Commerical Law and Corporations Act 2001 - Research Paper Example

Running head: CORPORATE LAW Corporate Law Name Institution Date Corporate Law Introduction Tina, a shareholder of Cyclone Financial investment and John, a lobbyist with the Australian Shareholders Association are unhappy with the board’s implementation of a report that the shareholders have rejected. Although the shareholders voted against the implementation of the remuneration report, the board insisted that it would implant it. Some of the shareholders had found the proposed remuneration unnecessarily excessive while others were uncomfortable with the undisclosed mysterious benchmarks. They claimed that the performance of the board should not be assessed solely in terms of financial returns to shareholders but should also consider the efforts that the board initiates towards implementing the firm’s policies on Corporate Social Responsibility. Other issues of concern are that the remuneration packages for the new Chief Executive Officer and Chief Finance office are probably higher than those of their predecessors1. The role of the Board In determining the steps to take, the role of the board must be considered. The Board is ultimately responsible for determining the remuneration packages for senior executives while monitoring their performance. They are required to establish and oversee remuneration policies of the top executives and analyze performance expectations of the executives. The Cyclone Financial Board is failing to meet all the legal requirements by failing to disclose the benchmarks that have been used to determine the remuneration2. Executive Remuneration Committee The executive remuneration committee must be failing in its duty to offer an oversight of remuneration of senior executives and other key personnel like the Chief Financial officer. The committee should make recommendations to the Board on remuneration policy structures and specific remuneration packages foe each of the senior executives as well as other key personnel. The committee should develop and assess remuneration policies in a way that rewards perfection and creates incentives for appropriate performance3. It should establish the remuneration packages for the company’s senior executives. It should ensure that legal requirements are adhered to. In this case, the committee should have ensured that the shareholders are informed of the alleged benchmarks. It should establish performance targets and expectations of the senior executives of the firm. It should be informed of the market rate of pay for the diverse executive positions in order to make a reasonable comparison in establishing remuneration packages. The approval of any relevant remuneration policies and packages should be based on the Committee’s recommendations4. Determining the Level of Remuneration Tina and John should also consider whether the four main factors in determining remuneration were taken into account when coming up with the new pay package. The four factors are: the work value of the position, the market rate of pay package for similar positions, and the performance of the individual occupying he position and the capacity and ability of the company to raise such an amount, the business conditions and the dependence or value the individual have to the firm5. A step wise procedure is involved in determining the true work value of a position. All the elements and components of the position must first be identified. This entails creating a job description that outlines the basic activities the position attracts and the responsibilities involved. The degree of complexity and difficulty of the tasks and responsibilities of the position should also be taken into account. The skills, experience and expertise necessary for the candidate of that particular position should be considered. The pay package should be comparable to the market rate of similar positions in the wide labor market. The performance level of the executives should be considered. Strong performance should be awarded a commensurate pay package especially when the objectives of the company are realized. Finally, the business conditions at that particular time as well as the ability of the company to raise the money to sustain the pay packages should be considered6. Disclosers Companies must publicly report the remuneration details they have with their executives. Detailed disclosers concerning executive remunerations were first required after the introduction of CLRA98 in Australia. After the following years, regulatory bodies made a number of alterations and clarifications to the discloser requirements stipulated in the Corporations act 2001. More modifications were done to the details included in the MR03-202 release by ASIC in 2003 and the CLERP 9 in 2004. From an accounting point of view, the initial events were the passing of the Exposure Draft 106 in May 2002 and the AASB1046 at the beginning of 2004. the Investment and Financial Services Association (IFSA), an Australian shareholder group increased pressure for a raise in discloser details of directors and executives remunerations in consistent with the more detailed requirements of the United States and the U.K7. Reforms in the remuneration disclosure provisions of the Corporations Act 2001 (Cth) should ensure that discussions concerning the entire policy of determining the nature and amount of pay packages for the senior executives are well outlined and understood by all parties involved including the shareholders. Details of each element and component of the pay package as well as factors considered in determining the benchmarks should be well outlined. This would avert situations such as that faced by Cyclone Financial Company in which the Board implemented remuneration packages against the wishes of shareholders. The reforms should provide for the discloser of the factors considered when formulating the pay packages8. The Board would thus have been compelled to disclose the benchmarks that the Board applied in formulating the pay package for the executives. The companies should be compelled to disclose information outlining the manner in which option values have been determined. For instance the model used components of the model, historical and expected volatility and the interest rates considered should be disclosed to the shareholders as well as other relevant parties. The details of remuneration packages should be disclosed to the shareholders whether they add value to the company or otherwise. Though the calculations of the remunerations involve the accounting department, the details should not be disclosed to the accounting personnel only. They should not be left to the accounting standards as well9. Reforms Publicly listed firm’s payments to senior executives and directors are subject to several regulations. Regulations include mandatory rules requiring firms to disclose all forms of remuneration awarded to their main management personnel. Existing rules allow and require that payments to senior management staff should be approved by the shareholders, but do not allow them to decide the amount to be awarded. Appropriate reforms should allow the shareholders to determine and decide the amount of pay package that should be awarded to top management of the firm. This way the Board of Cyclone Financial Company would have been compelled to disclose the benchmarks with which the Board applied to formulate the pay package10. The regulations existing at the moment include advisory guidelines or principles that firms may opt to adopt or not. The company is not required to give explanations as why it did not consider the regulations in the determination of pay packages. The reforms to the Corporations Act 2001 (Cth), should compel the company and the board to consider all the regulations failure to which it should offer explanations for failing to comply. Accounting standards mandating how items are to be valued with the intention of compiling the financial statements of the firm. The Corporations Act 2001 (Cth) should not provide any exceptions in the regulations11. Transparency of remuneration reporting Complex reporting procedures minimize the impact of the information being disclosed and make it hard for shareholder to extract relevant information from remuneration reports. The Corporations Act 2001 (Cth) should make the reporting of remuneration details much flexible for the shareholders. For instance, several disclosure requirements concerning equity grants are not only time consuming and complex for retail shareholders to understand but also costly for business organizations to comply with. Appropriate reforms should make the discloser requirements much flexible and easy for the firms to comply with. Many Boards claim the cost of disclosing payments details to shareholders does not add value to the company. The discloser requirements in the Corporations Act 2001 (Cth) should thus make the requirements much easier and less costly. This will enable the Boards to discloser finer details such as the benchmarks or other factors considered in formulating the pay packages. Information concerning remuneration arrangements should be accessible by institutional investors and retail investors12. At this point the disclosers in the pay package reports should be formulated on the basis of the real value derived by the top management from the various elements of their remuneration. For instances, one method of effecting a simpler discloser patterns would be to disclose the accounting figures of equity grants in the reports to the financial statements. This would serve the complicated investors and other users of the organization’s financial information13. Simplifying remuneration disclosers in this manner would help shareholders to evaluate whether the organization’s remuneration structures are suitably aligned to performance and the level to which firms have suitable mixes of short, medium and long term inducement. Finally, improved discloser of short-term performance procedures should be resisted because the discloser of this information may damage the firm’s ability to maintain business information in confidence. Business organizations may still willingly disclose such procedures in retrospect, if necessary, that is, in conditions where it would not be detrimental to the firm’s interests to act in such a manner. Reducing compliance costs The expenses of the firm associated with coming up with a remuneration report is significant. These expenses arise from the considerable time and effort required from the Board or the management to prepare the remuneration report, the commitment of external consultations to aid in such specialized task, as well as the expenses of getting the necessary legal and audit conformity checks. The reforms in Corporations Act 2001 (Cth) should simply the discloser requirements in order to minimize the compliance expenses and this will create equivalent advantage of motivating organizations to handle the remuneration report as a useful communication tool just as was intended by the legislature instead of compliance exercise14. Shareholder influence The Corporations Act 2001 (Cth) should allow the shareholders to have a significant influence on the pay packages allowed to the executives. The difference between corporate power, the Board and the shareholders, that is, the division that exists between the directors of the company also acting as the board of the organization and the shareholders is totally founded in the Corporations Act, the legislation Rules and a firm’s own constitution. This way the firm’s shareholders will have a significant role or some influence on the board of director’s decisions. The Corporations Act needs broad discloser of executive and director remuneration to be incorporated in the remuneration report15. Non-binding shareholder vote on the Remuneration Report At the moment the vote of the shareholder on the remuneration report is not binding and is only advisory. Reforms in the Corporations Act 2001 (Cth) should be such that the shareholder’s vote is rendered binding on the remuneration report. This is important in order to make the shareholders views practical and significant in determining remuneration packages. For instance, if the no vote for instance was binding, it would be hard for the firm to alter its practices against the shareholder wishes. The shareholders view which is through their vote will assist in making decisions in sensitive matters of the remuneration. It will assist in checking out for areas that require changes, when to implement the changes and how to implement them. If the shareholders vote was binding, the board of Cyclone Financial Company would not have implemented the alleged pay package against their (Shareholders) wishes16. The non-binding vote is though useful to the company in that it provides a means in which the firm’s board as well as the top management gets the shareholder opinion concerning the running of the firm. This should however not be a means of misusing the non-binding vote or taking the non-binding vote on the remuneration report as insignificant or useless. The Corporations Act 2001 (Cth) can strengthen the non-binding vote by incorporating additional reporting requirements in subsequent remuneration reports. For example, a remuneration report that gets a no vote in a certain year can include a statement like the reasons behind the ‘no vote’ or whether the firm has addressed the shareholders concerns. This will ensure that the remuneration report will not get a ‘no vote once again. Explanations should be made should the company fail to address the share holders concerns17. Boards interest versus shareholders interests Appropriate reforms in the Corporations Act 2001 (Cth) should provide mechanisms to enhance the alignment of the interest of the board and executives with those of the shareholders and the general community. The responsibilities of the directors and officers to the firm and consequently to the shareholders are significant to company law. The directors and top executives of a firm have several stringent responsibilities to the firm as per the Corporations Act 2001 (Cth), at common law and in equity. The responsibilities themselves which include the duty to serve the organizations to its best interest and for a proper course prevent interferences in remuneration practices. Requiring the board to take into account the interests of the society at large, in addition to the organization’s and shareholders’ interests when executing their mandates and discretions considerably undermines and weakens their essential legal responsibilities. In aligning the interests, corporate governance doctrines recommend that a reasonable share of top management pay be at risk based on the organization’s performance in order to align their interest with the interests of the shareholders. The ASX Principles have guidelines of this form that take into account that performance based remuneration associated with clearly defined performance target can be an efficient tool in enhancing the interests of business organizations and shareholders18. The firms are also directed by corporate governance stakeholders who uphold performance measures that enhance a long term view. Businesses are losing faith in traditional financial measure and are finding different combinations of incentives to establish firm alignments with the firm’s performance. These include adoption of more individualized performance procedures which project on the long term corporate policy objectives. The government can offer further guidance to business organizations on the suitable procedures required to match remunerations with shareholders interest. This can be done through proper reforms in the Corporations Act 2001 (Cth). Reforms will allow the adoption of a non-binding code which is equivalent to the ASX Principles. Such a non-binding code will help firms to select performance metrics and make decisions on the remuneration policies which are most suitable for the organization19. Conclusion In conclusion, it is important to note that there are several reforms that can be done on the Corporations Act 2001 (Cth) to ensure that the predicament Tina and John are facing concerning the Cyclone Financial Company. The reforms will however, assist the shareholders of the firm after the board of the company adheres to the existing stipulations of the Corporations Act 2001 (Cth). The company should have in place a remuneration committee that guides the board on the appropriate pay packages to set for the top executives of the firm. The most significant reform in the Corporations Act 2001 (Cth) that will sufficiently handle the case above is to make the shareholders vote abiding. This way, the shareholders wishes will no be overlooked20. References Abernethy, M. (2005). Boards Gear Up for Open Season Under New Rules. The Australian Financial Review June 16: 12 Aggarwal, R. & Samwick, A. (2001). The Other Side of the Trade-off: The Impact of Risk on Executive Compensation. Journal of Political Economy 107: 65-105 Australian Accounting Standards Board. (2004). AASB1046, Director and Executive Disclosures by Disclosing Entities. Bebchuk, L. & Grinstein, Y. (2005). "The Growth of Executive Pay". Harvard University: John M. Olin Center for Law, Economics and Business Buffini, F. (2005). Government Streamlines Pay Disclosure. 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