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New Treasury discussion paper on clawback of executive remuneration

by Hilary Kincaid 7. January 2011 18:18

Treasury has released a discussion paper — The Clawback of Director and Executive Remuneration in the Event of a Material Misstatement, which is available as a pdf on the Treasury site.

The release of the discussion paper was accompanied by the release of an exposure draft bill, the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Bill 2011. The Bill will implement 16 of the 17 recommendations made by the Productivity Commission in its January 2010 report Executive Remuneration in Australia.

The discussion paper relates to a proposal, not identified in the Productivity Commission report, to clawback executive remuneration where a company has made a material financial misstatement.

The clawback would impose an obligation on a director or executive to repay remuneration that flows from materially misstated financial information: Discussion Paper [2.5]. This could involve recovery of funds, or the cancellation of a vested but unpaid entitlement to reward: [2.6]. ASIC would also have the power to commence action for recovery: [2.7].

The proposed reform purports to:

  • Simplify the process for recovery of overpaid remuneration ([2.9]);
  • Provide an incentive for directors and officers to meet their CA obligations to provide a ‘true and fair view’ of the company’s financial position ([2.10]);
  • Reflect the prevalence of clawback provisions in other jurisdictions ([2.11]);
  • Limit the role of remuneration in promoting risky behaviour ([2.12]- [2.14]); and
  • Have a “moral force” behind it ([2.15]). 

The moral force argument is that it is “unfair” for executives to retain remuneration based on profits that have not been “objectively verified”. Some clarification regarding objective verification is provided by the discussion of “material misstatement” (and alternative triggers for clawback) at [3.20]-[3.24].

Implementation questions raised in the paper (Pt 3):

  • Is a clawback reform needed to improve the regulation of executive remuneration?  
  • Do the benefits outweigh the compliance costs?
  • Should the reform apply to listed companies only; or to all entities, large proprietary companies and registered schemes with s 292 reporting obligations?
  • Should the reform be implemented by amendments to the Corporations Act, amendments to the ASX Listing Rules, amendments to the Corporate Governance Principles, or a combination?  
  • Who would the obligation apply to?  
  • What would trigger the obligation?   
  • What would be the quantum of bonuses clawed back?  
  • By when would the repayment need to be made?

Interested parties are invited to make written submissions by 30 March 2011. Submissions may be made by email to clawback@treasury.gov.au.  More information is available on the official Treasury page.



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ASIC | Disclosure | Law reform


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