Remuneration report and voting
As a result of the Two Strikes Act, the remuneration report has received a lot of attention is recent months. Although the Two Strikes Rule won't start to apply until next year, the Act significantly changes the rules about remuneration-related matters and voting. Those changes are relevant to preparing this year's report and for the AGM.
ASIC has also identified three areas for improving disclosure in this year's remuneration reports:
the board’s policy on the nature and amount of remuneration of the key management personnel;
performance conditions in short-term incentive plans;
the terms and conditions applying to cash bonuses, performance bonuses and share-based compensation.
For more details on ASIC's "hit list", see our detailed Alert.
Remuneration report contents
The statutory requirements for the 2011 remuneration report have not changed. However two recent changes may affect the content of the report, even though they only apply to FY2011-2012 and later financial years:
- the ban on hedging of unvested remuneration by key management personnel;
- the new procedures governing the use of remuneration consultants.
The 2011 remuneration report must still disclose the company's remuneration hedging policies. It is likely that shareholders will expect this year's report to also discuss the effect of (and the board's response to) both the ban on hedging and the controls on remuneration consultants.
Voting on remuneration and the remuneration report
The Two Strikes Act introduced a number of significant amendments to the rules governing voting-related to remuneration:
- key management personnel and their related parties cannot vote undirected proxies on resolutions connected with the remuneration of the company's key management personnel;
- key management personnel and their related parties cannot vote on the remuneration report, except when voting directed proxies.
The position of the chair of the AGM is unclear. The general prohibition on voting undirected proxies on remuneration-related resolutions contains a specific exemption for the chair. However, the specific prohibition on voting undirected proxies on the remuneration report contains no such exemption.
There is no doubt that Parliament intended that the chair could vote undirected proxies on the remuneration report; this was clearly stated a number of times. Unfortunately, it appears that, due to a drafting oversight, the amendments didn't quite get there.
New proxy rules affect the administrative procedures for all AGMs.
Under the rules, if a person holding a directed proxy doesn't vote that proxy, the proxy must be exercised by the chair of the meeting. This means that those running the meeting must:
- ensure that they have an accurate list of all proxies and proxyholders;
- monitor the attendance and poll voting of the proxyholders, as well as the attendance and voting of anyone who has given a directed proxy;
- inform the chair when directed proxies are not voted, so that the chair can then vote those proxies on the relevant resolution.
No vacancy rule
Public company boards now require shareholder approval to limit the number of directors to a number smaller than the maximum allowed by the company's constitution.
That approval must be renewed at each AGM. Shareholders must be notified of the "no vacancy" resolution and provided with an explanatory statement as part of the notice convening the meeting.
Boards may make appointments through the year, even where they exceed the approved number. However such appointments must be confirmed by shareholders at the next AGM. Without that approval, any appointments will lapse at the conclusion of the AGM.
Corporate Governance report
The Corporate Governance Council (CGC) Principles were revised in 2010. These revisions only apply to reports relating to financial years beginning on or after 1 January 2011. However, as usual, the CGC encourages companies to make "an early transition to the amended Principles".
In respect of one particular change - diversity reporting - the CGC believes that listed entities with a balance date of 30 June 2010 "should be able to establish a diversity policy and report against the new recommendations in respect of the year commencing 1 July 2010".
There are three substantive diversity recommendations:
- Recommendation 3.2: Companies should establish a policy concerning diversity and disclose the policy or a summary of that policy. The policy should include requirements for the board to establish measurable objectives for achieving gender diversity for the board to assess annually both the objectives and progress in achieving them.
- Recommendation 3.3: Companies should disclose in each annual report the measurable objectives for achieving gender diversity set by the board in accordance with the diversity policy and progress towards achieving them.
- Recommendation 3.4: Companies should disclose in each annual report the proportion of women employees in the whole organisation, women in senior executive positions and women on the board.
The former Recommendations 3.1 and 3.2, which required a company to report on a trading policy for directors, senior executives and employees, has been superseded by Listing Rule 12.9, which requires all listed entities to establish a trading policy and post it on the Company Announcements Platform. In strict terms, the removal of the trading policy requirement from the CGC guidelines only applies to financial years beginning on or after 1 July 2011. Accordingly, we would expect that this year, companies will comply with Recommendations 3.1 and 3.2 by reference to the trading policy that they will have now posted.
The Listing Rules require that, as of 1 July 2011, Remuneration Committees for S&P/ASX 300 companies should comprise only non-executive directors. This requirement is additional to a Corporate Governance recommendation that all Remuneration Committees should have a majority of independent directors, be chaired by an independent chair, and have at least three members.
Financial reporting - What ASIC is focused on
ASIC's recently-released list of "focus areas" for 30 June 2011 financial reports identifies the following areas of concern:
inadequate detail in segment reporting;
no consolidation of controlled entities, in some cases even where the reporting entity has had 90% ownership;
use of the "going concern" assumption;
fair value of financial assets;
inadequate disclosure of financial instrument risks;
inadequate disclosure of estimates and accounting policy judgments;
business combinations - ASIC warns directors to ensure that acquisitions are properly accounted for;
related party disclosures;
operating and financial review - a warning that the OFR should allow members to assess the company's operations, financial position, business strategies and future prospects, and
The Commission has also identified three broad areas where improvements need to be made to audits:
where there is insufficient evidence on the files to support the audit opinion, particularly in the areas of reliance on the work of experts or other auditors, confirmation of key balances, classification of material loan balances, consideration of the risk of fraud, and financial statement disclosures;
the level of professional scepticism exercised (or evidenced on the engagement files) in key areas of audit judgement, including fair value measurement of assets, impairment calculations, going concern assessments and other fundamental areas of the audit; and
a lack of evidence on the files about the nature, timing and extent of engagement quality control reviews.
Still waiting in the wings is ASIC's proposed crackdown on the use of "underlying profit" figures in reports and announcements.
This proposal was floated in late March (see our Alert). At that time, ASIC indicated that its final policy would be published by 30 June this year. However, at a liaison meeting at the end of May, ASIC told us that it was still studying the submissions it had received on the proposal and that it would publish its final position later this year.
Directors' report: review of operations
In 2010, the s 299A requirement for the directors' report to include a review of operations and financial condition was extended to cover all listed entities (i.e. including listed managed investment schemes), rather than just listed companies.
This requirement applies to directors' reports for financial years ending on or after 30 June 2011.