Address to the LexisNexis Corporate Governance & 
Compliance Conference 
 
 
 
 
 

Geoff Miller 
General Manager, Corporations and Financial Services 
Division 
Australian Treasury 
 
 
 
 
 
14 September 2010 
 
   
Executive remuneration is an important topic. It has been the subject of much debate and
community concern in Australia, particularly following the global financial crisis. While
shareholder value fell during the crisis, there was a widespread perception that the levels of
executive remuneration remained largely unchanged.

Today, I’d like to begin by providing some brief comments on why I believe sound corporate
governance principles are important, both in a general sense and specifically in relation to
executive remuneration.

Secondly, I will talk about Australia’s current remuneration framework — a strong

framework that is highly ranked internationally.

Thirdly, I’ll discuss the recent Productivity Commission inquiry into Australia’s
remuneration framework, including its recommendations, the Government response to those
recommendations, and how the recommendations have been received by some key
stakeholders.

And finally, I’ll touch on some other recent Government initiatives that have strengthened
Australia’s remuneration framework, such as the reforms to termination benefits and
international standards on remuneration applying to the financial sector. I’ll also talk briefly
about the Government’s proposal to consult on a possible reform to clawback remuneration
in the event of a material misstatement.

Of course, as you are aware, new Treasury portfolio Ministers have recently been announced.
As I’m sure you can appreciate, I have not yet had the opportunity to seek any specific views
from those Ministers. So my talk today reflects the previous announcements made by the
Government.

The importance of, and the inter-linkages between, sound corporate

governance principles and well structured remuneration packages

Sound corporate governance principles

Sound corporate governance principles are a critical component of any effective corporate
regulatory framework. They provide a structure, process and system for exercising,
constraining, monitoring and accounting for power within a corporation.

There has been extensive research on the connection between good governance and company
performance. In an Australian context, the Treasury, in conjunction with the Australian
National University, conducted research in 2008 on the correlation between good corporate
governance practices and the financial performance of listed companies. Not surprisingly,
the research confirmed previous findings on the positive relationship between the two.

Corporate governance structures in Australia are based on what is known as the “shareholder
approach” of corporate control.

Under this model, which applies in several other common law countries, the achievement of
corporate goals and profit maximisation is monitored by the owners of the corporation and its
shareholders, to whom corporate management is accountable.

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The role of shareholders within a corporation has significant implications for executive
remuneration. It raises questions about the extent to which shareholders, rather than
directors, should have the power to determine executive remuneration.

For the most part, it is the responsibility of the directors, not the shareholders, to determine
executive remuneration. However, shareholders can express their views on the company’s
remuneration policies through a non-binding vote.

There are, however, certain elements of remuneration such as directors’ fees and large
termination benefits, where shareholders do have a binding vote and the ability to determine
remuneration levels. In these specific cases, the power given to shareholders can be justified
due to the nature of the remuneration and the need for greater accountability.

Well structured remuneration packages

The need for well structured remuneration packages was highlighted during the global
financial crisis. The crisis demonstrated the consequences of remuneration structures that
reward risky short term behaviour and promote corporate greed.

And not surprisingly, some commentators have observed that excessive remuneration is one
of the common characteristics of many of the companies that collapsed during the crisis.

Concerns about remuneration paid to company directors and executives appear to stem from
several sources.

One source is the perceived gap between pay and company performance, which is
exacerbated in cases where executives receive relatively high payments that do not appear to
be justified by the company’s financial results.

Another source of shareholder concern has been the setting of performance hurdles at
inadequate levels, that fail to pose any real challenge to the executives.

This can be compounded by further concerns that directors may be ”captured” by the
executives, and as result, are not sufficiently at ”arm’s length” from the executives. This can
lead to remuneration decisions that are not in the best interests of the shareholders or the
company.

To address this, the regulatory framework contains mechanisms for shareholders to hold
directors to account, by expressing their collective view — and at times, their outrage — on
remuneration issues, coupled with the comprehensive disclosure of remuneration details.

Australia’s current remuneration framework

Which brings me to Australia’s current remuneration framework.

As I mentioned earlier, a fundamental principle underlying our corporate governance system

is that directors are responsible to shareholders for managing all aspects of the company’s
operations, including setting executive remuneration.

Accordingly, Australia’s approach to the issue of director and executive remuneration is to

provide a regulatory framework that encourages shareholder activism through the transparent
disclosure of remuneration details.
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There are currently extensive legislative and non-legislative requirements regarding director
and executive remuneration. These provide a strong framework, which gives shareholders
the opportunity to critically analyse the company’s remuneration policies.

Under the Corporations Act, a disclosing entity that is a company (predominantly comprising
of listed companies) is required to prepare an audited remuneration report.

The remuneration report contains extensive information on director and executive

remuneration, including:

• the board of directors’ policy on director and executive remuneration;

• the link between that policy and company performance; and

• details of remuneration paid to directors and certain senior executives during the year,
including performance conditions, bonuses and options.

Shareholders also have the opportunity to vote on a non-binding resolution, expressing their
support for, or their opposition to, the board’s remuneration policies and practices.

This allows shareholders to communicate their views on remuneration issues, especially

where the level or composition of remuneration is not considered appropriate given company
performance and community expectations. I will talk more about the non-binding vote, and
the Productivity Commission’s recommendation to strengthen it in a moment.

Further guidance on setting remuneration for listed companies is provided through the
Australian Securities Exchange Corporate Governance Council’s Principles and
Recommendations.

These principles build on the Corporations Act requirements by requiring company directors
to:

• firstly, establish and disclose details of an independent remuneration committee,

including a formal charter describing its roles and responsibilities, its members and
their attendance at meetings;

• and secondly, prevent direct involvement by individuals in setting their own

remuneration.

Overall, the Productivity Commission found that Australia’s corporate governance and
remuneration framework is highly ranked internationally.

Many jurisdictions are only now reaching the point that Australia’s regulatory framework has
been at for several years.

For example, in the United States, the 2010 Dodd-Frank Act implemented many
improvements to their remuneration framework, such as increased disclosure, a non-binding
vote for shareholders, and disclosure on hedging practices. Australia’s regulatory framework
has had similar features for a number of years.

The Productivity Commission’s recommendations and the Government’s

response
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While Australia’s framework is relatively strong, the global financial crisis highlighted many
issues relating to remuneration structures.

In particular, it illustrated the dangers of remuneration structures that focus on short-term

results, reward excessive risk-taking and promote corporate greed.

Responding to these concerns, in March 2009 the Government announced that it would
introduce legislative reforms to curb excessive termination benefits. And at the same time, it
announced that it would task the Productivity Commission to undertake a broader review of
Australia’s remuneration framework.

I will talk more about the reforms to termination benefits in a moment. Right now, I would
like to turn to the Productivity Commission review and its recommendations to further
strengthen Australia’s remuneration framework.

The Productivity Commission’s terms of reference were very broad, encompassing all aspects
of the remuneration framework. These included the non-binding shareholder vote... the role
that remuneration consultants play in setting remuneration... the disclosure of remuneration
details... and potential conflicts of interest in the remuneration-setting process.

The Productivity Commission undertook a thorough and comprehensive inquiry, engaging

with a diverse range of stakeholders throughout the nine-month review process.

The Commission released an issues paper in April 2009, followed by a discussion document
in September 2009, before completing its final report in December 2009.

Overall, the Commission received a total of 170 submissions, as well as conducting a number
of roundtables and public hearings.

In its final report, the Productivity Commission made 17 recommendations. I would like to
talk briefly about some of the key recommendations contained in the report, including:

• the “two-strikes” test to strengthen the non-binding vote;

• the regulation of remuneration consultants;

• the disclosures contained in the remuneration report;

• the prohibition on hedging incentive remuneration;

• the establishment and composition of remuneration committees;

• the prohibition on key management personnel from voting their shares on

remuneration related resolutions;

• the “no vacancy” rule; and

• preventing proxy holders from “cherry picking” which votes they cast.

“Two-strikes” test to strengthen the non-binding vote

I’ll begin with the “two-strikes” proposal to strengthen the non-binding vote.

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This proposal was put forward by the Productivity Commission as a way to give shareholders
more leverage over boards that were not listening to their concerns on remuneration issues,
without supplanting their role in setting executive remuneration.

The Corporations Act requires listed companies to put their remuneration report to a
non-binding shareholder vote at the annual general meeting.

Anecdotal evidence suggests that some boards are responsive to the non-binding vote, and
that the opportunity for shareholders to cast a vote is having a positive impact on
remuneration policies.

Many submissions to the Productivity Commission inquiry also noted that the introduction of
the non-binding vote has resulted in increased dialogue between companies and shareholders
on remuneration issues.

There have been several notable examples where companies have responded to significant
“no” votes.

Telstra is a prime example. In 2007, Telstra received a “no” vote of 66 per cent. The
following year, Telstra engaged further with its shareholders and changed its remuneration
policies, which resulted in a resounding approval rate of around 97 per cent.

Cases such as these suggest that the non-binding vote is working well. But, as the
Productivity Commission found, there is still scope for further refinements.

The Productivity Commission concluded that, although many boards, particularly of larger
companies, have generally responded adequately to shareholder concerns on the
remuneration report, concerns remain with the small number of boards that are not responsive
to feedback from shareholders.

In particular, there are concerns about the ability of a board to proceed with its remuneration
proposals despite a significant protest vote, with very few repercussions.

The Corporations Act does not currently set out any consequences where a board proceeds
with its remuneration proposals despite a negative shareholder vote. There may, of course,
be reputational consequences for the company and its directors, but there are no are
consequences under the law.

Naturally, if shareholders are dissatisfied, they have the power to remove a director.
Interestingly, however, there have been notably few instances where shareholders have voted
to remove a director for remuneration-related reasons, notwithstanding shareholder discontent
with many remuneration packages.

One possible explanation is that removing a director seems to be a rather blunt and excessive
means of conveying their discontent on a particular issue, especially in cases where the
director is adding value to the company.

Beyond voting rights, shareholders can also elect to sell their shares. This would depress
share prices, putting pressure on the company to change its remuneration policies. But again,
this is a rather extreme response, and does not provide shareholders with any genuine
recourse if they are unhappy with the company’s remuneration policies.

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To address this, the Productivity Commission has recommended the introduction of the “two-
strikes” and re-election process.

The first strike would be triggered where a company’s remuneration report receives a “no”
vote of 25 per cent or more. If this occurs, the company is required to explain in its
subsequent remuneration report the action it intends to take to address shareholders’
concerns, or if they have not been addressed, the reasons why.

Some boards may already choose to provide such an explanation to their shareholders, but it
is not mandatory for them to do so. Formalising this practice for all listed companies would
promote communication and engagement with shareholders.

If shareholders are still dissatisfied, and the company receives another “no” vote of 25 per
cent or more the following year, the second strike would be triggered.

Once the second strike is triggered, shareholders would then vote on whether the entire board
of directors should be made to stand for re-election within 90 days. If this re-election
resolution is passed by more than 50 per cent of eligible votes cast, then an extraordinary
general meeting would be held within 90 days, at which shareholders would vote on the re-
election of the directors, one by one.

The Productivity Commission introduced the separate re-election resolution to create a clear
delineation between the vote on the remuneration report, and the vote on whether directors
should be required to stand for re-election.

The concern was that, if these two resolutions were combined, it would have a “chilling”
effect on the vote on the remuneration report. In other words, shareholders who were afraid
of losing the directors would not vote against the remuneration report, even if they were
unhappy with it.

The separation of these two resolutions overcomes this problem, and maintains the
effectiveness of the non-binding vote as a feedback mechanism.

The Commission also recommended that, where the second strike is triggered, the process
would be re-set the following year so that the effect of the strikes would not be cumulative.

The Productivity Commission consulted extensively on this proposal, particularly on the

threshold level of 25 per cent. The Commission concluded that a threshold of 25 per cent for
each of the strikes was appropriate, as this is in line with the level of support required for
special resolutions, where a 75 per cent majority is required for the resolution to pass.

As well, a threshold of 25 per cent would better align with levels commonly accepted as
demonstrating serious shareholder concern about remuneration, particularly in light of current
voting patterns. Clearly, it would also have greater reach than a threshold of 50 per cent.

Government’s response

The Government supported the “two-strikes” proposal, noting that it would provide enhanced
transparency and accountability on remuneration issues.

Page 7 of 20 
 
The Government also noted that there are number of outstanding implementation details
relating to this proposal, for example, whether additional rules are required in the event that
all elected directors are removed from office. It indicated that it would publicly consult on
the draft reforms to provide a further opportunity for stakeholders to comment on these
implementation details.

The “two-strikes” proposal has attracted significant attention and discussion. It provides
shareholders with a very powerful tool, because it allows them to fast-track the re-election of
directors who are unresponsive to their concerns on remuneration issues.

This proposal targets the small number of boards that have not adequately addressed
shareholder concerns over two consecutive years. And it is arguably appropriate that these
boards are subject to additional scrutiny and accountability.

If implemented, this reform would send a clear signal that unresponsive directors will be held
accountable for their decisions on executive remuneration.

Not surprisingly, there has been a wide range of opinion on the “two-strikes” proposal.

Is the “two-strikes” proposal necessary?

Some stakeholders regard the “two-strikes” proposal as unnecessary, as the Corporations Act
already provides a mechanism for shareholders to fast-track the election of directors, through
the 100 member rule.

This rule allows 100 members, or five per cent of shareholders, to put forward a resolution at
an AGM, including a resolution to remove directors.

The Productivity Commission considered this issue and concluded that the 100 member rule
is unlikely to bring about behavioural change on remuneration issues across boardrooms,
particularly as it is not specifically related to remuneration, and has rarely been invoked.

In contrast, the “two-strikes” test is more likely to be triggered, as it would occur

automatically as a result of the annual vote on the remuneration report.

In fact, the Commission found that nearly five per cent of ASX 200 companies had received
consecutive “no” votes of 25 per cent or more. And the incidence of this appears to be rising.

The “two-strikes” test also relates specifically to executive remuneration, thus elevating the
prominence these issues in the minds of directors.

Should the vote be made binding?

Other stakeholders regard the “two-strikes” proposal as inadequate, because the vote has not
been made binding and is seen as having no teeth. The Productivity Commission considered
whether the vote should be made binding or not.

The Commission came to the view, which was supported by the Government, that there are
significant risks and practical difficulties associated with making the vote binding.

Page 8 of 20 
 
For example, if a binding vote on remuneration were introduced, companies would not be
able to finalise a contract with an executive until they obtained shareholder approval, and this
is likely to create considerable uncertainty and delay.

Introducing a binding vote for shareholders would also represent a fundamental change to the
directors’ role and their capacity to manage the company.

A binding vote on remuneration would also absolve directors of their responsibility to

shareholders on remuneration issues. This would also undermine their capacity to make key
decisions affecting the performance of the company.

Usurping the role of directors?

A third concern raised by shareholders is that the “two-strikes” test would unnecessarily blur
the distinction between the role of shareholders and the role of directors.

In particular, some stakeholders believed this proposal would allow shareholders to usurp the
role of the directors and interfere in the operational aspects of the company.

For example, the Business Council of Australia noted that the “two-strikes” test puts
“inappropriate power in the hands of minority shareholders.”

Importantly, however, the “two-strikes” test would not provide shareholders with the power
to determine executive remuneration. This decision would continue to rest with the board of
directors.

Instead, the “two-strikes” test encourages the board to clearly explain and justify the
remuneration packages given to executives. If the board puts a compelling explanation to
shareholders, it’s unlikely that both strikes would be triggered over two consecutive years.

Support for the “two-strikes” test

On the other hand, many stakeholders have expressed support for the “two-strikes” test.

In particular, stakeholders have noted that the proposal will provide an additional level of
accountability for directors and increased transparency for shareholders.

For example, the governance research company Regnan noted that “even if instances of a
second strike occurring are few, it is anticipated that the mere threat of the consequences of a
second strike will be enough to drive further company engagement with shareholders on
remuneration”.

Importantly, the “two-strikes” test strengthens the non-binding vote, while maintaining the
fundamental principle underlying Australia’s corporate governance framework — that
directors are responsible for, and accountable to, shareholders on all aspects of the
management of the company. This includes the amount and composition of executive
remuneration.

Regulation of remuneration consultants

Page 9 of 20 
 
Turning now to the regulation of remuneration consultants.

Seeking advice from remuneration consultants appears to be a common practice, with various
surveys indicating that somewhere between 67 and 83 per cent of boards seek independent
advice on the CEO’s remuneration.

Remuneration consultants provide a range of services to companies, including advice on

matters relating to remuneration arrangements, pay structures, performance hurdles, and
strategic advice on how the levels of remuneration are benchmarked against industry
standards.

However, some stakeholders have expressed concerns about companies engaging

remuneration consultants to provide advice on director and executive remuneration.

In particular, concerns have been raised that remuneration consultants may have a conflict of
interest if they are asked to advise on the remuneration of officers who may be able to affect
future decisions about engaging that consultant’s services.

In addition, concerns have been raised that the use of remuneration consultants can “ratchet
up” remuneration levels.

While the advice of remuneration consultants may be influential in determining a company’s

remuneration decisions, it is important to recognise that the primary responsibility for
remuneration arrangements rests with company directors.

The Productivity Commission considered this issue, and proposed that the ASX Corporate
Governance Council should make a recommendation that companies disclose their use of
remuneration consultants.

In particular, the Commission recommended the disclosure of the remuneration consultant

used, who appointed the consultant, who the consultant reported to and the nature of other
work undertaken for the company by the consultant.

The Government supported this proposal and indicated that it would further strengthen it by
requiring additional details to be disclosed, such as:

• the amount the consultant was paid for the remuneration advice;

• the amount the remuneration consultant is paid for providing other, non-remuneration
related, services to the company;

• the basis on which the consultant was paid; and

• a summary of the nature of the advice received and the methodology employed in
formulating the advice.

The Government noted that the summary of the nature of the advice would relate broadly to
the type of the advice received, such as whether the advice included recommendations related
to the quantum of pay. However, it would not require the content of the advice to be
disclosed, as this information could potentially be commercially sensitive.

Page 10 of 20 
 
In addition, the Government proposed to make this disclosure requirement mandatory for all
companies, rather than being on a “comply or explain” basis.

As such, the Government supported implementing this recommendation through legislation,

namely the Corporations Act, rather than the ASX Corporate Governance recommendations.

This would strengthen the enforceability of the disclosure requirement, and ensure that there
is transparency with the use of remuneration consultants.

The Productivity Commission also recommended that the ASX listing rules be amended to
require any remuneration consultants used by ASX 300 companies to be engaged by, and
report to, the board of directors or the remuneration committee, rather than company
executives. Confirmation of this arrangement would then be disclosed in the company’s
remuneration report.

Again, the Government supported this recommendation and proposed that it be further
strengthened by mandating this requirement for all listed companies that engage a
remuneration consultant, not only the ASX 300 companies. The Government also
recommended that the recommendation should be implemented through the Corporations Act
rather than the ASX listing rules, to broaden the scope of the reform and improve compliance
and enforceability.

Stakeholders opposed to this proposal suggested that the increased levels of disclosure may
result in the release of competitive or proprietary information.

Furthermore, some stakeholders suggested that any restrictions on the ability of remuneration
consultants to liaise with company executives would lead to poorer outcomes in designing
performance based remuneration, because executives may have a better understanding of
business drivers than the company directors.

On the other hand, stakeholders who supported this reform pointed out that it would deliver
greater transparency for shareholders, as they would be in a better position to assess potential
conflicts of interest.

For example, the Australian Shareholders’ Association noted that, “all too often, listed
company boards of all sizes shield themselves by stating that they took advice from
independent expert remuneration advisors, without shareholders having any way to ascertain
who the advisor was, who appointed them, who they reported to and whether they were truly
independent”.

If this proposal is implemented, it would also bring Australia into line with other key
jurisdictions which require disclosure of the use of remuneration consultants, such as the
United States, the United Kingdom and the European Union.

Stakeholders have also indicated that the proposal to require remuneration advice to be
provided directly to the board, rather than the company executives, would facilitate greater
independence of remuneration consultants.

Disclosures in the remuneration report

Turning now to the disclosures contained in the remuneration report...

Page 11 of 20 
 
Under the Corporations Act, a company is required to prepare an annual remuneration report.
This report is a key source of information for shareholders on how executive remuneration is
determined, and the company’s remuneration policies.

However, concerns have been raised about the increasing length and complexity of the
remuneration report. In particular, there are concerns that shareholders can sometimes find
the report incomprehensible and possibly even misleading.

For example, Freehills noted that “complex reporting requirements reduce the impact of the
information being disclosed and make it more difficult for shareholders to extract meaningful
information from remuneration reports”.

This is a real problem, particularly as shareholders need to understand the company’s

remuneration policies in order to be engaged on remuneration issues.

The Productivity Commission shared his concern, noting that the complexity of remuneration
reports to shareholders had diminished their usefulness.

The Commission added that some information which would be useful to shareholders is
currently not disclosed in the remuneration report.

For example, the remuneration report does not currently require disclosure of the pay actually
realised by executives. Rather, it requires disclosure of the accounting cost to the company in
providing the remuneration. Naturally, there can be a significant difference between these
two figures.

To address these problems, the Productivity Commission recommended that remuneration

reports should include:

• a plain English summary of the company’s remuneration policies, in addition to the

full remuneration report required to be prepared;

• actual levels of remuneration received by the individuals named in the report, in

addition to the accounting cost to the company of providing that remuneration; and

• the total company shareholdings of the individuals named in the report.

This last disclosure proposed by the Commission, the total company shareholdings, is
contained in other parts of the annual report, but is not currently disclosed in the
remuneration report. The key reason for this is that changes in the value of an executive’s
portfolio are not currently considered to be “remuneration”.

Nevertheless, the Commission noted that providing this information in the remuneration
report would provide a more complete picture of the extent to which an executive’s
incentives were aligned with the interests of the company and its shareholders.

While these additional disclosures would add to the volume of information in remuneration
reports, they could also potentially improve shareholder understanding of the company’s
remuneration policies.

Page 12 of 20 
 
Of course, there will always be tension between achieving simplicity and ensuring
comprehensiveness. The challenge is to strike the right balance between these two competing
goals.

To facilitate this balance, the Productivity Commission also recommended that the
Government establish an expert panel under the auspices of ASIC to advise the Government
on how best to revise the disclosure requirements contained in the Corporations Act and the
supporting regulations.

The Government supported this recommendation, although it tasked the Corporations and
Markets Advisory Committee, or CAMAC, to undertake the review, rather than ASIC, given
CAMAC’s expertise in this area, and its role in providing advice to the Government on
corporate law matters.

The length and complexity associated with many remuneration reports is due, in part, to the
increasing complexity of the underlying remuneration arrangements.

For this reason, the Government broadened CAMAC’s terms of reference beyond those
suggested by the Productivity Commission, by asking CAMAC to make recommendations on
how the incentive components of pay could be simplified.

In July this year, CAMAC released an information paper, and sought submissions from the
public on these issues. CAMAC is scheduled to finalise its review by 30 November 2010.

Prohibition on hedging incentive remuneration

Turning now to the prohibition on hedging incentive remuneration...

An important component of remuneration is “incentive” remuneration. Incentive

remuneration aligns the interests of management with the interests of shareholders, so that
management has “some skin in the game”.

This helps to address agency costs, and is usually achieved by providing some form of
equity-based remuneration, for example, shares and options.

Currently, however, it is possible for directors and executives to “hedge” or limit their
exposure to incentive remuneration. Typically, this involves the director or executive using
financial products, for example put options, to reduce their current exposure and mitigate
their personal financial interest in the company’s success.

The effect of hedging incentive remuneration is to “de-link” remuneration from company

performance. This practice is inconsistent with a key principle underlying Australia’s
remuneration framework — that remuneration should be linked to performance. It is difficult
to see how hedging could benefit companies or their shareholders.

There is also a real, as well as perceived, conflict of interest where a director or executive
enters into an arrangement where they stand to benefit if the company’s share price falls, as is
the case with put options which pay off when the share price falls.

Hedging can be achieved in many different ways, and can take on a number of guises.

Page 13 of 20 
 
The Corporations Act currently requires disclosure of the company’s policy in relation to
directors and executives hedging their incentive remuneration, and how the company
enforces this policy.

While this disclosure ensures that shareholders are informed about the company’s policy on
hedging incentive remuneration, it does not prohibit this practice.

In order to address this problem, the Productivity Commission has recommended prohibiting
directors and executives from hedging their incentive remuneration.

The Government supported this recommendation, and also proposed to strengthen it by

extending the prohibition on hedging to closely related parties of key management personnel,
such as close family members. This will maintain the integrity of the reform by ensuring that
it cannot be easily circumvented, and that it applies to all relevant parties.

Some stakeholders opposed this proposal, noting that disclosure was a sufficient deterrent
from hedging remuneration. Other stakeholders, such as the Australian Institute of Company
Directors noted that black letter law may not prove effective, given the complexities of
hedging arrangements, and the difficulties in legislating for all possible guises of hedging.

On the other hand, other stakeholders have supported this recommendation, saying that it will
ensure that directors and executives cannot undermine the purpose of their incentive
remuneration, which is to align remuneration with performance. In other words, it will
ensure that remuneration is genuinely linked to company performance.

Composition of remuneration committees

Turning now to the composition of remuneration committees...

Under the Corporations Act, the board is responsible for determining the remuneration of the
CEO and senior executives.

The Australian Securities Exchange Corporate Governance Council recommends that boards
establish remuneration committees, although this is not mandatory.

The Productivity Commission noted that around 55 per cent of all listed companies have
established a remuneration committee. Based on 2008 data, this rate increased in larger
companies, with about 85 per cent of top 250 companies having a remuneration committee,
and 98 per cent of top 50 companies having a remuneration committee.

To alleviate the conflict of interest that exists when executive directors determine their own
pay, the ASX Corporate Governance Council also suggests that remuneration committees
should comprise at least a majority of independent directors, be chaired by an independent
director, and have a minimum of three members.

The Productivity Commission recommended that it be made mandatory, through the ASX
listing rules, for ASX 300 companies to have a remuneration committee, which should
comprise solely of non-executive directors.

The Commission also recommended elevating the status of guidelines dealing with the
composition of remuneration committees to an “if not, why not” recommendation through the
ASX Corporate Governance Council recommendations.

Page 14 of 20 
 
The Government supported these recommendations in principle, while noting that it was
ultimately a matter for the ASX, and the ASX Corporate Governance Council.

On 4 August this year, the ASX announced that it has amended its listing rules to require
ASX 300 companies to have a remuneration committee, comprising solely of non-executive
directors, in line with the Productivity Commission recommendation. The amendment will
come into effect on 1 July 2011.

As well, the ASX Corporate Governance Council announced on 30 June 2010 that it has
largely implemented the Productivity Commission recommendations on the composition of
remuneration committees. This change will take effect from 1 January 2011, although the
Council is encouraging early adoption for companies with a balance date of 30 June 2010.

Prohibiting key management personnel from participating in the vote

Turning now to the recommendation to prohibit key management personnel from voting their
shares in remuneration related resolutions...

Currently, the Corporations Act does not prohibit directors or executives who hold shares in
the company from participating in the non-binding shareholder vote on remuneration.

There is a real, as well as perceived, conflict of interest when directors and executives vote on
their own remuneration packages.

As these directors and executives have an interest in approving their own remuneration
arrangements, allowing them to participate in the non-binding vote may result in a higher
approval rating on the remuneration report than might otherwise be achieved.

This could distort the outcome of the non-binding vote and diminish its effectiveness as a
feedback mechanism. Of course, the extent to which this could occur depends on the relative
shareholdings of the key management personnel.

Importantly, though, there have been some reported cases where the key management
personnel’s shareholding has been significant enough to alter the outcome of the vote.

The Productivity Commission recommended that key management personnel be prohibited

from voting their shares on remuneration reports and any other related resolutions.

The Government supported this recommendation, and proposed to further strengthen it by

expanding the prohibition to closely-related parties, such as close family members, of the key
management personnel, as an anti-avoidance measure.

Some stakeholders opposed this recommendation, suggesting that it would have very little
impact on the vote. For example, Macquarie Group, BHP and the AICD noted that the
number of votes held by executives would be small and unlikely to influence the outcome of
the vote.

Other stakeholders, such as Chartered Secretaries Australia and RiskMetrics, supported the
proposal. They pointed out that there is a conflict of interest when executives vote on their
own remuneration, and that this would disempower shareholders.

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Furthermore, stakeholders noted that this proposal would improve the effectiveness of the
non-binding vote as a feedback mechanism for shareholders and companies.

“No vacancy” rule

Turning now to the “no vacancy” rule...

Some company constitutions include a rule that allows the board to declare it has no vacant
positions, despite the maximum size allowed by the constitution not being reached. This is
known as the “no vacancy” rule.

No one can nominate for election to the board when the “no vacancy” rule has been invoked.
This means that a board seat will become available only when an incumbent director is up for
re-election or retires, or where the shareholders remove a director. However, the board can
still decide whether that position should continue to be filled.

The “no vacancy” rule provides boards with a lot of power over their composition. In
practice, boards can use the rule to prevent outside nominees being voted onto the board.

The Productivity Commission’s report cited concerns that boards are using this rule to
entrench incumbent directors and to prevent the nomination and election of non-board
endorsed candidates.

This greatly reduces the contestability of board positions and leaves shareholders with little
influence over the composition of their company’s board.

This is a concern, particularly from a remuneration perspective, because shareholders need to

have confidence in the board of directors, and their ability to represent shareholders’ interests
on remuneration matters.

For these reasons, the Productivity Commission recommended that when a board must obtain
shareholder agreement seeks before invoking the “no vacancy” rule.

The Government supported this recommendation, as it would enhance board accountability

and promote shareholder engagement.

Primarily, the aim is to give shareholders a viable course of action where they are concerned
that the board is functioning as a “closed shop”, or is not sufficiently independent from
management.

At the same time, it is important that boards have the flexibility to deal with situations that
might arise during the year. For example, an excellent candidate may become available for
board membership, the board may need additional skills, or the board may wish to take on an
additional member to assist with succession planning.

The Government response addressed these concerns by enabling boards to retain the
flexibility to appoint directors and fill or leave casual vacancies throughout the year. This
retains flexibility for boards to deal with unexpected operational requirements, while
providing shareholders with an appropriate and real mechanism to influence board
composition if they are concerned that the board is not acting in their best interests.

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Some stakeholders did not support the Productivity Commission recommendation, as they
believed that board members, rather than shareholders, were in a better position to determine
the board’s operational needs.

Other stakeholders, such as the Australian Shareholders’ Association, RiskMetrics and

Guerdon Associates supported the recommendation as it would enhance shareholder capacity
to hold boards accountable.

This increase in board accountability will also have positive flow-on effects for controlling
excessive remuneration and would promote the flow of information to shareholders.

By enhancing the power of shareholders to affect board composition, this proposal will
require the board to be more accountable when setting executive remuneration. It will give
shareholders a real opportunity to express displeasure with the board and exercise influence
over its membership. It will also increase the effect of the ”two-strikes” proposal.

Cherry picking
Shareholders who are not able to attend a company meeting but still wish to vote, usually do
so by using the proxy voting system. Shareholders can provide directed proxies — which
specify how they wish to vote on a resolution — or undirected proxies, which allow the
proxy holder to choose how to vote.

Currently, the law requires all directed proxies held by the Chair to be voted, however, non-
Chair proxy holders can choose which directed proxies to vote.

This enables non-Chairs to choose to vote only the proxies who accord with their personal
view on a resolution. This is known as “cherry-picking”.

Cherry-picking impairs the transparency and effectiveness of shareholder voting. In essence,

it enables shareholder wishes to be ignored, generally without shareholders being aware that
their directed proxies might not be voted as they intended.

Cherry-picking also enables conflicts of interest to intrude into the voting process. For
example, a non-Chair proxy might be prohibited from voting their own shares on a resolution
because they have a conflict, but they can still cherry-pick the directed proxies they hold to
influence the outcome.

As such, cherry-picking can mute, or completely change, the shareholder signal on a

resolution. This is particularly important for the non-binding vote on remuneration.

Accordingly, the Productivity Commission recommended that all proxy holders be required
to vote all directed proxies on remuneration-related resolutions.

The Government supported this recommendation and proposed that it be extended to all
resolutions.

The Productivity Commission noted in its final report that to extend the requirement in this
way would be beneficial, and would also be consistent with a previous recommendation made
by the Parliamentary Joint Committee on Corporations and Financial Services in 2008.

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Stakeholders generally supported this proposal on the basis that shareholders are entitled to
expect that their shares will be voted as they direct.

Other Government initiatives to strengthen Australia’s remuneration

framework

Termination benefits
A number of other important reforms have also been made recently to the remuneration
framework.

In November 2009, the Government enacted reforms to lower the threshold for shareholder
approval of termination benefits, or “golden handshake” payments, given to company
directors and executives.

Termination benefits are a unique component of remuneration. Unlike many other

components of remuneration, termination benefits are subject to a binding shareholder vote.

Part of the reason that termination benefits are subject to greater shareholder approval and
scrutiny is the fact that the company and shareholders derive little or no value from them.
They are often determined in advance, and are generally not related to the value that the
individual has delivered to the company.

These payments are given to outgoing company directors and executives at a time when they
are no longer able to influence the company’s future performance.

So it is appropriate that these payments are closely scrutinised by shareholders.

As part of these reforms, the threshold for shareholder approval was significantly reduced
from seven years total remuneration to one year’s base salary. This has significantly
strengthened the power of shareholders to reject excessive termination benefits.

The reforms also made a number of other important improvements to the framework,
including:

• expanding the range of individuals captured by the regulatory regime to include

directors;

• broadening and clarifying the meaning of a termination benefit;

• improving the shareholder voting process; and

• improving compliance mechanisms (for example, by requiring unauthorised

termination payments to be immediately repaid, and significantly increasing the
penalty provisions).

Importantly, these reforms do not impose a cap on termination benefits. Rather, they require
boards to properly justify any payments in excess of the threshold to shareholders, who will
then decide whether to approve it.

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APRA’s standards
Looking now at the international arena, Australia has played a key role in developing new
global standards on pay in the financial sector.

These standards have been implemented by the Australian Prudential Regulation Authority,
or APRA, and ensure that remuneration arrangements do not lead to excessive risk taking in
Australia’s financial institutions.

APRA’s standards formally took effect from 1 April 2010. They apply to all authorised
deposit-taking institutions, general insurers and life insurers.

The key components of the APRA standards are that:

• all regulated institutions must establish a board remuneration committee and

implement a remuneration policy;

• the performance-based components of remuneration must be designed to align

remuneration with prudent risk taking; and

• any unvested performance-based components must be able to be adjusted to zero or

“clawed-back”.

Clawback proposal
The final issue that I would like to talk today is the proposal by the Government to consult on
a reform to claw-back remuneration in the event of a material misstatement.

This was an additional proposal put forward by the Government and was not identified by the
Productivity Commission in its report.

At present, shareholders are only able to recover overpaid remuneration amounts by

commencing legal proceedings. There is currently no legislative requirement that provides
for clawing-back bonuses or other remuneration in the event of a material misstatement by
the company.

Under the proposal, remuneration could be clawed-back or recovered where it was

subsequently revealed that the company’s financial statements were materially misstated.

This proposal would discourage management from taking risky decisions that may lift share
prices or otherwise inflate their bonuses in the short-term, where such actions would
ultimately result in financial restatements in the long-term.

Arguably, it is legitimate to question whether directors and executives should be entitled to

keep remuneration which was based on financial information that subsequently turns out to
be materially incorrect.

Internationally, claw-back policies have either been implemented, or are being considered by
a number of other jurisdictions, such as the United States, the United Kingdom and the
European Union.

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The Government noted that the introduction of a claw-back requirement in Australia warrants
further consideration and analysis. As this proposal had not been identified in the
Productivity Commission report, it had not been subject to the same consultation process that
was undertaken for the Commission’s recommendations.

For this reason, the Government announced that it would consult extensively on this
proposal.

As an initial step, the Government proposed to release a discussion paper seeking comments
on whether a claw-back policy should be implemented in Australia, and if so, how the policy
should be implemented.

As I mentioned earlier, we will know more about the status and timing of this proposal once
the new Minister has had the opportunity to consider this issue.

CONCLUDING REMARKS
In conclusion, a sound corporate governance framework is an essential prerequisite to
ensuring that remuneration packages are appropriately structured.

While Australia’s current remuneration framework is strong, it is important that we are not
complacent.

The Productivity Commission, while noting that Australia’s remuneration framework is

highly ranked internationally, has recommended that the framework be further strengthened.
These recommendations are designed to refine the framework, not dramatically overhaul it.

But the Productivity Commission review is just one of a suite of measures that have been
progressed recently to strengthen the remuneration framework. Other measures include the
reforms to termination benefits, and APRA’s standards to link remuneration with risk-taking.
These are important reforms that have gone a long way to improving Australia’s
remuneration framework.

And finally, I would like add that there are several important topics on today’s agenda, and I
believe the discussion here will be extremely valuable to inform future policy formulation in
this area.

Thank you.

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