration.[56]
The survey examined the annual reports of listed companies with financial
reporting dates in the second half of 1998.
14.40
At the PJSC hearing in Melbourne on 16 June
1999, Mrs Ruth Picker, a Partner at Ernst & Young, summarised the results
of the survey and the major areas of concern with the late amendments:
When we did our survey, what we
wanted to do was to find out what was the level of compliance with section 300A
amongst our top corporates and how they were interpreting it. We found that
there was a lack of consistency, and we expected that, because we felt that
300A was ambiguous. We felt that ASIC practice note in many cases was contestable,
because it construed a certain interpretation to come out of section 300A, but
the law does not actually prescribe that interpretation. So we felt that,
although the practice note had been issued, there was nothing to force
companies to comply with that practice note. In fact, they contest it....
The second area that we found concerned the elements of the
package to be disclosed. Section 300A just talks about the components or the
elements of the remuneration. Companies have interpreted that vastly differently.
The breakdown of what is disclosed is different among almost all the companies
that we surveyed. ASIC have said, ‘These are the components we think you should
disclose,’ but there is no evidence that companies are following that. The
final area-and probably the most controversial one-is whether or not the values
of options granted to directors and executives should be included. ASIC have
said that they think they should be included. The law is silent on that, and we
think there is also a conflict between 300A and 300(1)(d) on options as to
whose options need to be disclosed.[57]
Disclosure of executive officers’
remuneration is not in the interests of the company
14.41
GIO argued that disclosure of executive
remuneration was not in the commercial interests of the company. The reasons
advanced for this argument were as follows:
- The disclosure of salaries will enable other
competitive companies to “poach” performing executives; [58]
- The disclosure will lead to the upward pressure
on executive packages as lesser paid executives will demand comparability;[59]
- Shareholders have no information against which
to benchmark the salary of an executive and to make judgments about the level
of salary; and
- Shareholders appoint directors to manage the
affairs of the company including the appointment and the remuneration of senior
executives. If shareholders are dissatisfied with the management of the
company, they are able to change the board.[60]
Previous disclosure regime adequate
14.42
As noted earlier, one of the two principal
arguments against the disclosure requirements is that the previous arrangements
were adequate. This argument was raised particularly in relation to the
requirement that the amount received by directors and executive officers should
be disclosed. Caltex Australia Ltd referred to the previous requirement under
which companies were required to report the number of officers receiving
remuneration in specified “bands”:
This information is more than adequate to enable shareholders to
assess whether the directors are generally paying an appropriate level of
remuneration to senior officers. In most cases, the managing director will be
the highest paid executive and the remuneration of the managing director will
therefore be known within a $10,000 range in the event. The previous
requirements also gave rise to a lesser potential for disharmony between
“envious” employees.[61]
14.43
Similarly, the ALRC suggested that it would be
preferable to require the disclosure of all remuneration packages with a value
in excess of a particular prescribed amount.[62]
Negative impacts on small listed
companies
14.44
The Forest Place Group Ltd opposed the
disclosure requirement on the grounds that it would have a negative impact on
the working relationships within a small publicly listed company. It advised
the PJSC that as a small listed company it did not have a hierarchical
structure of senior management. The 5 most highly remunerated executives
received a salary in a range of $60,000-$84,000 per annum, including all
non-cash benefits, with the 5th ranked executive receiving a salary
in accordance with the State Nurses Aged Interim Care Award. The Forest Place
Group Ltd submitted that it did not “believe its is the intention of the law to
make specific disclosure of such relatively low salary” and recommended that
salaries below a benchmarked level, say $150,000, should not be disclosed and
disclosure should be as required under AASB 1034.[63]
Conclusions
Accountability and openness
14.45
The overriding principles in respect of
directors’ and executives’ remuneration are those of accountability and
openness. The PJSC attaches the highest importance to the full disclosure of
directors’ and executives’ remuneration as a means - to quote from the
Greenbury Report – of ensuring accountability to shareholders and public confidence
in the capital markets. As witnesses told the PJSC, shareholders are entitled
to know the remuneration of directors and executives in all its form and the
board’s policy in determining directors’ remuneration. A number of companies
also expressed the view that the disclosure requirements in paragraphs (a) and
(b) in section 300A are “inherently reasonable in today’s corporate
environment” [64]
and “either in the interest of shareholders or of more efficient corporate
governance.” [65]
14.46
The PJSC agrees with the objectives behind
paragraphs (a) and (b) of section 300A but as the AICD noted, this requirement
might only produce a discussion that states the obvious. The PJSC agrees with
the AICD that more meaningful statements will result if boards indicate the manner
in which directors’ present and future benefits are structured to encourage
higher performance. As witnesses told the PJSC, justification for these
policies and their relationship to the performance of the company can be at
times misleading. For example, a company’s share price in a bull market, which
may be increasing shareholder value, is not necessarily a true indicator of the
performance of directors. A company’s performance can also be affected by
factors outside the directors’ control. On the other hand, a company may be
performing well but the board’s remuneration policy might be wrong in that the
company is not attracting or retaining directors of the quality required, or
the board may not be seeking as wide a field of candidates for nomination. The
PJSC believes that requirements (a) and (b) may not achieve the objective of
informing shareholders that directors’ and executives’ remuneration
realistically reflects the responsibilities and risks of being an effective
director or executive.
14.47
In the view of the PJSC the statement of board
policy should at a minimum discuss how the remuneration package reflects the
responsibilities and risks assumed by the director and the various performance
oriented factors linking rewards to corporate and individual performance. It is
more relevant for the board’s statement to focus on the relationship between
the board’s remuneration policy and the effectiveness of directors and
executives in terms of the risk profile of the company, the board’s long term
strategic plans and the factors specific to that company.
14.48
The PJSC concludes that section 300A should be
amended as follows:
- The word ‘broad’ should be amended to ‘board’;
- The words ‘senior executive’ should be amended
to ‘executive’;
- The reference to ‘company’ should be retained and that it is
intended that this will include executives within an ‘economic entity’, as
referred to in AASB 1034 and in ASIC Practice Note 68, paragraph 55(iv);
- The words ‘emolument’ and ‘emoluments’ should be amended to
‘remuneration’, which has a more general and agreed use than the word emolument
and is defined for the purpose the Law intended in Accounting Standards, AASB
1017 and AASB 1034; and
- The words ‘details of the nature and amount or
each element of the emolument of each director and each of the 5 named officers
of the company receiving the highest emolument’ should be replaced with
‘details of the nature and amount of each element of the remuneration of each
director and details of the nature and amount of each element of the remuneration
received by the 5 named most highly remunerated executives of the company’.
14.49
The PJSC also concludes that the new accounting
standard on directors’ and executives’ remuneration should require a statement
by the board which discusses its remuneration policy and the relationship
between that policy and the company’s performance and how individual
performance is measured, in addition to the responsibilities of directors to
encourage higher corporate performance, the risks assumed by the directors and
how rewards are related to that policy. The key to encouraging enhanced
performance by directors – to quote from the Greenbury Report - lies in
remuneration packages that align the interests of directors and shareholders.[66]
14.50
In the view of the PJSC the provisions relating
to the disclosure of directors’ and executives’ remuneration should apply to
all listed companies. Companies have a responsibility to shareholders to
explain the policy in determining and accounting for directors’ and executives’
remuneration. If there are areas where full compliance is not practicable, as
for example, when executive salaries are based on state industrial awards then
relief should be sought from the ASIC, but this should be explained and
justified in the annual report.
Unintended consequences
14.51
As witnesses told the PJSC, it is not unusual
for companies, particularly small exploration junior companies, to have highly
paid staff who are not in positions of management or control of the company or
by virtue of the size of the company to have only a handful of employees. Any
such disclosure requirement would have an unintended consequence and may result
in misleading information being disclosed. The PJSC concludes that a definition
of the term ‘executive’ should be inserted in Section 9 – Dictionary as being
‘a person who is involved in the management of the company or entity’. The PJSC
believes that this change will provide a basis for uniform remuneration
disclosures.
Disclosure and valuation of options
14.52
The PJSC was presented with two surveys of
listed companies’ compliance with section 300A. In the ASIC survey,
non-compliance with the requirement for directors’ and officers’ emoluments was
identified in a small number of annual reports lodged by the 111 companies.
While almost all the companies surveyed complied with section 300A, “there were
a number of cases where the value of options granted to directors and officers
were not included in the emoluments”. The Ernst & Young survey indicated a
similar disparity in practice between companies. In the view of the PJSC the
lack of apparent compliance with section 300A and in particular with the
disclosure of a value of options is not due to an unwillingness of companies to
comply with the Law but to the fact that the Law is unclear because of the
drafting of section 300A. Notwithstanding ASIC policy that an amount should be
disclosed for the value of options granted to directors and officers, as the
Law currently stands the drafting of section 300A is inconsistent with section
300(1)(d). Section 300(1)(d) does not specify whose options should be
disclosed, and section 300A, which requires ‘details of the nature and amount
of each element of the emolument’, does not specify whether or not the details
of the emoluments are to aggregated for the purpose of disclosure. Indeed it is
questionable whether the Law at present requires the disclosure of a value of
options as part of the remuneration package. As the Ernst & Young survey
found, the majority of companies issued options to directors and executives in
the current financial year and the number of options granted was disclosed.
However no value was attributed to the options and it was not clear whether or
not the value was included in the remuneration package. As the survey noted,
companies returned to the previous practice of attributing no value to options
granted. Given the increasingly large amounts involved where options are
granted to senior executives, the PJSC believes that the Law should require the
disclosure of a value of options in the remuneration package. To resolve an
inconsistency in the drafting of section 300A and section 300(1)(d) and the
inclusion of a value of options in the remuneration package, the PJSC
recommends that:
- Section 300(1)(d)(ii) should be replaced by ‘granted to the
directors and to the 5 most highly remunerated executives of the company’; and
- Section 300A should include a provision which requires disclosure
of the value of options granted, exercised and lapsed unexercised during the
year and their aggregation in the total remuneration.
14.53
In Practice Note 68, the ASIC indicated the
method of valuation to be used. However, this methodology has been criticised
and there is no certainty that this valuation methodology will be used in the
future as financial reporting moves towards market value accounting. The PJSC
believes that one body should be responsible for developing the method of
valuation and that body should be the Australian Accounting Standards Board
(AASB). This would be consistent with the AASB’s policy to develop a new
accounting standard on directors’ and executives’ remuneration.
Listed Managed Investment Schemes
14.54
The disclosure provisions in section 300A were
passed by the Senate with listed companies in mind but the principles of
accountability and openness apply equally to listed managed investment schemes.
As the PJSC was told, there was no reason for applying the disclosure
requirements to listed companies and not to listed schemes which are subject to
the same financial reporting requirements. Accordingly, the PJSC concludes that
section 300A should apply to listed managed investment schemes to ensure that
the same levels of accountability and transparency apply to these entities.
Recommendation
14.55
The PJSC recommends that sections 300 and 300A
of the Corporations Law should be amended as described above.
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