Sheehan, Kym --- "The Regulatory Framework for Executive Remuneration in Australia" [2009] SydLawRw 11; (2009) 31(2) Sydney Law Review 273
[∗] Senior Lecturer in Business Law, Faculty of Economics and Business, University of Sydney. This work forms part of my PhD studies at the Melbourne Law School, University of Melbourne. My thanks to Christine Parker, Geof Stapledon, Chander Shekhar, Ian Ramsay, John Roberts, together with the anonymous reviewers for their helpful suggestions.
[1] Janet Dine, ‘Executive Pay and Corporate Governance in the UK: Slimming the fat-cats?’ (2006) 3 European Company Law 75 at 82.
[2] Evidence to Senate Standing Committee on Economics, Parliament of Australia, Canberra, 23 October 2008, E5 (Dr Laker, APRA), noting, at E7, that at the Australian Prudential Regulatory Authority (‘APRA’): ‘We have always seen the setting of remuneration levels as the responsibility of boards and shareholders.’
[3] Jennifer Hill, ‘“What Reward Have Ye?” Disclosure of director and executive remuneration in Australia’ (1996) 14 Company and Securities Law Journal 232 at 233; Brian Cheffins, Company Law: Theory, structure and operation (1997) at 211.
[4] The major initiative in the USA is the Emergency Economic Stabilization Act of 2008, 12 USC 5221, as amended by the American Recovery and Reinvestment Act of 2009, Pub L No 111–5, 123 Stat 516, § 7001. A condition of participation in the financial assistance program in the USA is that ‘the TARP (Troubled Asset Relief Program) recipient is prohibited from making any golden parachute payments to a senior executive officer of any of the next five most highly-compensated employees of the TARP recipient during any period where the obligation arising from financial assistance under the TARP remains outstanding’. A golden parachute payment is defined in amended s 111(a)(2) as ‘any payment to a senior executive officer for departure from a company for any reason, except for payments for services performed or benefits accrued.’ Additional amendments to the Internal Revenue Code, 26 USC § 162(m)(5) (2008) reduce the deductibility of compensation paid to particular executives whose firms sell ‘troubled assets’ to $500,000 (from $1,000,000). Golden parachute payments have been even further restricted under § 280G(e) with the imposition of an additional tax of 20 per cent imposed on a ‘covered executive’ who receives an excess golden parachute payment, defined as a payment in excess of three times the base amount (the tax is imposed on the payment less the base amount). The obligation on TARP recipients to comply with this provision is found in the amended Emergency Economic Stabilization Act of 2008, 12 USC 5221,§ 111(b)(1)(b). See also 31 CFR §§ 30.1–30.11.
[5] Banking Act 2009 (UK) c 1 s 20(1)(b) and (2)(b) allow the Bank of England or the Treasury respectively, to alter the terms of a director’s service contract upon taking a share transfer in a bank. A clause reflecting the US approach in relation to termination payments was discussed but not adopted at the committee stage: Report Stage Proceedings, Banking Bill 2008, House of Commons, 26 November 2008, 943–4.
[6] The Australian response has been to guarantee retail deposits and some wholesale funding measures: Guarantee Scheme for Large Deposits and Wholesale Funding Appropriation Act 2008 (Cth). The Deed of Guarantee and the Scheme Rules currently issued as part of the scheme make no reference to this issue.
[7] Evidence to Senate Standing Committee on Economics, Parliament of Australia, Canberra, 23 October 2008 at E6 (Dr Laker, APRA); APRA, ‘APRA Outlines Approach on Executive Remuneration’ (Media Release No 08.32, 9 December 2008). The APRA principles are not released at the time of final article preparation (early May 2009) but will reflect global initiatives in this area, such as the principles released by the Financial Stability Forum, FSF Principles for Sound Compensation Practices (2009), the Institute of International Finance’s principles of conduct for compensation policies found in the Final Report of the IIF Committee on Market Best Practices: Principles of conduct and best practice recommendations (2008) at 49, and the FSA’s remuneration code: Financial Services Authority, ‘Reforming Remuneration Practices in Financial Services’ (Consultation Paper No 09/10, 2009).
[8] Regulation can be defined as ‘the intentional activity of attempting to control, order or influence the behaviour of others’: Christine Parker et al, ‘Introduction’ in Christine Parker, Colin Scott, Nicola Lacey and John Braitwaite (eds) Regulating Law (2004) 1 at 1.
[9] Id at 3.
[10] Joanna Bird and Jennifer Hill, ‘Regulatory Rooms in Australian Corporate Law’ (1999) 25 Brooklyn Journal of International Law 555 at 555–6.
[11] Jennifer Hill, ‘Regulating Executive Remuneration: International developments in the post-scandal era’ (2006) 3 European Company Law 64 at 66–7.
[12] Eilís Ferran, ‘Corporate Law, Codes and Social Norms — Finding the right regulatory combination and institutional structure’ (2001) 1 Journal of Corporate Law Studies 381 at 389.
[13] Joseph Raz, ‘Legal Principles and the Limits of Law’ (1972) 81 Yale Law Journal 823 at 838.
[14] The Committee on Corporate Governance, Final Report (1998) at B1; ASX Corporate Governance Council, Corporate Governance Principles and Recommendations (2nd ed, 2007) at 35.
[15] The Study Group on Directors’ Remuneration, Directors’ Remuneration: Report of a study group chaired by Sir Richard Greenbury (1995) at 34–5, 37.
[16] The Company Law Review Steering Group, Modern Company Law for a Competitive Economy: Developing the framework (2000) at 8.
[17] Explanatory Memorandum, Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Bill 2003 (Cth) 1–2 (‘CLERP 9 EM’).
[18] Commonwealth, Parliamentary Debates, House of Representatives, 4 December 2003, 23764 (Peter Costello, Treasurer); CLERP 9 EM, id at 166.
[19] Joint Committee on Corporations and Financial Services, Commonwealth of Australia, CLERP (Audit Reform and Corporate Disclosure) Bill 2003, ‘Part 1: Enforcement, executive remuneration, continuous disclosure, shareholder participation and related matters’ (2004) at 31–2 (‘CLERP 9 Report Part 1’). Empirical evidence on pay for performance in the Australian context is mixed: see Geof Stapledon, ‘The Pay for Performance Dilemma’ [2004] GriffLawRw 6; (2004) 13 Griffith Law Review 57 at 63.
[20] CLERP 9 Report Part 1, id at 50.
[21] Id at 87. Of note from the CLERP 9 debates is the stated policy of the Australian Labor Party to require trustees of super funds to vote and to disclose their voting records, as part of institutional shareholders discharging their responsibility to take an active role in Australian companies: Commonwealth, Parliamentary Debates, House of Representatives, 16 February 2004, 24824 (Simon Crean, Member for Hotham).
[22] Evidence to Joint Committee on Corporations and Financial Services, Parliament of Australia, Melbourne, 29 April 2004, CFS 56 (Mike Rawstron, Department of Treasury).
[23] CLERP 9 Report Part 1, above n 19 at 33.
[24] Productivity Commission, Regulation of Director and Executive Remuneration in Australia, Issues paper (2009) at 5.
[25] Id at 16–17.
[26] The time lags implicit in the cycle are those surrounding the company’s ability to respond to evolving views of good practice: Kym Sheehan, ‘Is the Outrage Constraint an Effective Constraint on Executive Remuneration? Evidence from the UK and preliminary results from Australia’ (Working Paper, University of Melbourne, 2007) 15–16, <http://ssrn.com/abstract=974965> accessed 11 December 2008.
[27] Steven P Croley, Regulation and Public Interests: The possibility of good regulatory government (2008) at 27.
[28] Julia Black, ‘Which Arrow? Rules types and regulatory policy’ [1995] Public Law 94 at 96; George J Stigler, ‘The Theories of Economic Regulation’ in George J Stigler, The Citizen and the State: Essays on regulation (1975) 78 at 88; CLERP 9 Report Part 1, above n 19 at 2–3; Jennifer Hill, above n 3 at 240–1 and footnotes 97–9 in particular in relation to earlier attempts to regulate executive remuneration in Australia. Kevin Murphy, ‘Politics, Economics and Executive Compensation’ (1995) 63 University of Cincinnati Law Review 713.
[29] Colin S Diver, ‘The Optimal Precision of Administrative Rules’ (1983–84) 93 Yale Law Journal 65 at 71–2.
[30] Lynn Sharp Paine, ‘Managing for Organizational Integrity’ (1994) 72(2) Harvard Business Review 106 at 111.
[31] Committee on Corporate Governance, Final Report (1998) at 8, 10–11, 13.
[32] Oxera, A Framework for Assessing the Benefits of Financial Regulation: A report prepared for the Financial Services Authority (2006) at 29.
[33] Isaac Ehrlich and Richard A Posner, ‘An Economic Analysis of Legal Rulemaking’ (1974) 3 Journal of Legal Studies 257 at 280.
[34] Anita Anand, ‘Analysis of Enabling vs Mandatory Corporate Governance Structures Post-Sarbanes-Oxley’ (2006) 31 Delaware Journal of Corporate Law 229 at 238–46 argues that costs should be calculated on the basis of the costs to all stakeholders: shareholders, the firm and the government.
[35] The financial report must comply with the accounting standards: Corporations Act 2001 (Cth) s 296(1).
[36] A related party transaction is a transaction in which a financial benefit is given by a public company to a ‘related party’ which includes directors as well as the director’s spouse, children and any companies controlled by any of these: Corporations Act 2001 (Cth) s 228. These transactions require prior shareholder approval under s 208(1).
[37] The most recent extensive amendments to the legislation on executive remuneration occurred in 2004, with amendments to s 300A involving consultation by the Joint Committee on Corporations and Financial Services, established under the Australian Securities and Investments Commission Act 2001 (Cth) s 243.
[38] Bronwyn Morgan and Karen Yeung, An Introduction to Law and Regulation (2007) at 43.
[39] CLERP 9 EM, above n 17 at 168.
[40] Delegated law-making at the Federal level is governed by the Legislative Instruments Act 2003 (Cth) and is subject to parliamentary scrutiny and disallowance: Legislative Instruments Act 2003 (Cth) ss 38–48. Stephen Bottomley, ‘Where Did the Law Go? The delegation of Australian corporate regulation’ (2003) 15 Australian Journal of Corporate Law 105 at 112.
[41] Compare The Combined Code on Corporate Governance in the UK (Corporate Governance Committee).
[42] ASX, Listing Rules, r 4.10.3.
[43] David Seidl, ‘Standard Setting and Following in Corporate Governance’ (2007) 14 Organization 705 at 711–15, 721.
[44] A more formal definition of listing rules can be found in the Corporations Act 2001 (Cth) s 761A and defines the subject matter of listing rules as admission and removal or securities from the market’s official list and the activities/conduct of entities included on the official list.
[45] Corporations Act 2001 (Cth) s 793A, Corporations Regulations 2001 (Cth) regs 7.2.07, 7.2.08.
[46] Corporations Act 2001 (Cth) ss 793D, 793E.
[47] Corporations Act 2001 (Cth) s 793E(3).
[48] Under s 793A(1), Corporations Regulations 2001 (Cth) reg 7.2.07 prescribes the content of the operating rules, of which the listing rules form a subset.
[49]ASX, Listing Rules, ‘Introduction’ <http://www.asx.com.au/ListingRules/chapters/ Introduction.htm> accessed 16 July 2008. An obligation owed by a company to its shareholders to comply with the listing rules has also been held to exist independently of this contractual relationship with the ASX: Repco Ltd v Bartdon Pty Ltd, Canadian Tire Corporations and McEwans Ltd [1981] VicRp 1; [1981] VR 1 at 9–10; Zytan Nominees Pty Ltd v Laverton Gold NL (1988) 1 WAR 227 at 232; Quancorp Pty Ltd v MacDonald [1999] WASCA 33; (1999) 32 ACSR 50 at 53; Robert Baxt, Ashley Black and Pamela Hanrahan, Securities and Financial Services Law, (6th ed, 2003) at 317–24.
[50] Corporations Act 2001 (Cth) s 793C(1).
[51] A wide range of orders is available in s 1101B(4), including an order directing that person comply with a provision of the operating rules (s 1101B(4)(b)), an order to disclose specified information (s 1101B(4)(c)), an order requiring the publication of advertisements (s 1101B(4)(d)) and an order declaring any contract relating to financial products (which include securities per the definition of ‘financial product’ in s 764A(1)(a)) void or voidable (s 1101B(4)(h)).
[52] Corporations Act 2001 (Cth) s 674(2) (the company), (2A) (a person involved in the contravention). ASIC can issue an infringement notice under s 1317DAC(1) or pursue a remedy via the civil penalty provisions should the disclosing entity not pay the prescribed penalty: s 1317E(1)(ja). Section 674(2A) makes it an offence for a person involved in the contravention of s 674(2) by the company and attracts a sanction under s 1317E(1)(ja).
[53] Accounting Standards Review Board, Release 100, Criteria for the Evaluation of Accounting Standards, (1985), cited in RH Parker, CG Peirson and AL Ramsay, ‘Australian Accounting Standards and the Law’ (1987) 5 Company and Securities Law Journal 231 at 232.
[54] The AASB has authority under Corporations Act 2001 (Cth) s 334(1) to make accounting standards.
[55] Changes made in 2007 to the regulations removed much of the prescriptive details for the remuneration report into the Corporations Regulations 2001 (Cth): Corporations Amendment Regulations 2007 (No 2) (Cth).
[56] CLERP 9 Report Part 1, above n 19 at 55–9. Part of the reason for the views stated in the submissions received and in witness testimony to the Committee was the inconsistencies between AASB 1046 Director and Executive Disclosures by Disclosing Entities (2004) and the CLERP (Audit Reform and Corporate Disclosure) Bill 2003. Those inconsistencies have taken regulators in Australia almost 3 years to resolve. The amendment of the regulations in 2007 via Corporations Amendment Regulations 2007 (No 2) (Cth) reg 3 and Sch 1(1), together with an amendment to paras Aus 1.4, Aus 1.4.1 and Aus 25.1 in AASB 124 Related Party Disclosures in June 2008 have corrected the repetitive reporting of information previously found in Australian annual reports.
[57] A principles-based approach to accounting standards is said to prefer substance over form and to contain ‘few, if any, rules’: Jim Psaros, ‘Do Principles-Based Accounting Standards Lead to Biased Financial Reporting? An Australian experiment’ (2007) 47 Accounting and Finance 527 at 528.
[58] David Alexander and Eva Jermakowicz, ‘A True and Fair View of the Principles/Rules Debate’ (2006) 42 Abacus 132, 138. As to the boundary between ‘rules’ and ‘principles’ in accounting, see Frank Clarke and Graeme Dean, ‘Principles vs Rules: True and fair view and IFRSs’ (2004) 40 Abacus i at ii; Frank Clarke and Graeme Dean, Indecent Disclosure: Gilding the corporate lily (2007) at 71.
[59] Parliamentary Joint Committee on Corporations and Financial Services, Report on Australian Accounting Standards Tabled in Compliance with the Corporations Act 2001 on 30 August and 16 November 2004 (2005) at 13. Thus interpretations of the standards are crucial, with the Urgent Issues Group of the AASB responsible for these determinations.
[60] Corporations Act 2001 (Cth) s 296(1) requires companies to prepare the annual financial statements in accordance with recognised accounting standards (s 304 requires the half-yearly financial report to comply with the accounting standards).
[61] The chief executive officer and the chief financial officer are required to declare that the annual financial statements comply with the accounting standards: Corporations Act 2001 (Cth) s 295A(2).
[62]Evidence to the Joint Committee on Corporations and Financial Services, Parliament of Australia, Canberra, 11 March 2004 at 51–7 (Professor Frank Clarke and Professor Graeme Dean). George J Benston, Michael Bromwich and Alfred Wagenhofer, ‘Principles-Versus Rules-Based Accounting Standards: The FASB’s standard setting strategy’ (2006) 42 Abacus 165 at 166 notes that some of this tension results from evidence surrounding compliance by Arthur Anderson with the rule, but not the spirit, of the accounting standards in relation to the financial instruments at the heart of the Enron collapse.
[63] Australian Council of Superannuation Investors, Environmental, Social and Governance Guidelines (2007) (‘ESG Guidelines’); Corporate Governance Guidelines: A guide for superannuation trustees to monitor listed Australian companies (2007) (‘CG Guidelines’).
[64] Investment and Financial Services Association, Corporate Governance: A guide for fund managers and corporations (5th ed, 2004) (‘Blue Book’); IFSA, Guidance Note Circular: Non-binding shareholder vote on remuneration reports (2005); IFSA, Executive Equity Plan Guidelines (2007).
[65] Association of Superannuation Funds of Australia, Best Practice Paper No 17: Active share ownership guidelines for superannuation fund trustees (2003).
[66] AMP Capital Investors, Corporate Governance Policy for Listed Australian Equity Investments (2004).
[67] RiskMetrics (Australia) Pty Ltd, Assessing Remuneration Reports for ASX-Listed Companies (2008).
[68] Regnan, Position Paper — Director and Executive Security Trading (2008).
[69] Examples include Australian Institute of Company Directors, Remuneration Committees: Good practice guide (2004); Executive Service Agreements (2003); Shareholder Consideration of the Annual Remuneration Report of a Listed Company: A guide for consideration of the issues (2004); Executive Equity Plan Guidelines, Position Paper No 2 (2007); Principles of Good Communication with Shareholders, Position Paper No 5 (2007); Non-Recourse Loans Provided to Executives, Position Paper No 8 (2008); Director Margin Loans, Position Paper No 9 (2008); Director Share Trading, Position Paper No 10 (2008); Executive Termination Payments, Position Paper No 13 (2008).
[70] Chartered Secretaries of Australia, Better Communication Between Entities and Proxy Advisory Services (2008); Guide to Procedures at AGMs (2008); Policy to Promote Effective Communication with Shareholders (other than at AGMs), Good Governance Guide No 6.6 (2004).
[71] Jeffrey N Gordon, ‘Proxy Contests in an Era of Increasing Shareholder Power: Forget issuer proxy access and focus one-proxy’ (2008) 61 Vanderbilt Law Review 475 at 480.
[72] Paolo Santella, Enrico Baffi , Carlo Drago and Dino Lattuca, ‘A Comparative Analysis of the Legal Obstacles to Institutional Investor Activism in Europe and the US’ (Working paper, MPRA Paper No 8928, May 2008) 49–50.
[73]Compare, Parliamentary Joint Committee on Corporations and Financial Services, Better Shareholders — Better Company: Shareholder engagement and participation in Australia (2008) at 56 (‘Better Shareholders’). Proxy advisors typically issue annual guidelines on voting recommendations: RiskMetrics (Australia) Pty Ltd, 2008 Australia Voting Guidelines (2008); CGI Glass Lewis, Australia Proxy Voting Policy Guidelines (2008).
[74] In 2008, both Glass Lewis & Co and Riskmetrics Inc established councils consisting of high profile experts to provide among other things to discuss (and develop?) global governance policy: Glass Lewis & Co, ‘Glass Lewis Selects Advisory Council’ (Press Release, 7 September 2008); RiskMetrics Group Inc, ‘RiskMetrics Group Creates New Governance Leadership Council (Press Release, 3 September 2008).
[75] Black, above n 28 at 101; Diver, above n 29 at 76–9.
[76] George J Stigler, ‘Regulation: The confusion of means and ends’ in George J Stigler, The Citizen and the State: Essays on regulation (1975) 176 at 176.
[77] Anthony Ogus, Costs and Cautionary Tales: Economic insights for the law (2006) at 106; Jennifer Hill, ‘Regulatory Show and Tell: Lessons from international statutory regimes’ (2008) Delaware Journal of Corporate Law 819 at 832.
[78] Evidence to the Joint Committee on Corporations and Financial Services, Parliament of Australia, Sydney, 16 March 2004, 6–7 (Richard Gilbert, IFSA); JT Romans, ‘Moral Suasion as an Instrument of Economic Policy’ (1966) 56 American Economic Review 1220 at 1223–4 argues there are two necessary conditions for a successful moral suasion policy: the public supports the government’s position and the population to be persuaded is small.
[79] Sandeep Gopalan, ‘Changing Social Norms and CEO Pay: The role of norm entrepreneurs’ (2007) 39 Rutgers Law Journal 1 at 19.
[80] Ogus, above n 77 at 130.
[81] Id at 131, citing Steven Shavell, ‘Law Versus Morality as Regulators of Conduct’ (2002) 4 American Journal of Law and Economics 227.
[82] Eilís Ferran, ‘Corporate Law, Codes and Social Norms — Finding the right regulatory combination and institutional structure’ (2001) 1 Journal of Corporate Law Studies 381 at 385.
[83] Melvin A Eisenberg, ‘Corporate Law and Social Norms’ (1999) 99 Columbia Law Review 1253 at 1257.
[84] Richard B Macrory, Regulatory Justice: Making sanctions effective, Final Report (2006) at 15.
[85] Australian Securities and Investments Commission, ASIC: A guide to how we work (2006) at 10–11; Commonwealth of Australia (Treasury), Review of Sanctions in Corporate Law: Discussion paper (2007) at 7–9; Australian Law Reform Commission, Principled Regulation: Federal civil and administrative penalties in Australia, ALRC 95 (2002) at 169–70.
[86] Australian Securities and Investments Commission Act 2001 (Cth) s 1(2)(a).
[87] Seidl, above n 43 at 707–9.
[88] Corporations Act 2001 (Cth) s 793A(2).
[89] Corporations Act 2001 (Cth) s 793E(2), (3).
[90] Corporations Act 2001 (Cth) s 793C(1).
[91] The range of enforcement options include education and guidance, persuasion, management letters, warnings, ‘name and shame’ through publicly identifying potential breaches of the listing rules up to suspension from trading, referral to ASIC where breaches amount to breaches of the Corporations Act (particularly with reference to insider trading and continuous disclosure) <http://www.asx.com.au/supervision/enforcement_outcomes/supervision_enforcement_approach.htm> accessed 25 November 2008. The notes to ASX, Disciplinary Processes and Appeals Rulebook (2008) r 2.1.1 states that ASX will refer a breach of the listing rules to ASIC.
[92] For example, the rules requiring shareholder approval for any termination payments beyond a threshold described in the Corporations Act 2001 (Cth) ss 200F, 200G (s 200B); or the guidance that ‘properly constructed liquidated damages clauses are one way of restricting payouts to executives who depart following a period of poor performance’ found in Australian Council of Superannuation Investors, CG Guidelines, above n 63 at 12–13 (Guidelines 14.2(a)–(j)).
[93] For example, the rules about the existence, structure and tasks of the remuneration committee found in three sources: ASX Corporate Governance Council, above n 14 at 35 (Recommendation 8.1); Australian Institute of Company Directors, Remuneration Committees: Good practice guide above n 69 and ACSI, id at 9 (Guideline 12.1(a)).
[94] Lucian Bebchuk and Jesse Fried, Pay Without Performance: The unfulfilled promise of executive compensation (2004) at 195.
[95] Id at 195–8. One feature of the regulatory responses to the global financial crisis is to assign new tasks to the remuneration committee in financial institutions including input from the risk management and compliance functions to ensure performance measures are appropriately risk-adjusted: Financial Services Authority, above n 7 at 29–31; Financial Stability Forum, above n 7 at 2, 6–8.
[96] Corporations Act 2001 (Cth) ss 200A–200J. The quantum limit comes via ss 200F and 200G, which impose a threshold on the level of payment that can be made without prior shareholder approval. The current exposure draft of the Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009 (Cth) proposes substantial amendments to the thresholds while the draft Corporations Amendment Regulations 2009 (Cth) regs 2D.2.01 and 2D.2.02 aim to remove uncertainty surrounding particular practices. Refer to the Draft Explanatory Memorandum, Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009 (Cth) at 11, 15.
[97] CLERP 9 Report Part 1, above n 19 at 37; Commonwealth, Parliamentary Debates, House of Representatives, 4 December 2003, 23764 (Peter Costello, Treasurer).
[98] Seidl, above n 43 at 707–9.
[99] The full list of 21 organisations that form the membership of the ASX Corporate Governance Council is available at <http://www.asx.com.au/about/corporate_governance/council_representatives.htm> accessed 17 November 2008.
[100] The most recent examples are the consultation on the review of the ASX Corporate Governance principles in 2006–07: ASX Corporate Governance Council, Response to Submissions on Review of Corporate Governance Principles and Recommendations (2007).
[101] ASX Corporate Governance Council, above n 14 at 3.
[102] Charlotte Villers, Corporate Reporting and Company Law (2006) at 15–16.
[103] John Braithwaite and Peter Drahos, Global Business Regulation (2000) at 162.
[104] Iris H-Y Chiu, ‘Delegated Regulatory Administration in Mandatory Disclosures — Some observations from EU securities regulation’ (2006) 40 International Law 737 at 744; Cheffins, above n 3 at 165 (arguing investors are not passive, hence information will find its way into the market, without mandatory disclosure. Cheffins does at 167, of course, acknowledge that disclosure mechanisms without legal regulation are unlikely to operate perfectly); Hill, above n 3 at 237.
[105] Braithwaite and Drahos, above n 103 at 121–74.
[106] John C Coffee Jr, ‘Market Failure and the Economic Case for a Mandatory Disclosure System’ (1994) 13 Virginia Law Review 717 at 725.
[107] Braithwaite and Drahos, above n 103 at 165.
[108] With the result that the institutional investors gain a knowledge advantage that makes them a more effective influencer of corporate behaviour: John Holland, ‘Financial Reporting, Private Disclosure and the Corporate Governance Role of Financial Institutions’ (1999) 3 Journal of Management and Governance 161 at 162.
[109] Igor Filatotchev, Gregory Jackson, Howard Gospel and Deborah Allcock, ‘Key Drivers of “Good” Corporate Governance and the Appropriateness of UK Policy Responses’ (Report prepared for the Department of Trade and Industry, UK, 2006) at 106.
[110] Ogus, above n 77 at 81.
[111] Report of the National Association of Corporate Directors Blue Ribbon Commission on Director Compensation: Purposes, principles and best practice (1995) at 19, cited in Jennifer Hill, above n 3 at 238; Bebchuk and Fried, above n 94 at 192.
[112] Bebchuk and Fried, id at 68, 72.
[113] Filatotchev et al, above n 109 at 103.
[114] CLERP 9 Report Part 1, above n 19 at 43–4.
[115] The ratchet has been dismissed as a justification for not introducing linked disclosure: Evidence to the Joint Committee on Corporations and Financial Services, Parliament of Australia, Canberra, 11 March 2004 at CFS 14 (Senator Stephen Conroy).
[116] Stephen J Perkins and Chris Hendry, ‘Ordering Top Pay: Interpreting the signals’ (2005) 42 Journal of Management Studies 1443 at 1462–3.
[117]Archon Fung, Mary Graham and David Weil, Full Disclosure: The perils and promise of transparency (2007) at 39–45.
[118] For example, legislation requires a director to disclose to the board any material personal interests in matters being considered by the board: Corporations Act 2001 (Cth) s 191. Such rules are justified by law’s conception of the director as a fiduciary vis-à-vis the company: Commonwealth of Australia, Directors’ Duties and Corporate Governance: Facilitating innovation and protecting investors, Corporate Law Economic Reform Program, Proposals for Reform, Paper No 3 (1997) at 15–16.
[119] For example, the rules mandating disclosure of director share trading to the market: Corporations Act 2001 (Cth) s 205G; ASX, Listing Rules, rr 3.19A, 3.19B; for such share trading to be forbidden during blackout periods surrounding the release of market-sensitive company information: ASX Corporate Governance Council, above n 14 at 23 (Recommendation 3.2 and related commentary).
[120] Michael Jensen and William Meckling, ‘Theory of the Firm: Managerial behaviour, agency costs and ownership structure’ (1976) 3 Journal of Financial Economics 305 at 354; Eugene F Fama and Michael C Jensen, ‘Separation of Ownership and Control’ (1983) 26 Journal of Law and Economics 301 at 311; Robert E Verrecchia, ‘Policy Implications from the Theory-Based Literature on Disclosure’ in Christian Leuz, Dieter Pfaff and Anthony Hopwood (eds), The Economics and Politics of Accounting (2004) 149 at 152–3.
[121] Frank H Easterbrook and Daniel R Fischel, ‘Mandatory Disclosure and the Protection of Investors’ (1984) 70 Virginia Law Review 669 at 680.
[122] A failure by a person to take all reasonable steps to comply with or to secure compliance with the remuneration report obligations in Pt 2M.3 can be either a civil penalty (Corporations Act 2001 (Cth) ss 344(1), 1317E(1)(d)) or an offence if the failure is dishonest (Corporations Act 2001 (Cth) s 344(2) imposes a fine of up to 2,000 penalty units or imprisonment for 5 years or both).
[123] ASX, Listing Rules, r 17.3.1.
[124] Julia Black, ‘Regulatory Conversations’ (2002) 29 Journal of Law and Society 163 at 170–1.
[125] Ron Gilson, ‘Catalysing Corporate Governance: the Evolution of the United States System in the 1980s and the 1990s’ (2006) 24 Company and Securities Law Journal 143 at 148–9; Michael Eisenberg, above n 83 at 1253, 1287; Financial System Inquiry Final Report (1997) at 127–31 (‘Wallis Committee’). Commonwealth of Australia, Parliamentary Debates, House of Representatives, 16 February 2004, 24828 (Mr Cox, Member for Kingston).
[126] Eisenberg, id at 1284–5 cites the rise of proxy advisors, collective institutional investor groups such as the CII, and shareholder proposal entrepreneurs as three such developments.
[127] Martin Gold, ‘Corporate Governance Reform in Australia: The intersection of investment fiduciaries and issuers’ in Paul Ali and Greg Gregoriou (eds), International Corporate Governance After Sarbanes-Oxley (2006) 137 at 137, 146–7.
[128] Filatotchev et al, above n 110 at 28.
[129] Geofrey P Stapledon, ‘Should Institutional Investors be Required to Exercise their Voting Rights?’ (1999) 17 Company and Securities Law Journal 332 at 332.
[130] Geofrey P Stapledon, Institutional Shareholders and Corporate Governance (1996) at 184–5.
[131] Filatotchev et al, above n 109 at 105.
[132] Gordon L Clark and Tess Hebb, ‘Why Should They Care? The role of institutional investors in the market for corporate global responsibility’ (2005) 37 Environment and Planning A 2015 at 2018.
[133] Filatotchev et al, above n 109 at 121; Stapledon, above n 130 at 153–4.
[134] Companies and Securities Advisory Committee, Shareholder Participation in the Modern Listed Company: Final report (2000); Better Shareholders, above n 73.
[135] International Corporate Governance Network, ICGN Statement of Principles on Institutional Shareholder Responsibilities (2007) at 7; ICGN, ‘Statement on the Global Financial Crisis’ (Media Release, 10 November 2008).
[136] Institutional Shareholders’ Committee, The Responsibilities of Institutional Shareholders and Agents — Statement of principles (2007) at 2.
[137] ESG Guidelines, above n 63 at 5–6 (Guidelines 2.1–2.2 for superannuation funds), 9 (Guideline 5.1 on fund managers), 19–20 (superannuation trustees), 23, 25, 27–8, 29.
[138] Blue Book, above n 64 at 4 (Guideline 8.1.1).
[139] United Nations Environment Program Finance Initiative (‘UNEPFI’), Principles for Responsible Investment (2006), principle 2 (‘UNPRI’).
[140] The 2008 report notes that there were 133 asset owners and 152 investment managers who had become signatories to the principles: UNEPFI, PRI Report on Progress 2008 (2008) at 4.
[141] Institutional investors and members of the investment industry were two of the key groups involved in the development of the principles: UNPRI, above n 139 at 2; James P Hawley and Andrew T Williams, ‘Shifting Ground: Emerging global corporate governance standards and the rise of fiduciary capitalism’ (2005) 37 Environment and Planning A 1995 at 1997–8, 2001, noting the interest of institutional investors in improving corporate governance standards is self-interest.
[142] UNPRI, id at 5 (Principle 6).
[143] One argument is that such universal owners do not benefit from change brought about by the market for corporate control, as gains are largely to the target shareholders, rather than to the bidder (over time): John Armour, Simon Deakin and Suzanne J Konzelmann, ‘Shareholder Primacy and the Trajectory of UK Corporate Governance’ (2003) 41 British Journal of Industrial Relations 531 at 546.
[144] Albert Hirschman, Exit, Voice and Loyalty (1970) at 31–43.
[145] John Parkinson, ‘The Role of “Exit” and “Voice” in Gorporate Governance’ in Saleem Sheikh and William Rees (eds), Corporate Governance and Corporate Control (1995) 75 at 108–9.
[146] Cheffins, above n 3 at 624–6 makes the point that some pension funds may have other political or ideological agendas motivating their actions. Institutional Analysis and Centre for Corporate Law and Securities Regulation, Corporate Governance: The role of superannuation trustees (2000) at 17 notes the different goals between those of fund managers and the beneficial interests of a superannuation scheme’s beneficiaries.
[147] Evidence to the Joint Committee on Corporations and Financial Services, Parliament of Australia, Canberra, 9 March 2004, CFS 18–20 (Mr Sandy Easterbrook, CGI).
[148] Evidence to the Joint Committee on Corporations and Financial Services, Parliament of Australia, Sydney, 16 March 2004, CFS 69 (Phil Spathis, ACSI); Melbourne, 18 March 2004, CFS 59 (Mr Douglas Gration, CSA).
[149] Cheffins, above n 3 at 633–7. Stapledon, above n 130 at 122–33, 135–8; Paul U Ali, Geof Stapledon and Martin Gold, Corporate Governance and Investment Fiduciaries (2003) at 15–16.
[150] Company Law Review Steering Group, Modern Company Law for a Competitive Economy: Developing the framework (2000) at [3.159]. For the relevant position in Australia, see Corporations Act 2001 (Cth) s 606 and ASIC Regulatory Guide 128, Collective Action by Institutional Investors (1998). Ali et al, id at 57–69, note that ASIC CO 98/649 is unable to operate as intended because it does not take into account the preference of institutional investors to adopt a ‘behind the scenes’ approach to engagement with investee companies on issues of particular concern. Cheffins, above n 3 at 638–41. Evidence to the Joint Committee on Corporations and Financial Services, Parliament of Australia, Canberra, 15 April 2008, CFS 60 (Phil Spathis, ACSI). Better Shareholders, above n 73 at 19–20.
[151] Company & Securities Advisory Committee, Shareholder Participation in the Modern Listed Public Company: Final Report (2000) at 63–6; CLERP 9 Report Part 1, above n 19 at 174.
[152] Seidl, above n 43.
[153] United Nations Environment Program, ‘Creating a Global Alliance of Investors’ (Press Release 2004/32, 15 July 2004).
[154] The UN Global Compact, launched in 2000, is a statement of ten principles relating to corporate responsibility that individual firms can adopt. United Nations Global Compact Office, Corporate Citizenship in the World Economy (2008) at 2.
[155] UNEPFI, Principles for Responsible Investment (2006) at 2; UNEPFI, Implementing Responsible Investment: A United Nations investor roundtable (2004) at 30.
[156] John Braithwaite and Peter Drahos, Global Business Regulation (2002) at 16.
[157] Ian Ayres and John Braithwaite, Responsive Regulation: Transcending the deregulation debate (1992) at 56.
[158] See above, n 150.
[159] Filatotchev et al, above n 109 at 82, 86–7, 121–2; Ali et al, above n 149 at 28.
[160] Organisation for Economic Co-operation and Development, OECD Principles of Corporate Governance, (2004) at 18.
[161] Filatotchev et al, above n 109 at 122.
[162] The noticeable absence is accounting standards made by accounting standards boards, which are also absent from remuneration practice and engagement on remuneration.
[163] CLERP 9 Report Part 1, above n 19 at 162 citing IFSA’s submission to the Committee, Submission No 44, 17 November 2003 at 5.
[164] Corporations Act 2001 (Cth) s 250R(2), (3).
[165] Shareholder Participation, above n 151 at i.
[166] Id at 67, citing IFSA, Guidance Note 2.00, Corporate Governance: A guide for investment managers and corporations (1999) Part 3, Guideline 11.
[167] A facilitative rule is the voting exclusion statement that must accompany the notice of meeting for such a resolution: ASX, Listing Rules, rr 10.15 and 10.15A.
[168] For example, the guidance about how to approach the advisory vote on the remuneration report: AICD, Shareholder Consideration of the Annual Remuneration Report, above n 69 at 8–10, 14–17.
[169] For example, the guidance about adopting a strategy for proxy voting: IFSA, Proxy Voting, above n 64; ASFA above n 65 at 11–12.
[170] Colin Scott, ‘Analysing Regulatory Space: Fragmented resources and institutional design” [2001] Public Law 329 at 331.
[171] Parliament of Australia, Parliamentary Debates, House of Representatives, 16 February 2004, 24843 (Peter Costello, Treasurer).
[172] James Kirkbride and Steve Letza, ‘Regulation, Governance and Regulatory Collibration: Achieving a “holistic” approach’ (2004) 12 Corporate Governance: An international review 85 at 89–90; Colin Scott, ‘Introduction’ in Colin Scott (ed) Regulation (2003) xi at xiv.
[173] Corporations Act 2001 (Cth) ss 200B, 200F and 200G.
[174]Corporations Act 2001 (Cth) s 300A(1)(c); Corporations Regulations 2001 (Cth) reg 2M.3.03(1) item 9.
[175] ASX, Listing Rules, r 3.16.1. The departure of other key executives might be caught by the continuous disclosure obligation in ASX LR 3.1 if news of the departure would be expected to have a material effect on the price or value of the company’s securities.
[176] ASX Corporate Governance Council, above n 14 at 36 (Box 8.1, Point 4).
[177] ASX, Listing Rules, r 4.10.3.
[178] CG Guidelines, above n 63 at 13 (Guideline 14.2(i)).
[179] Id at 12–13 (Guideline 14.2(a)–(h)).
[180] Australian Accounting Standards Board, AASB 124 Related Party Disclosures (2005), AASB 2 Share-Based Payment (2007), AASB 101 Presentation of Financial Statements (2007), AASB 119 Employee Benefits (2006).
[181] Bebchuk and Fried, above n 94 at 88–9.
[182] Corporations Act 2001 (Cth) s 200J(1).
[183] Bebchuk and Fried, above n 94 at 92–3, 95–6.
[184] An assumption that appears to have a factual foundation: Kym Sheehan and Colin Fenwick, ‘Seven: The Corporations Act 2001 (Cth), corporate governance and termination payments to senior employees’ [2008] MelbULawRw 7; (2008) 32 Melbourne University Law Review 199 at 217, 230–1; Geof Stapledon, ‘Termination Benefits for Executives of Australian Companies’ (2005) 27 Sydney Law Review 683 at 710.
[185] Eugene F Fama, ‘Efficient Capital Markets: A review of theory and empirical work’ (1970) Journal of Finance 383; Company and Securities Advisory Committee, Report on Continuous Disclosure (1996) at 4; CLERP 9 EM, above n 17 at 47 (continuous disclosure is fundamental to investor confidence in the market); CLERP 9 Report Part 1, above n 19 at 99.
[186] This may be the board attempting ‘damage control’ whereby the former executive signs a deed of settlement and release, releasing the company from any claims he or she might have against it for the circumstances of the termination: David Yermack, ‘Golden Handshakes: Separation pay for retired and dismissed CEOs’ (2006) 41 Journal of Accounting and Economics 237 at 241–2, but compare at 253.
[187] Michael Jensen and Kevin Murphy, ‘Remuneration: Where we’ve been, how we got to here, what are the problems and how to fix them’ (Working Paper No 44/2004, 2004) 22; Bengt Holmström, ‘Moral Hazard and Observability’ (1979) 10 Bell Journal of Economics 74 at 75; Fama and Jensen, above n 120 at 315.
[188] Louis D Brandeis, Other People’s Money and How the Bankers Use It (1995) at 89.
[189]The argument made by Stapledon, above n 184 at 713 in relation to the contractual terms for newly appointed CEOs applies equally to departing CEOs, if the departure occurs within the first quarter of the new financial year.
[190] Michael Vaughan, ‘Michelmore Must go to the Buy Side’ Australian Financial Review (Melbourne) 22 August 2008 at 56, noting the $8.4 million payout to Owen Hegarty made in spite of shareholder votes against a $10.7 million payment in July 2008; Michael Vaughan, ‘Oxiana Proxies Reject Hegarty’s Handshake’, Australian Financial Review (Melbourne), 19 July 2008 at 14.; John Durie, ‘Sweetheart Pay Deal Gets the Kiss-Off’ The Australian (Sydney) 19 July 2008 at 37.
[191] Draft Explanatory Memorandum, Corporations Amendment (Improving Accountability on Termination Benefits) Bill 2009 (Cth) at 12.
[192] Although there is the potential for this to occur under the provisions mandating disclosure of the beneficial owner of shares (Corporations Act 2001 (Cth) s 672A), as the information can require the name and address of each person who has given the registered owner instructions about the exercise of voting rights attached to shares: s 672B(c)(ii). This has been criticised: Better Shareholders, above n 73 at 57.
[193] ESG Guidelines, above n 63 at 6, 10.
[194] Gold, above n 127 at 149. There is some debate as to whether pension funds and superannuation funds can select investments on the basis of a positive ESG rating rather than on their positive impact on the overall portfolio: Benjamin J Richardson, Socially Responsible Investment Law: Regulating the unseen polluters (2008) at 222–3, 225–6.
[195] This may be in the form of an example of how best to disclose remuneration practices in the remuneration report, rather than adding to the list of information items to be disclosed.
[196] Kevin Rudd, ‘Global Financial Crisis’ (Address to the National Press Club, Canberra, 15 October 2008) speaks of unrestrained executive greed.
[197] Diane Swanson and Marc Orlitzky, ‘Executive Preference for Compensation Structure and Normative Myopia’ in Robert Kolb (ed), The Ethics of Executive Compensation (2006) 13 at 14.
[198] Commonwealth of Australia, Parliamentary Debates, Senate, 4 December 2008, 8197 (Senator Bob Brown, Senator Nick Sherry).