Gai Brodtmann (Canberra, Australian Labor Party) Share this | Hansard source

Is that what you do? Was that this morning? Okay! I remind those opposite of what the Labor government—not just this Labor government but also Labor governments in the past—has done in introducing market based solutions for this country. In the 1980s we opened up the economy, we opened up markets, we opened up banks and we opened up the country, particularly to the Asia-Pacific. We cut protection. Most recently, since 2007 we have saved this economy from the global financial crisis. I hardly regard that as some sort of mad, red-ragging socialist bunch of people crazily singing The Internationale every morning.

The issue of remuneration has been at the forefront of the minds of shareholders and the Australian community for some time, an issue more pressing following the corporate collapses associated with the global financial crisis. People around the world were rightly outraged that senior executives continued to receive large pay packages—so-called performance bonuses and golden parachutes—at a time when their companies were failing, leaving many average employees without jobs and their homes at risk. We in this country were spared the full extent of the effects of the global financial crisis thanks to the quick actions of the Labor government. But Australians remain highly concerned about the rates of executive pay. This concern is sharpened by the disparity between the pay packets of senior executives and those of average Australian working families. I am struck by the Productivity Commission's findings on this. The Productivity Commission reports that the top CEOs of Australian public companies receive pay some 110 times average Australian weekly earnings. This compares with the earnings of the CEOs of Australia's smallest companies of just four times average Australian weekly earnings. In some cases, CEO remuneration grew by as much as 300 per cent in real terms between 1993 and 2007.

Australians do not have a problem with other hardworking individuals earning more pay than they do. But they do have a problem with these remuneration packages, bonus schemes and golden parachutes being bestowed regardless of the actual performance of the individual. Given this, it is easy to understand why these packages are so hard for people to accept. We should not be surprised at the level of anger and mistrust that exists over this issue. Such mistrust is not healthy, as it undermines the basic strong sense of fairness that Australians have and the trust that is needed for a society based on the free market to function.

There have been efforts in the past to ensure that management teams look after the best interests of shareholders, principally by linking performance to share value. This worked up to a point. But research shows that this linkage has been distorted. It has emerged that there are a number of factors that go into the calculation of remuneration, some of which are reasonable, some of which are the result of what can only be described as gaming. As the Productivity Commission mentioned, while local shareholder value plummeted in 2008 as the result of the GFC, the imported crisis, with some countries and sectors being propped up by taxpayers, executive pay seemed to emerge unscathed, crystallising a view that executives were being rewarded for failure after having been rewarded for success.

The argument that these packages are required to acquire and keep the best talent is also not supported by available evidence. One journal article notes that there is a turnover rate for senior executives of between four per cent and six per cent. The article states that it is a matter of judgment whether a turnover rate of five per cent is sufficient to create market pressure to raise levels of compensation by itself. It is also questionable whether independent remuneration committees are by themselves capable of better linking performance with reward, given some of the biases and conflicts of interest that may result. In fact, Jennifer Hill and Charles Yablon, who are regular commentators on this issue, have noted that even carefully constructed remuneration packages will frequently provide corporate manager with incentives to use their strategic advantage within the company to prefer their own interests over those of the shareholders.

This bill seeks to address these problems and allay the concerns of shareholders and Australians as a whole by implementing changes to the Corporations Act recommended by the Productivity Commission. It seeks to address the imbalance between shareholders and management and provide some much-needed help to ensure that boards are responsive to the concerns of shareholders. But rather than imposing a government limit on remuneration this bill seeks to make boards more accountable for their decisions on pay, improve the manner in which conflicts are dealt with and increase transparency and accountability in executive remuneration matters.

It achieves these things by introducing the so-called three-strikes test. This test creates a process by which directors will face a spill motion on their position if over two consecutive years a company's remuneration report has been rejected by 25 per cent or more of the votes. Should this spill motion be passed, directors will need to seek re-election at a spill meeting within 90 days of the AGM. This will make directors accountable for their decisions and responsive to their shareholders.

This bill also seeks to bring greater transparency to the role of remuneration consultants. This measure reflects the concern expressed by some shareholders that remuneration consultants are placed in a potential conflict situation when they have to provide their advice, in the first instance, to the very managers who are responsible for signing off on their services in the future. Obviously, this has the potential to create a situation whereby the consultant may feel constrained in what advice they can provide. To counter this potential conflict, this legislation will require that the reports of independent consultants go first to the non-executive directors or a remuneration committee rather than company executives.

This bill also seeks to eliminate situations where key management personnel or closely related parties are voting on pay issues. The bill will prohibit such parties from voting on non-binding remuneration votes, which otherwise may distort the results and diminish their effectiveness as a feedback mechanism.

The government is also committed to strengthening the link between performance and remuneration. That is a really important point to make. This bill will prohibit directors and senior executives from hedging their incentive remuneration. It is currently possible for a director or senior executive to hedge their exposure to incentive remuneration, thereby effectively bypassing the link between performance and pay. This is not consistent with the principles underlying a remuneration framework that seeks to ensure pay is fairly linked to achievement. I do not think that that is too much to ask.

This bill is a comprehensive approach to the issues of remuneration of Australian boards and senior executives. It seeks to answer the questions and concerns of the community and shareholders over the issues of excessive executive pay, particularly in the light of poor performance. It does this without placing restrictive or draconian regulation on companies or by interfering drastically in the marketplace. I want to underscore that point, because from the way that the people opposite have been talking it seems that they view it as quite the contrary. It does not interfere in the marketplace. This bill enhances Australia's corporate governance framework, particularly transparency. It provides shareholders with the power they need to effectively monitor their own companies to ensure that boards and senior executives are delivering on the organisational outcomes and are rewarded accordingly. It gives shareholders the power to say no to packages that reward failure or poor performance, and it improves the governance of companies to ensure better reward for good performance and no reward for failure. Most importantly, it benefits not only shareholders but the economy as a whole. The benefits of this legislation are clear, and I commend it to the House.

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