The nonbinding vote on remuneration CEO Report

CLERP 9 is now law. With it comes the new requirement for a non-binding shareholder vote on remuneration. Every listed company will be required to publish a report setting out the full details of the remuneration of their ten most highly paid executives and all directors and submit it to a vote by shareholders.

CLERP 9 is now law. With it comes the new requirement for a non-binding shareholder vote on remuneration. Every listed company will be required to publish a report setting out the full details of the remuneration of their ten most highly paid executives and all directors and submit it to a vote by shareholders.

All public companies will be obliged to hold such a vote at their AGMs from next year. Such a vote is optional this year, but some companies may proceed with it to establish the pattern.

AICD believes the non-binding vote will present major challenges to boards and especially to chairmen. A guide on how to handle it, prepared for our members by Professor Geoffrey Kiel, is summarised here and is available on our website.

We will be watching the experiences companies have with the vote over the next two reporting seasons and will provide additional comment and advice as warranted.

AICD opposed the non-binding vote in its lobbying on the CLERP 9 Bill, but to no avail. While the vote was apparently conceived to rein in executive runaway salaries, we expect it to lead to widespread escalation as managers by the thousand compare what they are paid with their peers in the same company or other companies. The runaway situation, if it really exists, is confined to a relatively small number of executives in the very biggest companies. This new law will require full disclosure of the remuneration of 12-15,000 people. (Not all companies have 10 executives, and the aggregate number of directors is not known, so we cannot state the exact number of those affected.)

The Treasurer did agree to one of AICD's requests, inserting a statement in his second reading speech that there would be no legal consequences for a company or its directors if its remuneration report were not approved and the company decided to implement it anyway.

Nevertheless, leading practising directors have told us they would regard a vote against their report as a vote against something passed by board resolution and thus a vote of no confidence in the board. Some have said they would resign under these circumstances.

In the case of the British company GlaxoSmithKline, two directors did resign when a non-binding remuneration vote went against their board's recommendation.

The Australian vote was borrowed from the UK. There, it applies to the five most highly-paid officers, and, unlike the Australian practice, these five are likely to be directors and full-time executives at the same time. Some British executive directors serve on remuneration committees, which is not approved practice here under the ASX Principles. There may have been a case for the non-binding vote in the UK, but the case is not directly transferable to Australia.

A potential situation short of rejection of the vote may well cause headaches for chairmen. This is when the small private shareholders who are a prominent feature of Australian AGMs are motivated to vote against the remuneration report but the big institutional shareholders whose proxies are available wish to support it. This may not be a rare occurrence: self-funded retirees often have difficulty coming to terms with today's top executive salaries, while institutions are more aware of what must be paid to get the best people. The vote could drive a new wedge between these two classes of shareholder. Chairmen will need to be even more tactful and patient in their handling of AGMs than hitherto and will need to plan their approaches with care.

There will be one good outcome from the non-binding vote and the remuneration report that goes with it. Few people in Australia realise that non-executive directors are not paid huge amounts like some of the very top executives. The new reports will make clear just what non-executive directors are paid.

The ties that bind

When is a non-bind shareholder vote really non-binding? The imminent implementation of the most public part of CLERP 9, the non-binding vote on remuneration, will raise this question in minds of Australian company chairmen and directors as the AGM season kicks off.

Guidance for chairmen on this difficult issue is the objective of the AICD paper "Shareholder Consideration of the Annual Remuneration Report of a Listed Company - A Guide for Consideration of the Issues".

The most important issue is how a board would proceed if the remuneration report was not approved. While there are no legal consequences if a company goes ahead with its remuneration plan, despite a non-binding vote against it, this occurrence could cause an erosion of trust and confidence in the board if not handled well.

The paper cover the issues that the board needs to consider in advance of the vote including:

• The AGM agenda and form of the resolution
• Whether amendments to the resolution will be accepted
• The handling of proxies
• Conflicts of interest
• Pre-AGM shareholder questions and discussions
• Show of hands versus a poll at the AGM
• And, most importantly, the board's response should the resolution not be approved

While the vote is not compulsory until next year, many companies will be road-testing it during this AGM season to establish a pattern and gauge the reaction from shareholders.

"The holding of this vote will require great tact and patience on the part of chairman," says AICD CEO Ralph Evans. "Many smaller shareholders, particularly self-funded retirees, have difficulty coming to terms with today's top executive salaries, while institutions are generally more aware of what must be paid to get the best people. This could drive a wedge between these two classes of shareholder and companies will need to plan their approach to this vote carefully.

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