Executive remuneration – productivity commission releases recommendations

On 30 September, the Productivity Commission (Commission) released a discussion draft of its report on executive remuneration in Australia (Report).

Despite finding no systemic fault in the private sector’s approach to executive remuneration, the Commission has made a number of recommendations to strengthen transparency, improve the accountability of boards, remove conflicts of interest and enhance shareholder engagement on remuneration.

In summary, the Commission’s recommendations include the following:

  • The maximum number of directors should only be permitted to be set by a general meeting of shareholders, thereby removing the discretion of boards to prevent the introduction of new directors.
  • Introduction of a new ASX300 rule that board remuneration committees have at least three members, who are non-executive directors, and chaired by and with a majority of independent directors.
  • Key executives and all directors (and associates) should be prohibited from voting:
    • their personal shares; and
    • their undirected proxies,

on remuneration reports and all other remuneration matters.

  • A ban on hedging of unvested or otherwise locked performance bonus shares (which is consistent with the G20 approach to de-coupling financial sector risk and bonuses).
  • Proxy holders should be required to cast all of their directed proxies on remuneration reports and other remuneration matters.
  • Remuneration reports to include a plain English summary, identifying policies, actual levels of pay, and all shareholdings of those identified in reports. Actual fair value of equity to be used for remuneration reports.
  • Disclosure of remuneration for ‘key management personnel’ rather than just for the top five executives.
  • Remuneration consultants to be used by boards directly, independent of management.
  • Disclosure of remuneration advisers, the circumstances of their appointment and reporting, and what other work they have undertaken for the company.
  • Institutional investors should regularly disclose how they have voted on remuneration matters.
  • Changes to taxation trigger points for deferred shares and rights.
  • Confirmation that electronic voting at AGMs is permissible without the need for amendment to company constitutions.
  • Where a remuneration report has received a 25% or greater ‘no’ vote, the board should be required to report back to shareholders in the subsequent remuneration report explaining how shareholder concerns were addressed.
  • If the subsequent remuneration report receives another 25% ‘no’ vote then all members of the board should be subject to re-election at either an EGM or the next AGM of the company (‘two strikes test’).

The Commission has invited the public to provide written submissions on the Report by Friday 6 November 2009. The final report will be prepared after submissions have been received and will be forwarded to the Government by 19 December 2009.

Please contact us if you wish to discuss the potential implications of the draft recommendations or if you are interested in contributing to our submission on the Report.

Domestic and off shore IPO activity

Vehicle trading website Carsales.com Ltd (Carsales) made a strong debut on the ASX last month in the first major float since the global financial crisis began. Carsales shares opened at $3.92, a 12% premium to the issue price of $3.50, and closed after the first days trade at $3.99, up 14% on the issue price. At $3.50 each, Carsales shares listed at an earnings before interest, tax, depreciation and amortisation (EBITDA) multiple of 14.5 and a bottom line net earnings multiple of 21.8.

The early success of Carsale’s IPO has further fuelled talks of an economic upturn, with IPO activity in general also increasing.

Whilst in August this year there were four new listings (compared to six in August 2008), the numbers for September and October look even better with 12 companies already listed or flagged as having made applications for admission to ASX for this period.

With the IPO market and the economy starting to support better valuations, now is a good time for companies with stable businesses to seek capital without the pressure of doing so at recently significant discounts.

Provided the market between now and December avoids any volatile trends, we expect a significant amount of IPO activity in the first quarter of 2010 across all industries. In particular, we expect that much of this activity will occur in the resource space, based not only on the increased domestic investor appetite, but also on increased investor appetite in off shore jurisdictions such as Hong Kong.

The Securities Exchange of Hong Kong (SEHK) is currently seeking to take advantage of the predicted increased activity and investor appetite by introducing changes to the exchange listing rules to better facilitate listings by mineral and exploration companies.

The proposed changes centre on:

  • clarifying the requirements that companies wanting to list on the SEHK must satisfy prior to being accepted for admission; and
  • introducing a JORC type reporting regime akin to the Australian environment.

It is anticipated that the introduction of these changes will improve the credibility of listings on the SEHK, which should in turn better satisfy the information requirements of sophisticated investors.

Hynes Legal has been specifically requested by the SEHK to comment on the proposed changes to the exchange listing rules.

Please let us know if you require further information on the current listing requirements for the SEHK, or the proposed changes and their status.

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