Executive Remuneration in Australia – Productivity Commission’s Report

The “no vacancy rule”

The “no vacancy rule” is a practice adopted by some boards in Australia to set the number of directors at a given time. This practice is also known as “shrinking the board”, especially if a casual vacancy arises, and has the effect of blocking the election of outside candidates.

The Productivity Commission recommends:

“For the election of directors at a general meeting, where the board seeks to declare vacancies and the number of directors is less that the constitutional maximum, approval should be sought from shareholders by way of an ordinary resolution at the general meeting”.

The Government agrees with the Productivity Commission that shareholders should have the ultimate right to determine whether the “no vacancy” rule should apply and proposes to amend the Corporations Act in line with the Productivity Recommendation.

The “two strikes” rule

The Productivity Commission recommends:

“Where a company’s remuneration report receives a “no” vote of 25 percent or more of eligible votes cast at an AGM, the board will be required to explain in its subsequent report how the shareholders concerns were addressed and, if they have not been, the reasons why where the subsequent remuneration report receives a “no” vote of 25 percent of more of a eligible votes cast at the next AGM, a resolution be put that the elected directors who signed the director’s report for that meeting stand for re-election at an extraordinary general meeting.”

The Productivity Commission points out that the managing director is exempt from the “board-spill”.

The “two strike” rule gives rise to the potential for significant shareholder influence over the composition of the board. Whilst the Productivity Commission acknowledged the potential for the “two strikes” rule to be used as a “cloak” for destabilising the board , it did not address these concerns.

Bonus claw backs

The Productivity Commission did not consider bonus claw backs however the Government has indicated that it intends to seek public consultation on a proposal to “claw back” bonuses paid to directors and executives where the company’s financial statements are materially misstated.