What Are The Laws Of Directors Remuneration In Australia Are They Adequate, Effective And Efficient To Protect The Interests Of The Shareholders - Research Paper Example

? What Are The Laws Of Directors’ Remuneration In Australia? Are They Adequate, Effective And Efficient To Protect The Interests Of The Shareholders?Introduction The conception of director’s remuneration is principally described as the complete compensation package that is obtained by a director from a specific company. It is simply regarded as the salary of the directors that is paid by a particular company to the director. A director is viewed to be an administrative officer of a business entity and acts as a principal agent of a concern. The remuneration of the directors is not only provided in the form of salary but also in the form of bonuses, incentives and stock payments and other benefits. Different laws are applicable concerning director’s remuneration in diverse nations. According to Section 9 of the Corporations Act, remuneration is typically defined as the benefits that are provided to an employee of an organization. It has been viewed that the remuneration reforms which formed by the Federal government of Australia attracted the response of various organizations as well as their respective directors and also made them to respond to make any sort of change in stakeholder engagement. However, the shareholders and the constitution frames by a company play a major part in determining the laws of director’s remuneration in Australia.1 In this discussion, the different laws concerning director’s remuneration in Australia will be taken into concern. Moreover, the laws are adequate, effective and efficient or not in order to protect the interests of the shareholders will also be portrayed in the discussion. Legal Issues Relevant To the Laws of Directors’ Remuneration in Australia The legal issues relevant to the laws of director’s remuneration in Australia can be processed under the recognition of Chartered Secretaries Australia (CSA). It has been apparently observed that the issue relating to directors remuneration received much attention in the year 2011. In this similar regard, this regulatory reform issue ranked third in the year 2012.2 Section 9 of the Corporations Act defines remuneration as any benefit that is provided to an employee or an officer belonging to a particular corporation. Moreover, the Act also described remuneration as compensation that comprises all employee benefits such as salaries, bonuses and wages among others. According to Chartered Secretaries Australia (2009), the Australian Government newly released the Corporations Amendment Bill 2009 for public consultation. Under the guidelines of this law, it has been proposed that the termination benefits especially for the directors as well as the senior management officials will need approval from the shareholders. This practice would ultimately ensure higher remuneration scrutiny that includes greater responsibility and termination payments.1 The different legal issues that can be correlated with the laws of director’s remuneration in Australia are the ‘two-strikes’ rule, proxy voting, no vacancy rule, remuneration consultants and voting by key management personnel.3 The detailed analysis of the aforementioned issues has been described hereunder. The ‘Two-Strikes’ Rule According to the Corporations Act 2001, every listed company is required to make a remuneration report that should be submitted to a non- binding vote of shareholders at the Annual General Meeting (AGM) of a company. The Act proposes to empower this requirement by forming ‘two strikes’ and re-election procedure. In this connection, the first strike would take place at the time when remuneration report of a company receives a ‘no’ vote of near about 25% or more. If certain situation arises, then it is the responsibility of the management officials of a company to convey the matter related to the board in order to take necessary steps or action. If a company does not convey any message relating to the matter, then the board would be liable to take necessary actions. The second strike would happen when the remuneration report of a company subsequently obtains a ‘no vote’ of nearly about 25% or more. This occurs especially at the time when the shareholders would vote at the same AGM for determining whether the directors will require standing for re-election. This process is however known as spill resolution.3 Proxy Voting It is one of the important legal issues related to director’s remuneration in a company. In this connection, it has been observed that Key Management Personnel (KMP) and their associates would be forbidden from taking any undirected practices related to proxy voting as well as on the resolutions related to remunerations. It also comprises an important aspect i.e. spill resolution.3 Remuneration Consultants Remuneration Consultants is principally regarded as another vital reform proposal that is contained under the guidelines of Corporations Act 2011. This proposal reveals with reference to the fact that it is quite essential to disclose certain important details in the remuneration report. In this similar context, the details include the exact consultant’s name and the statement made by the consultant relating to KMP.3 No Vacancy Rule Public companies would be needed to search for approval of the shareholders before declaring that there is no vacancy in the position of board members. This particular rule is applied especially for all public companies that set a board limit which is quite lower as compared to the maximum stated in their constitution.4 Voting By Key Management Personnel This aspect can be considered as one of the major legal issues concerning to the laws of director’s remuneration in Australia. It affirms that KMP along with their close associates would be forbidden from taking part in the non-binding vote in the case of listed companies. Moreover, in this context, it has been apparently observed that KMP and their close associates would be excluded from hedging their incentive remuneration. The main intention of this proposal is to make shorten the procedure especially for the shareholders in order to practice the overpayment of remuneration. In the Corporations Act 2001, it has been stated that the regulations that are provided by the A ct are to be obeyed by everyone and changes made are supportive for the success of the company as a whole.3 Legal Concepts and Principles In relation to legal concepts as well as principles concerning director’s remuneration in Australia, it has been viewed that under Section 202A of Corporations Act 2001, the director’s of a particular company are paid the remuneration which strongly determines by the company in terms of resolution. In this regard, within the circumstance of director’s remuneration, a company may also liable to pay travelling along with other expenses to the Director’s. The expenses may include regarding partaking in general meetings of the director’s held by a company and incurring expenses by the director’s while transacting company’s’ business.5 Other principles related to remuneration to the directors of Australia include determination of remuneration to the directors according to the constitution of the company. It has been observed that if the constitution of a company does not formulate any sort of provision regarding director’s remuneration, then the remuneration of the director’s is determined by the Corporations Act by resolution. In this connection, the directors may permit to incur additional expenses according to his or her capability. However, extreme facilities for providing additional remuneration to the directors can be challenged under the Corporations Act. At the same time, a company should disclose the payment of remuneration to the directors of a company only by revealing the information concerning a minimum of 100 members who are permitted to vote at the meeting of the members. With regard to the case of listed entities, the notion of Listing Rules controls the amount of remuneration that is paid to the directors. This Listing Rule makes sure that the fees belonging to the directors do not comprise a percentage or a commission of operating income of a company. It has been observed that the directors of listed companies that are incorporated in Australia are needed to deliver exact information about their remuneration for a definite financial year in director’s report.6 In the context of director’s remuneration, the internal administration of a company is mainly regulated as per the constitution of the company. But, it is the Corporations Act that governs certain important matters of a company which encompass engagement, remuneration and most significantly removal of the directors. Moreover, apart from performing the aforementioned functions, several sections belonging to Corporations Act along with the clauses of Listing Rules also administers regarding whether the directors are allowed to vote or not on specific matters in a company. Moreover, in relation to the case law, the Corporations Act states that the directors can exercise every power of a company. Nonetheless, the powers of the company are duly restricted as per the constitution framed by a company. The Corporations Act 2001 also provides provisions to the companies for the preparation of their annual report relating to remuneration, valuation of share-based payments and other financial statements.7 Are These Laws Are Effective To Protect the Interest of the Shareholders In the context of providing remuneration to the directors of Australia, it has been viewed that the shareholders play a major role in the decision-making procedure for providing remuneration to the directors. In the case of non-binding vote, it has been observed there is an active participation of shareholders about making effective decisions connecting to director’s remuneration. The aspect of non- binding vote facilitates the shareholders with a prospect for indicating the support of designing an effectual remuneration policy of a company. It has been observed that certain financial institutions such as the Australian Institute of Company Directors and the Business Council of Australia has provided opposition to the voting process of shareholders regarding director’s remuneration. It has been suggested that the decisions should be taken collectively by the board of directors as well as the shareholders regarding remuneration payments effectively and efficiently. The two strike policy of Australia provides the shareholders with more power to strengthen their position and thus enhances their decision-making procedure related to remuneration issues. According to the new amendment of the Corporations Act, it has been observed that if 25% of more votes have been cast on two AGMs on a consequent basis, then it is the responsibility of the company to respond to the all members of the board except the managing director for standing for re-election within a period of 90 days (The Conversation Media Group, 2012). The pay-for –performance relation ultimately strengthened the role of shareholders for the purpose of attaining greater monitoring as well as higher control concerning the procedure belonging to executive remuneration. According to the reports of the research provided by the Australian Shareholders Association, it has been observed that the shareholders are incessantly voicing their utmost concern regarding the payment of remuneration to the shareholders. Furthermore, the shareholders also provided valuable advices about offering unsuitable remuneration packages to the board members along with the directors. In this similar context, according to the research, the board of directors has paid attention towards the views of the shareholders and adapted significant measures regarding remuneration payments aligning with the expectations of the shareholders. The research also revealed the fact that the ‘two-strikes’ rule provides the shareholders to raise their strong voice concerning the payment of remuneration to the directors.8 On the basis of the above discussion, it can be comprehended that the shareholders play an imperative part concentrating upon director’s remuneration in Australia at large. The Corporations Act and the Listing Rules within the background of director’s remuneration are quite effective in protecting the interests of the shareholders by a significant level. Conclusion and Recommendation The perception of director’s remuneration is fundamentally regarded as a remuneration package that comprises certain essential elements in the form of salary, short as well as long-term performance rewards and share option related schemes. In order to resolve the issue about director’s remuneration, the incentive arrangements should be effectively structured in such a manner so that the performance rewards cannot get maximized through unsuitable short-term risk taking procedure. Moreover, apart from effectively structuring the incentive arrangements, it is also quite essential to introduce an attractive remuneration package so that it would incessantly motivate the directors and act in the best way towards protecting the interests of the shareholders. The aforementioned practices would ultimately lead towards establishing a smooth interrelation between the shareholders and the managers of a company. However, failure to perform the aforesaid practices, crucial problems may rise between the members of a company including the shareholders as well as the directors. The major reason of making structured incentive arrangements and remuneration package is because of changing the perception of the investors about the company and also to enhance their decision-making procedure by a greater extent.2 In this similar context, it can be stated that if a particular company possess poor or weal packages of director’s remuneration, then it would lead towards affecting upon the decisions of the investors and also making bad image of the company. Furthermore, the remuneration policy measurements are also required to take the necessary approval of the non- executive directors who are associated with the company for providing remuneration to the directors y. Additionally, it can also be affirmed that the issue concerning director’s remuneration can be solved through the participation as well as the voting of the shareholders. This is owing to the fact that improved communication which takes place between the shareholders and the compensation committees while voting might ultimately establish a strong base of solving the issue relating to director’s remuneration. As the shareholders play a pivotal part in providing attractive remuneration to the directors, it is obvious that the shareholders need to cast their votes in an effective manner as well as participate in every meeting held by a company.2 It is also required to observe that if any deficiency occurs regarding the related issue of remuneration, then effective measures needs to be taken effectively and efficiently. By prohibiting KMP and other related parties from involving in non- binding shareholders vote, the exercise of proxy voting and the process of voting can be efficiently completed. It is been stated that KMP and their associates are not allowed to interfere in matters related to director’s remuneration. The final decision of providing remuneration to the directors lies with the approval of the shareholders or the constitution as framed by a company.9 From the above observation it can be comprehended that legal issues which are to be implemented and followed in the aforementioned statements for the success of the organization, requires proper vision and futuristic amendments. There should be effective and mutual understanding between the members of the board and the directors regarding the work process as well as remuneration policy to maintain a peaceful environment in the work schedule. If any deficiency occurs, it is required for the board members to resolve the issues as early as possible for the motive of raising the decision-making procedures of the investors at large. References Australia Government, Corporations Act 2001 (2012) Constitutional Basis For This Act Chartered Secretaries Australia, Trends in remuneration (2009) Remuneration Commonwealth Consolidated Acts, Remuneration of directors (2012) Corporations Act 2001 - Sect 202a Jaques, Mallesons Stephen, Directions 2012 (2012) Documents < http://www.mallesons.com/Documents/Directions_2012.pdf> Langes, Director And Executive Remuneration Bill Passed (2012) Compliance Mondaq, Australia: Reforms to Director and Executive Remuneration (2012) Corporate/ Commercial Law PWC, 10 Minutes on Executive Remuneration Corporations Law amendments (2011) At a glance Read More