Laura Smyth (La Trobe, Australian Labor Party) Share this | Hansard source

I am very pleased to speak on the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Bill 2010, which strikes such a sensible balance in the community debate around director and executive salaries, bonuses and incentives. I am also pleased to see that the opposition will ultimately be supporting the bulk of this legislation, although, given the remarks of some of those speakers during the course of this debate, it has obviously been quite a struggle to reach that very reasonable view. I have been particularly interested to hear remarks from opposition members in the debate about overregulation, which is quite a curious line of argument for a group of people who are ultimately going to support this bill. I really have to admire the ability of those members opposite who ran that line of argument with no shame. It is quite a balancing act and quite a skill. Some of those opposite seem to think that the coalition had a marvellous track record in minimising regulation when in government. I suspect that those members were possibly harking back to the wafer-thin volume of Work Choices regulations, or possibly the mere pamphlet that was John Howard's GST legislation. I really have a feeling that, during the break, some members opposite have been passing around old Family Ties DVDs, because there is more than a little bit of Alex P Keaton in the debate we have seen from the other side of the chamber, both in this session and at the end of the last. They seem to still be convinced by a curious and entirely fictional notion that they stand for small government and lessening regulation—and, suddenly, Reagan is back in the White House. They may want to have a quick recap on some of the regulatory interventions of the Howard government during its decade and more in office to perhaps disabuse themselves of that view. In any event, it is more than a little disingenuous to come to this place and masquerade as a free marketeer and then proceed to support the legislation with little more than a fig leaf amendment. But I will leave all that aside now because, as with so many other things, the opposition's views on this legislation ultimately will not rate, even as a footnote.

This legislation developed by the government is a timely and even-handed regulatory response to genuine community concerns about executive remuneration. Those concerns came to the fore during the global financial crisis. Members of the opposition have said that we should not try to drag down people who have done well for themselves—that is, executives who have been paid significant sums—as though that was the intention of the legislation. No, it is about making sure that mums and dads, self-funded retirees and all others who invest in shares directly and indirectly can be confident that the savings they have scraped together to buy a few shares are not being squandered and that the companies they invest in are being managed sensibly and prudently.

Obviously this legislation will have consequences for remuneration itself. But, more importantly, the legislation is focused on ensuring the confidence of the community generally, and investors in equities in particular, in the prudent management of the companies in which so many Australians invest their earnings. The bill responds to both the matters raised during the Productivity Commission inquiry on this issue and the findings of the commission. The commission took into account very wide-ranging submissions from the community, after extensive consultation. It noted in its report that the prime motivation for its enquiry was a 'widespread perception that executives have been rewarded for failure or simply good luck'. The report goes on to say that 'certainly in some periods and for some CEOs, pay outcomes appear inconsistent with a reasonably efficient executive labour market'. This is reflected in the submission made to the enquiry by Professor David Peetz, of Griffith University. Professor Peetz's submission notes that the growth rate of CEO pay between 1971 and 2008 was around 470 per cent, while for the same period average weekly earnings growth was around 54per cent. On any sensible view, members will certainly realise that that is out of kilter with community expectations about what are reasonable levels of pay for CEOs.

The Productivity Commission noted:

If the community came to regard executive pay as the product of poor corporate governance or weak regulation, this could undermine public confidence in the corporate sector itself, potentially detracting from the ability to raise equity capital and distorting the allocation in investment funds.

This is a genuinely held concern about maintaining public confidence in our companies. It goes to whether people will believe that putting their money into shares is a good prospect, whether it will generate a good return or whether it will simply prop up inefficient and overpaid executives. These are reasons why a regulatory response of a balanced and reasonable kind that is being presented here today is responsible and timely.

The Productivity Commission considered that certain trends in executive and director remuneration in Australia were inconsistent with effective executive labour markets and may actually have had the effect of weakening company performance. In particular, it cited incentive payments and termination payments as examples of such trends, noting that certain executive incentive payments may have delivered an unintended upside and that some termination payments considered by the Productivity Commission seemed excessive. Although the commission ultimately found that Australia's existing corporate governance and remuneration framework does rank highly internationally, it made various recommendations to improve that framework; many of those recommendations are reflected in the bill before us.

Members will recall that, in early 2009, this government announced reforms to limit excessive termination benefits given to outgoing directors and executives. This was the beginning of reform in this area and we are now taking the next steps. My own experience in working with boards, and in relation to corporate governance, does lead me to expect that most company boards will act appropriately in relation to director and executive pay and that they will and do give due regard to the expectations of shareholders. We know that many boards are already very mindful of their responsibilities and community expectations in this regard. We also know that they take very seriously their commitments to corporate social responsibility. It will be only those boards which are out of step with the kinds of shareholder expectations and community standards which are likely to be subject to the two strikes provisions of the bill. So I do consider that the bill reaches a very sensible balance between the interests of shareholders, the expectations of the wider community and the desire of businesses to give incentives to their executives to generate growth.

Importantly, this bill will enable shareholders to hold directors to account for their decisions on executive salaries. It will better enable conflicts of interest in the remuneration-setting process to be addressed. It will increase transparency and accountability in matters of executive pay. It is appropriate that shareholders, who ultimately bear the risk associated with the performance of companies in which they hold equity, have an opportunity to thoroughly scrutinise remuneration packages. The bill does this and provides for those safeguards and balancing measures through a variety of means. Speakers on this side in the debate have already referred to the two-strikes test, which would arise in the context of a company putting its remuneration to shareholder vote. It is a measure that is consistent with the underlying expectations in the Corporations Act that directors will be responsible for, and accountable to, shareholders in relation to all aspects of the management of a company, including executive remuneration.

As we have heard, the bill also includes measures relating to remuneration consultants, which will deliver greater transparency for shareholders as they will be in a position to assess potential conflicts of interest in a more successful way. The bill will help to prevent conflicts of interest by prohibiting key management personnel and their related shareholding entities from voting on remuneration related resolutions. The bill also seeks to ensure that the link between remuneration and performance is maintained by prohibiting directors and executives from hedging any incentive remuneration afforded to them. Finally, the bill contains measures to limit the remuneration details required to be disclosed in the remuneration report to the key management personnel of the consolidated entity. This simplifies the disclosures in the remuneration report to enable shareholders to better assess and understand the company's remuneration arrangements. It is intended to reduce the regulatory burden on companies, while maintaining an appropriate level of accountability.

In conclusion, despite the observations made by those on-again off-again free marketeers on the opposition benches about overregulation, members should understand that this bill strikes a balance between the interests of shareholders, the expectations of the wider community and a desire of business to give appropriate incentives to their executives to generate growth. It goes no further in amending the Corporations Act than is necessary to achieve those very eminently sensible aims.

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