10 minutes on. the Government s response to the CAMAC recommendations

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1 February 2012 What you need to know about emerging topics essential to your business. 10 minutes on. the s to the CAMAC recommendations Brought to you by, 21 st February 2012

2 10 minutes on the s to the s Highlights In seeking to enhance Australia s executive remuneration framework, encourage greater board accountability, and simplify remuneration reporting, the has supported several of CAMAC s recommendations. These are in relation to: enhanced disclosure on the company s remuneration governance framework; reduced disclosure in relation to options (the value of lapsed options and the percentage of remuneration that consists of options); enhanced disclosure on termination benefits; and enhanced disclosure on remuneration outcomes crystallised past pay, present pay and future pay. In addition, after an extensive consultation period, the will effectively be requiring companies to adopt clawback provisions by requiring these provisions to be disclosed in their remuneration report. These provisions are limited to where there is a material misstatement in the company s financial statements. Draft legislation to enact these reforms is expected to be released for public consultation in the latter half of On 21 February 2012, the responded to the recommendations made by the Corporations and Markets Advisory Committee (CAMAC) to improve disclosure in remuneration reports. The has accepted several of CAMAC s recommendations. It has also announced that it will progress amendments to the Corporations Act 2001 to require listed companies to disclose to shareholders in their remuneration report the steps they have taken to claw-back bonuses and other remuneration where a material misstatement has occurred in relation to the company s financial statements. If the company has not clawed back any remuneration, the board will be required to provide a detailed explanation to their shareholders. If shareholders are unhappy with the company s actions, they would be able to use their powers under the two-strikes rule to vote down the remuneration report and potentially spill the board. The first announced that it was considering legislating claw-back provisions in December Accordingly, after over one year of consultation, it appears that the is effectively requiring companies to adopt claw-back provisions (only in the case of material misstatement in the company s financial statements) as these provisions will be required to be disclosed in the company s remuneration report. No further information was provided in relation to the definition of a material misstatement. This may be left for each company to define in their policy. Given it appears that each company will have the flexibility to decide on their claw-back policy, we anticipate that the trend will be for the clawback to only apply to unvested amounts as opposed to also applying to cash incentives already paid. 2

3 10 minutes on the s to the Outlined below is the s to CAMAC s 2011 report on executive remuneration, along with our comments on what these may mean for you. s reason for - What this means 1. Remuneration governance framework s300a should require companies to set out in their remuneration report a general description of their remuneration governance framework. Disclosure of this information will benefit shareholders. Further consultation would be appropriate on the precise details that would be required to be disclosed. These details could be drafted to avoid duplication and overlap with existing disclosure requirements. Many companies already disclose this information on a voluntary basis so this does not represent a significant change. Where this information is not currently disclosed, shareholders will now have a basic understanding of the company s remuneration governance framework. 2. Relationship between remuneration policy and corporate performance s300a(1aa) and (1AB) which require additional details for the link between remuneration policy and corporate performance should be repealed as it is unduly prescriptive. The details required by s300a (1AA) and (1AB) are fundamental to assessing performance and should not be removed. It is disappointing that this recommendation was not accepted as it would have given companies the flexibility to determine how to express the relationship between its remuneration policy and company performance without having unduly prescriptive disclosure obligations to satisfy. Companies will need to continue to disclose the additional prescriptive information in relation to the company s earnings and the consequences of the company s performance on shareholder wealth in the current financial year and in the prior 4 financial years. 3

4 10 minutes on the s to the s reason for - What this means 3. Performance conditions a company should be permitted to exclude from its remuneration report commercially price-sensitive information, contingent upon the satisfaction of certain criteria. The current framework, which requires a detailed summary, provides sufficient flexibility for companies to withhold any commercially sensitive information. While it is disappointing that this recommendation has not been accepted, it is positive that the has clarified that the current framework provides sufficient flexibility for companies to withhold any commercially sensitive information. In addition, an explicit exemption may result in a lower level of engagement with shareholders, particularly if companies assert that they are not required to disclose the information. Companies should have the ability to structure incentive plan metrics that are most aligned to their business, without fear of providing commercially sensitive information to the market. Where commercially sensitive information is omitted, we expect that shareholders would expect retrospective disclosure of performance conditions. We note that ASIC has called for better disclosure in remuneration reports on the nature and rationale of performance conditions (particularly non-financial performance conditions) used in incentive plans. 4

5 10 minutes on the s to the s reason for - What this means 4. Application of accounting standards s300a(1)(e)(ii) should be amended to remove the reference to the accounting standards. That is, CAMAC recommends removing the requirement for key items, such as options granted to key management personnel (KMP), to be calculated in accordance with the accounting standards, as the application of accounting methodology to the remuneration report can confuse and mislead shareholders without providing useful information. Instead, CAMAC recommends that companies be permitted to use their own valuation methodology which they must disclose in the remuneration report. If the remuneration report is not prepared in accordance with the accounting standards, shareholders will not be able to make meaningful comparisons between remuneration reports, given that there will be no requirement for the numerical values to be calculated on the same basis. In addition, this recommendation could adversely affect the integrity of information provided in the remuneration report. While the intention of this CAMAC recommendation was positive, there are a number of implementation challenges associated with companies applying different valuation methodologies and potentially changing their own valuation methodologies year on year. Shareholders will continue to be able to compare remuneration levels across companies, and within companies year on year, as remuneration will continue to be valued in the same way. 5. Role of the external auditor s308(3c) should include a requirement for the external auditor to give an opinion on the accuracy of calculations in a remuneration report. This recommendation would result in a lesser level of assurance that is currently provided on the remuneration report. In any event, this recommendation is no longer required if Recommendation 4 is not implemented. There were a number of practical challenges associated with implementing this recommendation such the basis upon which the auditor would provide their opinion (in the lack of a standard valuation methodology). The auditor will continue to audit remuneration figures based upon accounting standards. 5

6 10 minutes on the s to the s reason for - What this means 6. Valuing future-vesting equity-based remuneration Corporations Regulation 2M.3.03 should be amended to require a company to disclose, in the financial year in which future-vesting equity-based remuneration was granted (i) the methodology used to value that remuneration and (ii) the number of securities granted as a result of the application of that valuation methodology. Consistent with the proposed to Recommendation 4, information contained in the remuneration report should be disclosed in accordance with the accounting standards. Allowing companies to decide on the valuation method may limit comparability between remuneration reports, given that there will be no requirement for numerical values to be calculated on the same basis. In addition, this recommendation could adversely affect the integrity of information provided in the remuneration report. Companies will continue to be required to value their equitybased remuneration in the same manner. Whilst, in the eyes of most shareholders, the accounting treatment of equity-based remuneration is overly complex, the continuation of the use of the accounting standards should enable shareholders to be able to compare the value of futurevesting equity-based remuneration across companies. 6

7 10 minutes on the s to the s reason for - What this means 7. Options s300a should be amended to require that the remuneration report disclose any options that have lapsed in the current financial year and indicate the year(s) in which they were granted. There should be no obligation to include a value for the lapsed options. The value of lapsed options is of limited use to shareholders. This is a positive decision as determining the value of lapsed options did not add any value to remuneration disclosures. The obligation in s300a(1)(e)(vi) to disclose the percentage of the value of remuneration that consists of options should be repealed as it can be deduced from information already required by Corporations Regulation 2M This proposal will simplify the legislative framework without substantially diluting the information available to shareholders. This is a positive decision as it leads to more simplified remuneration report disclosure. No information is lost as the percentage of remuneration that consists of options could already be calculated from the remuneration table. 8. Benefits on termination s300a(1)(e)(vii) should be amended to require the disclosure of all payments (including entitlement payments, severance payments and post-severance payments) for KMP upon their retirement from the company, regardless of whether those payments were provided under a contract of employment. These disclosures will provide greater transparency on the amount and composition of termination payments disclosed in the remuneration report. Shareholders will have a more informed view of the total value of benefits that are provided to KMP upon termination of employment. Given the sharp focus shareholders put on termination payments, it will be important to be transparent in earlier remuneration reports about potential obligations on termination. 7

8 10 minutes on the s to the s reason for - What this means 9. Remuneration outcomes there should be a requirement that the remuneration report disclose, for each KMP, crystallised past pay, present pay and future pay. Presenting information in this way will assist shareholders to clearly distinguish between present pay, and pay that has been received due to past pay having crystallised. The intends to consult on the precise details that would be required to be disclosed under each of these categories. As part of this process, the also intends to consult on the need for disclosure of dividends on unvested shares paid to KMP. It is positive that this recommendation was accepted as the intention is for remuneration reports to become more meaningful by requiring the KMP s actual take-home pay to be disclosed. However, key challenges associated with this recommendation is that it delinks remuneration disclosed from company performance in the current financial year, and it could also lead to more complex and lengthy remuneration report disclosures which is against the intention of the changes. 8

9 10 minutes on the s to the How can help To have a deeper discussion about these issues, please contact: Sydney Debra Eckersley Partner Ph: (02) debra.eckersley@au.pwc.com Alena Mackie Director Ph: (02) alena.mackie@au.pwc.com Melbourne Della Conroy Partner Ph: (03) della.conroy@au.pwc.com Daryl O Callaghan Principal Ph: (03) daryl.ocallaghan@au.pwc.com Emma Grogan Director Ph: (02) emma.grogan@au.pwc.com The information contained in this publication is general in nature and does not constitute advice. will not be held responsible to those persons who act solely on the information provided in this document. You should seek your own professional advice from an appropriately qualified person on your company s specific situation before taking any actions on this issue. This material is intended for PricewaterhouseCoopers professionals and their clients. Quotation, citation, attribution, reproduction or utilisation of any portion of this publication by any party other than PricewaterhouseCoopers is strictly prohibited without express written permission. No part of this paper may be reproduced, stored in a retrieval system, or transmitted in any form or by any means electronic, mechanical, photocopied, recorded or otherwise without the prior written permission of PricewaterhouseCoopers PricewaterhouseCoopers. All rights reserved.