MANDATORY CLAW-BACK PROVISIONS – DRAFT 5TH EDITION OF THE ASX CORPORATE GOVERNANCE PRINCIPLES AND RECOMMENDATIONS

11th June, 2024

Earlier this year the ASX Corporate Governance Council released the draft 5th edition of the ASX Corporate Governance Principles and Recommendations which proposed various amendments to the 4th edition which was released in 2019. One of the more notable changes in the draft 5th edition is proposed recommendation 8.3, which would require a listed entity to:

  • have remuneration structures that can claw back or otherwise limit performance-based remuneration outcomes of its senior executives after award, payment or vesting; and
  • disclose (on a de-identified basis) the use of those provisions during the reporting period.

Any entity which does not include such provisions will be required to disclose its reason for not doing so under ASX’s “if not, why not” approach to the recommendations. However, there are limited reasons that an entity would have not to comply with the recommendation and there may be significant market and shareholder pressure for the inclusion of such provisions to ensure that entities can obtain the associated benefits of claw back.

Benefits of claw-back provisions

The key benefit of a claw-back provision is the ability to recoup remuneration (whether in the form of cash or securities) already paid to executives in instances where there has been unsatisfactory performance, or misconduct. Additionally, the inclusion of claw-back provisions aligns with broader corporate governance principles and encourages outcome-driven rewards.

Use of claw-back provisions

Notwithstanding the ASX’s proposed recommendation regarding claw-back provisions, it is good practice in any event for entities to include such provisions in executive remuneration packages (including employee share option plans) to ensure that they can effectively manage any misconduct or performance failures. Claw-back provisions can be tailored to the relevant entity’s requirements and included (for example) in employee share option plans, short term incentive offers, long term incentive offers or in the remuneration provisions of the relevant employment agreement. Typically claw back will be activated in specified instances such as where the relevant employee has in the reasonable opinion of the board of directors of the relevant entity:

  • acted fraudulently or dishonestly or been grossly negligent;
  • materially breached their obligations or duties owed to the relevant entity;
  • demonstrated serious or wilful misconduct;
  • caused or contributed to false or misleading statements or omissions being made; or
  • had their employment, office or engagement terminated for cause.

While the 5th edition of the ASX Corporate Governance Principles and Recommendations is not expected to be released until early 2025 (with an anticipated effective date of 1 July 2025), both listed and unlisted entities should in advance revisit their existing remuneration and incentivisation practices with key executives to ensure that they appropriately address claw-back issues and provisions.

Should you have any queries, please contact Taila Childs by e-mail to tchilds@mphlawyers.com.au or on (08) 9221 0033.

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