Director Remuneration

Topics: Corporate governance, Board of directors, Executive compensation Pages: 12 (3638 words) Published: April 14, 2011
Company Law Assignment

“The global financial crisis in late 2007 and in 2008 increased public disquiet about the high level of executive remuneration” Lipton & Herzberg p 316. Outline the laws, rules and principles governing payment and disclosure of remuneration to directors and senior executives in Australia. Explain how and why this is important in corporate governance. Compare the Australian provisions with those in other countries.

The remuneration of company directors and executives is a subject which has attracted substantial interest from shareholders, business groups, press and at the same time invoked public fury since the commencement of the economic crisis . There has been a great deal of debate on executive remuneration over the last six months, with remuneration practices recognized by various forums as a contributing factor to the global financial crisis. A series of giant corporate failures in recent years have forced public limited companies to unveil all price sensitive information. As a result, shareholders have started placing great importance on executive remuneration, it being a major factor highlighting the integrity of the company in utilising its earnings. There has been a lot of criticism of existing executive pay regimes and a recent period of excessive risk-taking that has been attributed to inapt incentive systems. This extreme risk taking has eventually led to a variety of market failures and has once again highlighted the significance of ensuring that remuneration packages are properly structured and do encourage corporate greed. Although there have been quite a few defenders of existing executive pay regimes, the crisis has shifted the focus on the need to maintain a vigorous regulatory framework that endorses transparency and accountability on remuneration practices, and better aligns the interests of shareholders and the community with the performance and payment structures of Australia’s executives. In addition to several national policy initiatives on the issue, executive pay regulation was the theme of discussion and subsequent agreement at two G20 summits in 2009. Besides, there have been numerous conditions imposed on remuneration for entities that have received the advantage of recent corporate bailouts and government assistance packages by countries like the United Kingdom and the United States. Executive remuneration can be seen as an essential part of corporate governance and proper remuneration schemes can be linked to good corporate governance. ‘Corporate governance’ can be defined as the set of institutions and practices designed to ensure that managers and directors act in the interests of the company and ultimately shareholders. It encompasses: … ‘the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations’. It encompasses the mechanisms by which companies, and those in control, are held to account. Australia’s corporate governance framework has been described as one of the best in the world. According to the World Economic Forum (2008), time after time Australia been ranked in the top three countries for the effectiveness of its corporate boards. Its regulatory framework for remuneration and corporate governance has over time brought greater disclosure, accountability of directors and involvement of shareholders. The ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations can be considered a ‘code’ of best practice , although they are not mandatory. Corporations Act 2001 (Cth), s 674 requires listed disclosing entities to comply with the obligation to disclose contained in ASX Listing Rule 3.1. This rule describes a wide range of corporate governance practices for listed companies, including executive remuneration including a compulsion on listed companies to outline compliance with the code and to explain deviations. The...

References: ‘Australia 's Corporate Disclosure Regime: Lessons from the US Model’ (2003) 15 Australian Journal of Corporate Law 81; and Department of Treasury, above n 31, 143-4.
ASX, Listing Rules, r 4.10.3
Barker, R., "The UK Model for Corporate Governance: An Assessment from the Midst of a Financial Crisis," October 3, 2008. Available from Institute of Directors website.
Lipton, P. & A. Herzberg, Understanding Company Law, Law Book Company Limited, 5th edition, 1993, Sydney
OECD Report (2004), “The OECD Principle of Corporate Governance, The Organization for Economic Cooperation and Development, Paris.
Prosser Thomas, Executive compensation and the economic crisis (2009), Industrial Relations Research Unit, University of Warwick.
Ferrarini, Guido A., Moloney, Niamh and Vespro, Cristina, Executive Remuneration in the EU: Comparative Law and Practice (June 2003). ECGI - Law Working Paper No. 09/2003
Sheehan, Kym --- "The Regulatory Framework for Executive Remuneration in Australia" [2009] SydLawRw 11; (2009) 31(2) Sydney Law Review 273
The Guardian, 2009a: ‘End this culture of greed
17 C.F.R. § 229.402(b) (2008)
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