shutting the stable door etc:from business spectator:Govt...

shutting the stable door etc:

from business spectator:

Govt targets remuneration clawback lawsPublished 11:50 AM, 20 Dec 2010


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By a staff reporter

The federal government is calling for public comment on plans to clawback remuneration where a company's financial statements are materially misstated, in a bid to improve disclosure and slice the number of shareholder actions.

Under the proposals, directors and executives will be forced to repay any remuneration based on financial information that turns out to be materially misstated - as opposed to the current arrangement, where shareholders can only recover overpaid remuneration through legal action. This may be a recoupment of remuneration already paid, or the cancellation of outstanding but unvested and unpaid future awards, the government said.

Noting information from the Australian Securities and Investments Commission (ASIC) that material misstatements are not an "uncommon experience", the government intends to give the corporate regulator the power to start legal action to recover funds.

In a discussion paper, the government notes that many aspects of measuring performance-based remuneration are reliant on information contained in company financial statements.

"If it is subsequently revealed that the financial statements were materially misstated, an executive should not be able to retain any excess remuneration contingent on that incorrect information," it says.

"Material misstatements in financial statements can occur either through deliberate misconduct or unintentional error, and may be large enough to influence the decision-making of investors and other stakeholders.

"For example, the company's share price may be artificially inflated due to misstated financial information, resulting in larger bonuses for directors or executives."

The discussion paper follows the government's response to a Productivity Commission review of Australia's director and executive remuneration framework, which included lowering the threshold for shareholder approval of termination benefits from seven years' total remuneration to one year's base salary, and giving shareholder greater power to reject excessive termination payments, known as golden handshake payments.

Beyond the moral issue of paying back fictitious accounting profits, the paper notes that a clawback policy could remove the incentive for executives to consider deliberately misstating earnings in order to inflate their bonus figures.

"An introduction of a well-crafted clawback policy could ensure that executives engaging in misconduct would not be able to receive unearned company funds," it states.


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