Given the current intense scrutiny and focus on consultant independence and implications for the management of conflicts of interest, it is disappointing that for the 2022 financial year only seven companies in the S&P/ASX100 disclosed engagement of a remuneration consultant that provided remuneration recommendations free from undue influence by company executives.
The Corporations Act prescribes a framework under which remuneration consultants are to be engaged should advice be sought relating to the quantum or structure of key management personnel (KMP) remuneration. The relevant provisions were introduced to proactively mitigate any conflicts of interest arising where, for example, the consultant reports directly to the company’s executives or where the consultant also provides other services to the same company.
The company is required to name the consultant, the amount paid for remuneration advice and any additional amounts paid to the consultant for other kinds of advice (including tax, legal and accounting services). The remuneration consultant is required to declare that any recommendation is made free from undue influence by KMP. The Board is also required to make a statement in the company’s annual report that it is satisfied that the advice was provided in this manner and outline its reasons for being so satisfied (outlining the steps it has taken to ensure that the advice is independent).
Four of the seven companies who disclosed that remuneration recommendations were obtained also disclosed significant fees paid for other advice. The consultants involved offer multi-disciplinary services across Australia, the region and globally. Potentially of more concern are the numerous other companies who did not disclose that remuneration recommendations were sought from such consultants but provided voluntary summary disclosure of their involvement and broad parameters around the advice obtained.
While the provision of facts does not constitute a remuneration recommendation (nor is legal, tax or accounting advice), there is a risk that remuneration advice is being dressed as provision of facts and not being subject to the strict governance framework prescribed in the Corporations Act to facilitate independence of such advice. The framework was introduced to deliver greater transparency for shareholders, and to put them in a better position to assess potential conflicts of interests associated with the use of remuneration consultants.
With the 2023 financial year reporting season upon us, it will be interesting to see whether Boards have improved their approach to engagement of remuneration consultants and the disclosure of their involvement. The recent events concerning consultant independence, breach of trust and conflicts of interest certainly bring this to light.
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