30 March 2011
Clawback of Executive Remuneration
Corporations and Financial Services Division
PARKES ACT 2600
Clawback of Executive Remuneration Discussion Paper
The Group of 100 (G100) is an organization of chief financial officers from Australia's largest business enterprises with the purpose of advancing Australia's financial competitiveness.
The G100 is pleased to provide comments on the Discussion Paper 'The Clawback of Executive Remuneration where financial statements are materially misstated'.
The G100 disagrees with the underlying rationale on which the proposals are based. We strongly believe that determining the remuneration policies and practices of the company, including the circumstances in which subsequent clawback and adjustments occur are clearly within the mandate of the Board and should remain so. In addition, we consider that existing mechanisms in the Corporations Act and elsewhere deal with instances of fraud and misleading statements and the proposed requirements are not necessary.
Our responses below to the questions raised in the Discussion Paper should be interpreted in the context of the views expressed above.
Do you believe that a reform to clawback director and executive remuneration when financial statements are materially misstated is needed to further enhance Australia's executive remuneration framework? Would the benefits of such a reform outweigh the compliance costs?
The G100 agrees with the principle that the quantum of director and executive remuneration should be based on reliable and accurate information. Where this is not the case, processes instituted by the Board should be applied to correct the situation. However, in view of the rarity of restatements of financial statements we do not expect that, if proceeded with, the provisions would be applied very often.
How would the provision be implemented?
The G100 considers that a clawback requirement, if proceeded with, is best implemented through the ASX Corporate Governance Council. We believe that this mechanism provides the flexibility for listed companies (who are the principal focus of the proposals) to design and implement their own provisions to recover erroneously awarded remuneration.
Who would the provision apply to?
The G100 considers that performance-based remuneration of all directors and key management personnel and former directors and executives who served during the relevant period should be subject to the clawback.
How would the clawback event be triggered?
The G100 considers that a material misstatement would normally occur where the company is required to make a statement to the market that the financial statements will be reissued because of the error. We believe that whether a re-issue of the financial statements triggers a clawback is a matter for the directors to determine in the light of the facts and circumstances. Whether an item is material or not is a matter of judgment and the application of quantitative tests to determine materiality can only be indicative and cannot replace the judgment of the directors.
In addition, there may be circumstances where clawback is appropriate even though the error will not result in a restatement, for example, where short term performance remuneration is based on a non-GAAP measure such as underlying profits or market share. Accordingly, the reasons for the restatement should be taken into account in determining the way in which the company addresses any clawback. The G100 believes that this is a matter which is clearly within the mandate of the directors and is best dealt with by directors in the light of the facts and circumstances relating to the event.
How would the clawback amount be determined?
The G100 believes that the amount of the clawback of the performance-based remuneration (or additional compensation paid by the company) should be determined as the difference between the amount already paid and the amount reasonably payable or allocable based on the relevant metrics resulting from the restated financial statements. Where remuneration is based on share price movements the amount of the adjustment should be based on the processes implemented by the company to comply with the ASX Corporate Governance Council's recommendation.
An underpayment in the executive's bonus caused by a material misstatement
The G100 believes, that on the grounds of equity, the clawback requirements should apply in respect of overpayments and underpayments.
When would be clawback amount need to be repaid?
The timing of the repayment should be at the discretion of the company taking account of the facts and circumstances in each case, for example, an adjusting event occurring after the balance date. The amount ultimately repayable should also take account of the taxation consequences of the receipt and repayment of the executive incentives. Alternatively, the taxation legislation should be amended to provide for certainty for affected executives, that any refunded remuneration is either not assessable in the year of original derivation or deductible in the year of refund.
A deliberate intention to mislead or act of misconduct
The G100 believes that adjustments to performance-based remuneration should occur whether or not there was an intention to mislead or an act of misconduct. Deliberate misconduct would be appropriately dealt with under other provisions of the Corporations Act.
Re-issue of financial statements due to subsequent events
The G100 believes that the clawback provisions should apply whenever a material misstatement has occurred. The reasons for the misstatement would be taken into account when the company addresses any clawback.
How far should the clawback provision apply?
The G100 supports Option 1 that the period to which the clawback applies commences twelve months before the material misstatement event.
Who is responsible for applying the clawback of bonuses?
Consistent with its view that the clawback requirements should be included as an ASX Corporate Governance Council recommendation the company should have the responsibility of recovering any excess amounts from, or paying additional amounts to, directors and key management personnel.
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