The Australian Institute of Company Directors wants to overhaul the disclosure rules for directors' remuneration, to make them more "shareholder friendly" and focused on remuneration actually received.
The Australian Institute of Company Directors wants to overhaul the disclosure rules for directors' remuneration, to make them more "shareholder friendly" and focused on remuneration actually received.
The Institute has released a position paper today outlining the proposed changes.
See full statement below:
Remuneration reports would be more "shareholder friendly" and would focus on the remuneration actually received by senior executives, under an overhaul of the Corporations Act being proposed by the Australian Institute of Company Directors.
The reforms, outlined in a position paper released today, would also mean these simplified remuneration reports would clearly distinguish between what executives have earned in the current year and their future remuneration entitlements, like bonuses and share allocations.
The remuneration report would not be required to include probability-based accounting valuations of current entitlements to future benefits like shares or options.
Unlike the current law, there would be an explicit requirement in the Corporations Act for companies to spell out for shareholders the governance structures they have in place to determine the remuneration of senior executives and directors.
Requirements for disclosure of a company's remuneration philosophy and policies for key senior personnel, including a summary of key aspects of equity-based and other performance-based plans, would also be improved.
"Remuneration reports and the requirements governing them require thorough reform," said Australian Institute of Company Directors' Chief Executive Officer, John Colvin.
"They are unduly complex, place a significant burden on companies and are of limited use to shareholders and other readers. At worst, they have become almost incomprehensible to even expert readers and can give a distorted picture of executive remuneration."
Mr Colvin said that simply providing a "plain English" version of the existing remuneration report will not solve the problem of complexity caused by the current requirements.
"It is the required content of the report, rather than the language used, which is fundamentally flawed," he said.
"The ability to understand remuneration reports will only be improved when the number and complexity of the specific disclosures required to be included in the reports are substantially reduced and simplified."
"The reforms are more important than ever now that the Federal Government has adopted the 'two strikes' policy recommended by the Productivity Commission inquiry into executive remuneration, which can mean negative shareholder votes against remuneration reports can trigger a spill of a company board."
Under the reform proposals, there would be a major overhaul of existing requirements in the Corporations Act governing the content of remuneration reports, moving to a principles-based obligation tied to the information shareholders would reasonably require to make an informed assessment of a company's remuneration practices.
Rather than the remuneration report incorporating elements of both "take home" pay and theoretical measures of remuneration used for accounting purposes, the remuneration outcomes in the report would be framed in "actual pay" terms only.
Components of current year remuneration to be revealed would include fixed remuneration (e.g. base pay), cash bonuses, realisable equity (e.g. share entitlements which have vested), termination payments made, post-employment benefits and other benefits.
The details of current entitlements of key senior personnel to future remuneration would include:
o the type of future remuneration and a summary of the performance conditions attaching to it at the reporting date;
o agreed entitlements where the employment relationship is terminated; and
o any changes that have occurred to the performance conditions since the last annual report, and the date of alteration.
While the remuneration report would not be required to include an estimate of the future monetary value of any securities or equities, these would still appear elsewhere in the company's financial statements.
"These reform proposals have been under consideration by the Australian Institute of Company Directors for some time and follow a number of constructive contributions to the executive remuneration debate, including our Guidelines for Listed Company Boards published in February 2009 and detailed submissions to various inquiries," Mr Colvin said.
"We think that if they are adopted, remuneration reports will provide a more accurate and fairer picture of executive remuneration and, most importantly, shareholders and other readers will be better informed."
The Federal Government has referred the issue of how existing remuneration reporting requirements can be improved to the Corporations and Markets Advisory Committee (CAMAC).
The Australian Institute of Company Directors hopes the reform proposals outlined in this position paper, which will form the basis of a submission to CAMAC, will further contribute to the debate and help inform the changes necessary in this vital area of corporate reporting and governance.
