One significant legacy of the global finance crisis is the impact it has had, and will continue to have, on executive remuneration. The catch-cry in America that ‘Wall Street’ needed to align itself more closely with ‘Main Street’ resonated throughout the western world.
On 26 October 2009 the Australian Senate passed the first in what is likely to be a series of new measures dealing with shareholder approval of executive pay packets.
The Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009 has as its aim the reduction in so called ‘golden handshakes’ on the resignation of directors and senior executives.
The key features of the new provisions include:
- termination benefits exceeding one year’s base salary must first be approved by shareholders [the existing law is that termination benefits can be seven times annual remuneration before shareholder approval is required];
- the definition of a ‘termination benefit’ has been expanded. It requires that the substance of the payment should prevail over its legal form;
- unauthorised termination benefits must be repaid to the company;
- the director or senior executive whose termination benefits are put to shareholders for approval cannot vote on the resolution; and
- the penalty provisions have been increased. The maximum penalty for individuals is now $19,800 and for corporations $99,000.
The coalition opposed the amendments on the grounds that the reform is ‘piecemeal’ and will lead to ‘Golden Hellos’ rather than ‘Bronze Goodbyes’. The legislation passed with the support of the independents in the Senate.
The new arrangements will not apply retrospectively to existing contracts. They will apply to contracts that are entered into or renewed or extended after the legislation receives the Royal Assent. The Royal Assent is expected very shortly.
The Government is expecting, in December 2009, a report from the Productivity Commission making recommendations in relation to general legislative reform as to the mechanism by which companies determine the pay packets of directors and senior executives. Many commentators are predicting that the Government will adopt a ‘two strikes [shareholder approval withheld at two consecutive AGMs] and the board is out [up for re-election]’ model. We will keep you informed of those developments.
All disclosing entities should ensure that no new director or executive service contracts are entered into, renewed or extended unless consideration has been given to, and there is compliance with, the new termination payment regime.
For further information please contact Geoff Stevens, Partner on 9288 6926 or firstname.lastname@example.org.