Executive Remuneration: Achieving Accountability through Disclosure

Abstract

Board accountability to shareholders is a contentious issue globally, particularly in the area of executive remuneration. Scrutiny of complex executive remuneration arrangements by shareholders, media and regulators peaked in Australia when excessive risk-taking driven by inappropriate pay contracts reportedly contributed to the Global Financial Crisis. As a result, the Australian Government’s Productivity Commission conducted an Inquiry into the executive remuneration framework in 2009. The Productivity Commission report led to a raft of changes to executive remuneration regulations, including changes to the Corporations Act, the Australian Accounting Standards and the ASX Corporate Governance Principles. A central goal of the overhaul of the executive remuneration framework was improved transparency in remuneration disclosure, in order to facilitate shareholder assessment of board accountability. To achieve improved transparency, no additional disclosure requirements were legislated. Instead, an accountability mechanism known as the two- strikes rule came into effect in 2010. This mechanism strengthened the existing non-binding shareholder vote on the remuneration report by introducing a voting threshold and a ‘board spill’ sanction.The extant literature questions the legitimacy of increased transparency for achieving greater board accountability. As such, regulators face concerns about the effectiveness of legislation that promotes transparency as the solution to the lack of board accountability for executive remuneration contracts. The real effect of the two-strikes rule in improving the transparency of disclosure is unclear. The purpose of this thesis is to examine the evolution of remuneration reporting in Australia from 2008 to 2014 with a focus on the conjectured improvements in the areas of transparency and accountability following the introduction of the two-strikes rule. This research is conducted in three stages. Media reports suggest the introduction of the two-strikes and spill legislation was not expected by the market, therefore the first stage of the thesis examines the standard setting process that was a precursor to the introduction of this accountability mechanism to better understand this process. The objective of the second stage of the thesis is to assess the effects of the two-strikes rule, focusing on quantitative improvements in the transparency of remuneration disclosures following negative shareholder feedback. Stage 3 continues to examine the real effects of the introduction of the accountability mechanism, by employing an emergent grounded theory approach to analyse the content of remuneration reports of the Australian listed firms that participated in the standard setting process.Stage 1 analysis indicates that the standard setting process involved the participation of various respondent groups, and each group enlisted various strategies in their attempt to convey their position regarding the executive remuneration framework in Australia. Individual respondents employed an honest, repeated contact approach, while Industry respondents engaged in frequent contact and were strategic in their responses to the Commission. With respect to the proposed two-strikes and spill mechanism, all industry and professional body respondents opposed the mechanism, while 40% of individuals were supportive.Consistent with expectations, Stage 2 findings indicate that despite no new legislated requirements for increased transparency of disclosures on executive remuneration, total and transparent disclosure increased significantly concurrent with the introduction of the two-strikes rule. Multivariate regression analysis of the relation between shareholder votes and disclosure levels indicate that boards respond to shareholder dissatisfaction by managing disclosure policy, increasing transparency when shareholder dissent is high, and decreasing transparency when shareholder dissent is low.Qualitative analysis in Stage 3 supports the quantitative findings of overall improvements in transparency between 2008 and 2014 remuneration reports, however the analysis also finds evidence of persistent poor disclosure practices, such as ‘boiler-plating’, sticky disclosure and ‘impressions management’. Evidence of these disclosures were found in both 2008 and 2014 reports, but were less prevalent in 2014. Despite lobbying against the introduction of the two-strikes rule, lobbying firms were found to have disclosure superior to the ASX200 firms. Therefore, firms do not appear to participate in the standard setting process in an attempt to conceal poor disclosure practices. Overall, the analysis provides evidence that the accountability mechanism influenced board remuneration disclosure policy in the Australian setting. The findings contribute to the understanding of the role of regulation in influencing firm disclosure policy. This evidence can inform the academic literature, and may assist regulators in assessing the impact and effect of legislation.