The Corporations Act 2001 of Australia - Essay Example

?Corporate Law Table of Contents Introduction 3 Legal Issues Prevalent to Laws of Directors’ Remuneration 4 The Corporations Act 2001 (Cth) 5 Effectiveness of New Regulations of Laws in Meeting Stakeholders’ Interest 7 Conclusion 10 Bibliography 13 Introduction Corporations Act 2001, informally known as Corps Act establishes the law for the purpose of governing the business activities effectively in Australia at both interstate and federal levels. The focus of this law primarily lies on the companies, but still it has coverage over various other business entities like the partnership and other schemes involving investment. This law is considered as the principle legislative mechanism that regulates all the companies running in Australia. The aspects that Corporation Law takes care of in relation to the activities of the companies are its formation and operations including fundraising and activities of the officer’s involved1. The Corporations Act already defines remuneration in Section 9 noting it to be “any benefit that is given to an officer or employee of a corporation is remuneration if and only if the benefit, were it received by a director of the corporation, would be remuneration of the director for the purposes of an accounting standard that deals with disclosure in companies’ financial reports of information about directors’ remuneration”1. This discussion intends to recognize the laws relating to director’s remuneration particularly in Australia. Moreover, the effectiveness of these laws safeguarding shareholders’ interests will also be determined in the discussion. Legal Issues Prevalent to Laws of Directors’ Remuneration There had been a public enquiry that was conducted by the Productivity Commission of Australia for the purpose of regulating the framework of the directors’ remuneration for the companies falling under the purview of Corporations Act. The commission was specifically requested to consider a few points namely; The Australian trend followed with respect to the remuneration of directors along with executives The strength of the regulatory framework in practice over the transparency, responsibility as well as oversight of the remuneration practices of the executives and directors The role of various bodies like the retail and institutional shareholders in various aspects of the remuneration practices like setting, development, reporting and consideration The possibility of mechanisms that would be helpful to enhance the alignment of the boards’ and executives’ interests with the broader community The strength of effects of the responses received internationally about the various issues of remuneration that tend to arise out of the financial crisis globally2. There were certain changes brought about in the Corporations Act with regards to the remuneration of executives and directors especially in Australia. These changes were passed through the Corporation Amendment Bill 2011. The changes include the following points: The ‘No Vacancy’ Rule: This change was set with intent to be applicable for public companies following a board limit less than the higher limit specified in their organizational constitution4. Proxy Voting: This is set for all the companies. According to this, the proxy holders shall have to direct every alternative as directed for all the resolutions4. The ‘Two Strike Rule’: This sets for the listed companies which signifies that any vote for the directors in order to compete for re–election shall be needed in case a board proceeds with proposal for remuneration even after obtaining 25 percent or more vote at two successive general meetings conducted annually4. Remuneration Consultants: This is for the companies that tend to disclose every detail in the report in connection with the remuneration provided by the company to the directors4. Voting by Key Management Personnel (KMP): This affirms that KMP as well as their close associates would be prohibited from partaking in the non-binding votes particularly in the case of listed companies. The main intention of this change is to support the shareholders to shorten the process concerning the practice of overpayment of remuneration4. In order to determine the issues that are prevalent to director’s remuneration, it has been viewed that various significant aspects such as transparency, disclosure as well as reliability of remuneration reports contributed in raising the issues linked with director’s remuneration in Australia. Moreover, the interrelation of director’s remuneration with corporate performance can also be regarded as one of the major issues that is related to director’s remuneration in Australia3. The Corporations Act 2001 (Cth) The remuneration that needs to be provided to the executive members and the directors of a company has been a point of concern for the stakeholders in the recent past. The reason rendering to such point of concerns are the various unprecedented imbalances faced by the global economy in recent times. However, in Australia, the Corporations Act 2001 (Cth) deals with various issues associated with the different business activities of the companies in the country. This act has specially devised regulations with respect to the remuneration of the executives and directors3. By taking into concern the subject matter of director’s remuneration in Australia, it can be affirmed that the Corporations Act 2001 (Cth) has formed effectual provisions that are directly linked with the roles, functions as well as the duties of the different board members of the companies. Moreover, the Act also established provisions associated with remuneration voting, termination payments and disclosure as well as transparency of remuneration reports. Notably, this particular Act enabled the different board members of diverse companies to appoint managing directors with the intention of determining the structure of the packages of director’s remuneration4. The Productivity Commission in Australia that was formed to review the practices of remuneration followed by the companies focuses upon the alignment of the interest of stakeholders by a greater extent. By concerning the interests of the shareholders, the Commission introduced various mechanisms that include determining the payments made on the basis of incentive schemes as well as equity and the approval process along with the source of payments made on the basis of equity. Moreover, the mechanisms also comprise assessing the tax treatment of on the remuneration based on equity, role played by ‘accelerated equity vesting arrangements’ and lastly the hedging that has been used as a technique for providing remunerations in the form of incentives5. The survey that performed by the Productivity Commission in Australia intended to bring about certain changes in the Corporations Act to deal with the situation of conflict linked with the remuneration of the directors along with the executives of a company. It was realized through public polling that there existed a general notion that the executive and the directors of different companies are overpaid in comparison to the general employees. In accordance with the situation, the commission has been entrusted with the task to figure out the real scenario behind the payments of the executives in Australia and the ways to curb the lacunas6. Effectiveness of New Regulations of Laws in Meeting Stakeholders’ Interest There has been a common belief among the common people about remunerating the executives and directors concerning that they are paid with higher scale of payments as compared to others. The main reason behind the debate over the remuneration payment structure is the rising number of corporate scandals. The stakeholders of the company intend to ensure that the remuneration of the executives are maintained effectively so that the company has a positive growth over the time and they can attain good return on investments. In this similar context, it has been apparently observed that the aspect of remuneration disclosure prohibits the actions that perform by the corporate directors from benefitting themselves from availing excessive remuneration. Thus, it can be stated that this particular practice i.e. remuneration disclosure broadly supports the shareholders to safeguard their interests from the unethical practices of the directors. In recent times, there have been many amendments in lieu of the remuneration arrangements for the directors keeping in mind the alignment of the stakeholders’ interest with the payments made6. The several recommendations that passed by Productivity Commission has been directed towards striking a balance between the payments made in form of remuneration of the directors and the stakeholders of the company. The different corporation legislations in Australia represents that the business of a company should run effectively by the board of directors who are in turn responsible towards protecting stakeholders’ interests. In this regard, the corporation legislations in Australia also recognizes that every day–to–day decisions cannot be practically passed through the stakeholders, as it would possibly jeopardize the working of a company by a certain level. Instead, the legislations consider that the decisions taken by the directors need to be reviewed by some other mechanism that would have a faster and effective impact. Furthermore, the legislations also identifies that the stakeholders being co–owners of the company must be engaged in the corporate governance of the company. The legislations consider that the stakeholders as co–owners must be given an opportunity to be engaged with the governance and the long-term strategies of the company so that their interests are well protected at large. The corporation legislation also realizes that the directors of the company cater to play the role of agents in the eyes of the stakeholders. Amongst several decisions that the directors are liable to take; remuneration is one of the most important one7. The recommendations that made by Productivity Commission in Australia have been warmly welcomed by the Australian Shareholders’ Association (ASA) as they considered that the recommendations provided quantitative evidence of the whole issue. In this similar context, the Productivity Commission has greatly emphasized on the maintenance of clarity and transparency concerning the governance structure as well as the preparation of remuneration reports of a company. The Commission has also laid greater emphasis pertaining towards the inclusion of substantial “at risk” element in the CEO’s remuneration packages. This is to keep the top management highly focused on the substantial return on investments to the shareholders. The payments of incentives aligning with the set targets that have been provided to the shareholders is another important point considered by the Commission. Also, the alignment of the structure of incentive payments with long–term achievements of the shareholders is also been paid utmost concern by the Commission.8. Conclusion The Corporations Act 2001 of Australia looks after the various issues that happen to make hindrance in the path of smooth running of any company. The recent issue that has been emerged strongly in recent days among the stakeholders is regarding the remuneration structure of the board of directors as well as the executive members. The Productivity Commission in Australia that had been set up to analyze the whole situation and give recommendations with certain line of actions and amendments in the Act. With regard to the issue concerning director’s remuneration in Australia, it can be affirmed that the disclosure of director’s remuneration, transparency as well as simplicity in the remuneration information are the prime considerations of remuneration laws especially in Australia. In its recommendation, the commission seems to point out a long–term achievement objective linked remuneration structure of the directors and the executive members in order to bring about better accountability of the company towards the stakeholders. The Corporations Act 2001 plays an imperative part in determining director’s remuneration by imposing effective regulations directing companies belonging to Australia for compulsorily preparing annual remuneration as well as financial statements. Thus, it can be concluded that the laws concentrating director’s remuneration in Australia must ensure that the remuneration reports are duly prepared according to the respective accounting standards by a greater extent. Moreover, the laws should also ensure that the remuneration reports are simple that can be easily understood by the investors, shareholders and other interested parties at large. References Australian Government Productivity Commission, Executive Remuneration (2012) Public Inquiry < http://www.pc.gov.au/projects/inquiry/executive-remuneration> Australian Government Productivity Commission, Executive Remuneration in Australia (2009) Productivity Commission Inquiry Report < http://www.pc.gov.au/__data/assets/pdf_file/0008/93590/executive-remuneration-report.pdf > Australian Government, Corporations Act 2001 (2012) Introductory < http://www.comlaw.gov.au/Details/C2012C00696 > Chartered Secretaries Australia, Regulating director and executive remuneration in Australia (2009) Trends in Remuneration < http://www.csaust.com/media/37040/Final_submission_PC_issues_paper.pdf > Corporation and Markets Advisory Committee, Executive Remuneration (2011) Report < http://www.camac.gov.au/camac/camac.nsf/byHeadline/PDFFinal+Reports+2011/$file/Executive_remuneration_report_April11.pdf > Dent, Helen, Productivity Commission draft report on Executive Remuneration - ASA presentation (2009) ASA presentation to Committee for Economic Development of Australia (CEDA) Event Melbourne < http://australianshareholders.com.au/asa_site/index.php?option=com_content&view=article&id=474:productivity-commission-draft-report-on-executive-remuneration-asa-presentation&catid=52:presentations&Itemid=81 > Kovacevic, Savo, Executive remuneration developments in Australia: responses and reactions (2012) Introduction < http://www.freepatentsonline.com/article/Economic-Labour-Relations-Review/295420361.html > Langes, Director and Executive Remuneration Bill passed (2011) News < http://www.langes.com.au/australian_regulatory_compliance/2011/06/21/director-and-executive-remuneration-bill-passed/ > Oxford University Press, Directors’ Performance and Remuneration (2009) The directors’ remuneration debate < http://www.oup.com/uk/orc/bin/9780199566457/9780199566457_ch09.pdf > Bibliography Australian Shareholders’ Association, ASA’s Comments on the Draft Recommendations (No Date) Draft Recommendation 1 < http://www.pc.gov.au/__data/assets/pdf_file/0006/92175/subdd121.pdf > Australasian Legal Information Institute, Commonwealth Consolidated (No Date) Acts Corporations Act 2001 - Sect 202B < http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s202b.html > BIS: Department for Business Innovation & Skills, Executive Remuneration (2011) Discussion Paper < https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/31660/11-1287-executive-remuneration-discussion-paper.pdf > Corfield, Andrea, The Stakeholder Theory and its Future in Australian Corporate Governance: A Preliminary Analysis (1998) Introduction < http://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1147&context=blr > King & Wood Mallesons, Directions (2012) Current issues and challenges facing Australian directors and boards < http://www.mallesons.com/Documents/Directions_2012.pdf > Lawyers, Redchip, Directors Duties Under The Corporations Act 2001 (No Date) Business Judgment Rule < http://www.acis.net.au/bulletins/Directors_Duties.pdf > Read More