BILLS DIGEST NO. 141, 2011–12, 30 May 2012

Corporations Amendment (Proxy Voting) Bill 2012

Paula Pyburne
Law and Bills Digest Section

Date introduced:  24 May 2012

House:  House of Representatives

Portfolio:  Treasury

Commencement:  On the day after the Royal Assent

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill's home page, or through http://www.aph.gov.au/Parliamentary_Business/Bills_Legislation. When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website at http://www.comlaw.gov.au/.

Purpose

The Corporations Amendment (Proxy Voting) Bill 2012 (the Bill) amends the Corporations Act 2001 (Corporations Act) to put beyond doubt that the chair of an annual general meeting who is a member of the key management personnel of a company can vote undirected proxies in a non‑binding shareholder vote on remuneration where the shareholder provides express authorisation.

Background

In December 2009 the Productivity Commission published the report of its inquiry into Executive Remuneration in Australia.[1] The catalyst for the inquiry was:

... concern that executive pay had got out of hand. This perception was fuelled by practices in financial institutions abroad that were seen as a key contributor to the global financial crisis. Further, while local shareholder value plummeted in 2008 as a result of that imported crisis—with some companies and sectors being propped up by taxpayers—executive pay seemed to emerge unscathed, crystallising a view that executives were being rewarded for failure ...[2]

The Productivity Commission noted that there is ‘an inherent conflict of interest where
executives—who are also board members—are able to make decisions regarding their own pay’, whilst acknowledging that the establishment of remuneration committees did ‘allow boards to deal more effectively with complex, specialised remuneration issues’ and ‘enhance the integrity of the decision-making process’.[3]

The Productivity Commission report contained seventeen recommendations—nearly all of which were supported by the Government.[4]  In particular, the Productivity Commission recommended that:

the Corporations Act be amended to prohibit company executives identified as key management personnel[5] and all directors from voting undirected proxies on remuneration reports and any resolutions related to those reports.[6]

Relevant amendments to the Corporations Act were contained in the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act 2011 (2011 Amending Act).[7]

Nature of the problem

Persons who are shareholders in a public company have the opportunity to express their views about the company’s performance in a general meeting.  Under the Corporations Act, the business of an annual general meeting (AGM) may include matters such as the consideration of the annual financial report and the directors’ report.[8]  The directors’ report for a financial year for a listed public company is required to contain, in a separate and clearly identified section, a remuneration report, with a discussion of board policy for determining the nature, and amount, of remuneration of the key management personnel.[9]

At a listed company’s AGM, a resolution must be put to the shareholders that the remuneration report be accepted.[10]  However, the vote on such a resolution is advisory only, and does not bind the directors of the company.[11] 

Shareholders often appoint the chairperson of the meeting (referred to as the ‘chair’ in the Corporations Act) as their proxy to vote on their behalf at the AGM. The chair may be directed how to vote on a resolution by ticking a box next to the resolution on the proxy appointment form (commonly known as a directed proxy) or the shareholder may not specify the way the chair must vote (commonly known as an undirected proxy).

The 2011 Amending Act introduced a conflict into the Corporations Act regarding whether the chair can vote undirected proxies on the remuneration report resolution.  The conflict is between section 250BD and section 250R.

On the one hand subsection 250BD(1) of the Corporations Act prohibits a person who has been appointed as a proxy from voting on a resolution that is connected with the remuneration of a member of the key management personnel for the company if the person is member of the key management personnel, and the proxy does not specify the way the proxy is to vote on the resolution.  The chair is considered a member of the company’s key management personnel.

However, subsection 250BD(2) provides an exemption to the rule at subsection 250BD(1) if the person is the chair of the meeting at which the resolution is voted on, and the appointment as proxy expressly authorises the chair to exercise the proxy even if the resolution is connected with the remuneration of a member of the key management personnel for the company.  That being the case, section 250BD authorises the chair to vote undirected proxies on the remuneration report.

On the other hand, subsection 250R(4) prohibits a member of the key management personnel from voting on the remuneration report if their details are included in the remuneration report.  There is an exemption from this rule if the person has a proxy that specifies how the proxy is to vote on the remuneration report.[12] In addition, subsection 250(10) of the Corporations Act provides that subsection 250R(4) has effect despite anything else in the Corporations Act—this includes section 250BD.  As a result, subsection 250R(4) prohibits the chair voting undirected proxies on the remuneration resolution where the chair’s details are included in the remuneration report.

Possible consequences

Although the vote on the resolution to accept the remuneration report is advisory only, the counting of all the votes, including proxies, is important in the context of another change brought about by the 2011 Amending Act.  This gave effect to a ‘two strikes’ approach[13], which was recommended by the Productivity Commission.[14]  It operates so that:

•       where a company’s remuneration report receives a ‘no’ vote of 25 per cent or more, the board is required in the subsequent remuneration report to explain how shareholder concerns were addressed (the ‘first strike’) and

•       where a company’s subsequent remuneration report also receives a ‘no’ vote of 25 per cent or more, (the ‘second strike’) a resolution (called a ‘spill resolution’) must be put to the vote.[15]  If the spill resolution is passed, another meeting of the company’s members is to be held within 90 days.  At that meeting, those individuals who were directors when the directors’ report was considered at the most recent AGM will be required to stand for re-election (other than the managing director, who is permitted to hold office indefinitely without being re-elected to the office).[16]

It is necessary therefore, that the conflict between the two sections be resolved so that there are not uncounted votes at an AGM.

Response to the problem

In August 2011, David Bradbury, Parliamentary Secretary to the Treasurer announced that the Government intended to introduce further amendments to the Corporations Act to:

clarify the ability of the chair, who is a member of the key management personnel, to vote undirected proxies in the non-binding vote where the shareholder provides their explicit consent for the chair to exercise the proxy.[17]

In the meantime, the Australian Securities and Investments Commission (ASIC) issued an Information Sheet to provide guidance on how companies could comply with the provisions in their current form.[18]

Committee consideration

At the time of writing this Bills Digest, the Bill had not been referred to any Committee for inquiry and report.

Financial implications

The Bill has no significant impact on Commonwealth expenditure or revenue.[19]

Key provisions

As already stated, subsection 250R(4) of the Corporations Act prohibits a member of the key management personnel from voting in any capacity on the remuneration report, if their details are included in the remuneration report. 

Item 1 of Schedule 1 to the Bill repeals and replaces subsection 250R(5) to create an exemption from that rule.  Proposed paragraph 205R(5)(a) reproduces much of existing subsection 250R(5). Proposed paragraph 250R(5)(b) provides that the chair of a meeting who is also a member of the key management personnel of the company can cast a proxy vote on the remuneration report if:

•       the appointment of the chair as proxy does not specify the way the proxy is to vote on the resolution and

•       the shareholder expressly authorises the chair to exercise the proxy—even if the resolution is connected directly or indirectly with the remuneration of a member of the key management personnel for the company.

This resolves the conflict with section 250BD. 

Members, Senators and Parliamentary staff can obtain further information from the Parliamentary Library on (02) 6277 2434.

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ISSN 1328-8091

[1].               Productivity Commission, Executive remuneration in Australia, Inquiry report no. 49, Commonwealth of Australia, Melbourne, 19 December 2009, viewed 28 May 2012, http://www.pc.gov.au/projects/inquiry/executive-remuneration/report

[2].               Ibid., p. xv.

[3].               Ibid., p. 173.

[4].               C Bowen, MP (then Minister for Financial Services, Superannuation and Corporate Law and Minister for Human Services), W Swan, MP (Treasurer) and Senator N Sherry (then Assistant Treasurer), Government responds to the Productivity Commission report on executive remuneration, media release, 16 April 2010, viewed 28 May 2012, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressrel%2FZKGW6%22

[5].               Section 9 of the Corporations Act 2001 defines ‘key management personnel’ as having the same meaning as in the accounting standards.  The relevant standard is AASB: 124 which states that key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity.  The text of AASB: 124 can be viewed at: http://www.aasb.gov.au/admin/file/content105/c9/AASB124_12-09.pdf

[6].               Productivity Commission, op. cit., Recommendation 6.

[7].               For a full account of the amendments contained in that Act see M Donaldson, Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Bill 2011, Bills Digest, no. 83, 2010–11, Parliamentary Library, Canberra, 2011, viewed 28 May 2012, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22legislation%2Fbillsdgs%2F638138%22

[8].               Section 250R, Corporations Act 2001.

[9].               Subsection 300A(1), Corporations Act 2001.

[10].               Subsection 250R(2), Corporations Act 2001.

[11].               Subsection 250R(3), Corporations Act 2001.

[12].               Subsection 250R(5), Corporations Act 2001.

[13].               The relevant provisions are in sections 250V–250Y of the Corporations Act 2001.

[14].               See Division 9 of Part 2G.2 of the Corporations Act 2001 and Productivity Commission, op. cit., Recommendation 15.

[15].               Notice of the spill resolution must be contained in the meeting papers for the AGM to ensure that notice has been given in the event that the second strike is triggered.  The notice must explain the circumstances in which the resolution will apply.

[16].               P Durkin, ‘Strike one ... strike two ... no pay rise for you!’, Australian Financial Review, 29 October 2011, p. 1, viewed 29 May 2012, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressclp%2F1185809%22

[17].               D Bradbury (Parliamentary Secretary to the Treasurer), Amendments to the Corporations Act 2011, media release, 11 August 2011, viewed 29 May 2012, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressrel%2F992779%22

[18].               Australian Securities and Investments Commission, Annual general meetings: voting on the remuneration report resolution, Information sheet 144, viewed 29 May 2012, http://www.asic.gov.au/asic/asic.nsf/byheadline/Annual+general+meetings+Voting+on+the+remuneration+report+resolution?openDocument

[19].               Explanatory Memorandum, Corporations Amendment (Proxy Voting) Bill 2012, p. 3.