Chris Pearce (Aston, Liberal Party, Shadow Minister for Financial Services, Superannuation and Corporate Law) Share this | Link to this | Hansard source

I move an amendment to the Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009, which I will return to in the consideration in detail stage of this debate:

That all words after ‘That’ be omitted with a view to substituting the following words:‘whilst not declining to give the bill a second reading, the House:

(1)

recognises the widespread concern in the community that termination benefits provided to some corporate executives and office holders have been excessive;

(2)

supports the introduction of more stringent requirements that payments in excess of reasonable levels should be subject to shareholder approval;

(3)

acknowledges that in its present form the government’s proposal is neither a practical nor an effective solution and that, if persisted with, it is likely to cause artificial and inappropriate alternative arrangements to be made, thus defeating the whole purpose of reform in this area; and

(4)

calls on the government to support the practical and effective amendments proposed by the opposition.’

This bill seeks to alter the Corporations Act in order to tighten regulation around termination payments. The bill is, in many ways, sound. The opposition welcomes reform which empowers shareholders, increases disclosure and, of course, enhances our corporate law.

The opposition supports the initiative to lower the quantum an executive can receive as a termination benefit from seven times their total salary before a shareholder vote is required. It is now appropriate that this threshold be reduced in a manner that will reduce excessive termination payments, whilst maintaining sound principles of corporate governance.

Unfortunately, the stated intention of this particular bill will be undermined through the bill’s practical application and its unintended consequences. The purpose of the bill should be to lower unjustifiable executive payments, to further align shareholder interests with directors and executives and to provide appropriate long-term incentives to directors to act in the best interests of companies and, of course, their shareholders. There is one significant problem in the bill which will likely have the perverse effect of raising executive and director payments on a permanent basis—that is, those payments which are not at risk or incentive based. This is because this bill will cause base pay to rise.

Make no mistake, this is sloppy policy making. Unintended consequences have again emerged—it is reminiscent of employee share schemes and the unlimited bank deposit guarantee, not to mention debacles such as Fuelwatch and GroceryWatch. It is very important that our parliament gets it right. We have to ask questions, such as, do we really want executives to have less pay at risk? Or, do we want to move away from performance based remuneration? ‘I think not,’ is the answer.

It is not hard to see how the government have managed to get this bill wrong. There was no regulatory impact statement prepared for the bill. I think this point goes some way in explaining the reason for the significant unintended consequences we find in this bill. Through the Senate Standing Committee on Economics’ process, a considerable weight of evidence has emerged which shows that this bill will undermine the alignment of executive and shareholder interests, and will actually cause base pay, and therefore total executive pay, to rise. I will return to this evidence in due course.

Let me now go to the substantial elements of the bill which, as I said earlier, seek to amend the Corporations Act. It does this by the following means: firstly, it lowers the threshold limit for termination benefits which can be received by directors and executives without requiring shareholder approval; secondly, it expands shareholder approval coverage to additional executives; and, thirdly, it broadens and clarifies the definition of a termination benefit.

The current corporate law provisions in the act relating to executive remuneration were devised during the Howard government’s Corporate Law Economic Reform Program, otherwise known as CLERP. A non-binding shareholder vote on the remuneration report was introduced in 2003 alongside a binding shareholder vote for termination payments to directors where greater than seven times total annual remuneration was to be provided. The current government announced in March this year that it would amend the Corporations Act to lower the threshold at which termination payments must be approved by shareholders from the current level down to one year’s average base salary. This termination payment initiative was announced alongside a holistic review into executive remuneration by the Productivity Commission, to be chaired by both Gary Banks and Professor Alan Fels. The commission is due to report to the government in November this year.

Despite the announcement of this holistic review, the government chose not to await its recommendations and decided to introduce this bill ahead of its completion. An exposure draft of this bill was released in May for public comment. On release of the exposure draft, many industry participants were of the opinion that the proposed provisions would be unworkable and indeed impractical. Subsequently, there have been a number of changes from the exposure draft to the final bill; these alterations are chiefly around the holding of AGMs for voting and the timing of shareholder votes when considering termination payments.

The bill carries four key objectives. Firstly, the bill seeks to expand shareholder approval coverage to additional executives and senior management. Currently, only certain executives are covered by termination pay provisions of the Corporations Act. The proposed requirements will extend coverage to senior executives and key management. Coverage of these additional persons will be determined through the accounting standards. This will occur through the Australian application of the International Financial Reporting Standards, otherwise known as IFRS.

Secondly, the bill broadens and clarifies the definition of a termination benefit. The definition of a termination benefit has been widened and regulation has been provided for the government to amend the definition at any given time.

Thirdly, a facility is provided for minor changes to the Corporations Act, including: repayment of unauthorised termination benefits and stronger penalty provisions for contraventions.

Fourth and finally, the bill lowers the threshold limit for termination benefits which can be received by directors and executives without shareholder approval. The current threshold provides for an unapproved termination pay limit of seven times a recipient’s total annual remuneration. Under the proposed changes, the new threshold before a shareholder vote is triggered would be any amount exceeding one year’s average—over three years—base salary. The definition of ‘base salary’ is provided by accompanying regulation, which was released last week.

It is this aspect of the bill—in relation to base salary—which will cause base salary to rise in order to compensate for the potential loss of incentive based remuneration. This defeats one of the key purposes of the bill, which is to limit excessive executive salaries. Low base pay reflects a company’s desire to remunerate executives and directors fairly and appropriately by linking their pay to performance. The coalition believes that this is desirable and must be maintained. In many cases, chief executives are provided with very low annual base salaries, with the remainder of their annual remuneration being short and long-term incentive based pay. It is often the case that the incentive component makes up some two-thirds of their total pay. The threshold of one year’s average base pay is a very low figure in terms of an executive or director’s total remuneration and inappropriate for the purposes of defining a platform level of remuneration.

This legislation threatens to undermine the objectives of short- and long-term incentives, which are designed—at the end of the day—to align the interests of those executives and directors with the shareholders and it will in fact increase fixed or guaranteed pay as a consequence. It is therefore the case that this bill, in its current form, will encourage companies to move away from incentive based remuneration.

Shareholders will ultimately bear the brunt of such low pay threshold provisions through growing base salaries, which will be fixed costs regardless of performance. In its current form, the bill is also likely to create ‘golden hellos’ or ‘golden welcomes’ or, if you like, ‘front loading’ in order to compensate for the potential loss of pay.

The Senate, through its Economics Legislation Committee, has clearly demonstrated these concerns around the base pay threshold. On Tuesday, 25 August in Sydney the committee conducted a public hearing. The majority of witnesses appearing before this committee highlighted the significant flaws in this bill. For the benefit of the House, I would like to quote some of the evidence provided to the committee.

The Business Council of Australia, with representation from Rio Tinto and Insurance Australia Group, discussed the definitional failure of base pay for the purposes of the bill. They said:

… we would like to bring to the committee’s attention the prospects for the bill to have a number of unintended consequences—consequences which are likely to extend beyond the stated policy objective and also have the potential to cut across other policy objectives of the government.

They went on to say:

… it is important to remain mindful of the objective of aligning executive remuneration with company performance. One consequence of the bill will be to encourage future remuneration packages to be more heavily weighted to base rather than performance linked remuneration.

They said:

Finally, the case does not appear to have been well made as to the basis for base salary being used as the critical threshold as opposed to the total remuneration package as the threshold.

They also said:

I think the issue we would see, for instance, is if the additional remuneration is in base salary, it is a certain additional cost to the company.

Moreover, the Australian Institute of Company Directors, AICD, stated in relation to the issue of the base pay threshold:

They are likely to cause an increase in the proportion of executive remuneration paid up other than as termination payments.

…            …            …

The bill is also likely to increase total executive remuneration, given the greater uncertainty for incoming executives and the likely necessary response by companies to have what would have only been a contingent payment.

They also said:

In practice it means you will be increasing your base pay. That is the inevitable consequence, because basically you are either guaranteeing STRs, which is not a good practice, or you are increasing the base pay. It introduces distortions to what should be a very open, transparent exercise.

In the context of a recent practical example of a company which has allegedly not produced optimum performances of late, the AICD also said in their evidence that there have been no fixed pay or base pay increases. They said:

Base pay has been held since April 2007. There is a direct relationship between the outcome for the shareholders and the outcome for the senior executives. If they deliver, they will be well paid. If they do not deliver then they do not receive their STI—

That is, short-term incentive—

and the benefit of any LTI—

in other words, long-term incentive—

under these circumstances is remote.

The Australian Bankers Association provided further evidence of problems with base pay as the platform. They said:

… the termination benefits legislation is likely to create pressure to increase the proportion of an executive’s salary which is base pay. This is inconsistent with moves to have executives put more salary at risk.

Guerdon Associates, who are remuneration consultants, said in relation to the base pay threshold:

The other issue is the possible consequences of the low maximum payment. It might put pressure on other areas of remuneration such as increase in base salary or increase in sign-on payments.

…            …            …

An elevation in the base payment in our view needs to be looked at carefully. The merit of a remuneration structure that has elements of variable reward and fixed payment is that it gives the company the opportunity to properly reflect payment and performance.

They went on to say:

More particularly, if you get an economic downturn, you have got a higher fixed cost base and so it probably translates in the extreme to the need for companies to separate employees, to reduce their workforce, rather than being able to reduce their overall costs by simply having the flexibility not to award variable remuneration payments. So, in essence, it is increasing fixed pay and it is taking control away from the company and its shareholders to be able to link the payments overall with the performance of the individual and the organisation.

They said:

Our preference would be to see a limit calculated by reference to both fixed pay and variable pay, because it has become part of the reward mix overall for executives, and a very important part, to have both short-term variable pay and long-term variable pay.

There is a considerable amount of evidence which emerged from the public hearings in the Senate Economics Legislation Committee inquiry into this bill. The evidence really does speak for itself. Clearly the bill, in its current form, would work at cross-purposes to what is good corporate governance practice. That practice is aligning the interests of shareholders and executives and increasing the amount of remuneration at risk, not decreasing the amount at risk.

I believe the failure to link pay with performance is contrary to the principles espoused by the Financial Stability Board of the G20, which has been championed by the Labor government. This bill, as drafted, is also inconsistent with recently stated government policy and regulatory approaches internationally. Furthermore, the threshold of one year’s base pay would leave Australia with one of the lowest base pay thresholds of comparable corporate law in any country. This prescriptive approach could threaten our ability to entice talented managers to our country and retain them.

Definitions of this essence should be vested in the legislation, not in the regulations. The market deserves certainty, not changing goalposts. It deserves not only certainty but consideration. As I mentioned earlier, a regulatory impact statement was not prepared for this bill. I think it is quite incredible that the government can have a bill here which will require many, many companies to restructure their remuneration policies and that a regulatory impact statement was not even bothered with. Regrettably, I think it demonstrates where the unintended consequences of this bill have emerged.

As this aspect of the bill will run at cross-purposes to the supposed objective of the bill, the coalition will move to amend this bill to alter the threshold to one year’s total annual remuneration. I will move this detailed amendment during the consideration in detail stage of the debate. Performance and pay should be linked, as should executive and shareholder interests. Causing base pay to rise will make these objectives far, far harder to achieve. Indeed, the adverse consequences of this bill will ultimately be borne by the shareholders themselves. This cost will be borne by all shareholders—by large institutional shareholders and by so-called mum and dad investors who are shareholders. It is for these very logical and, I believe, sensible reasons that this bill should be amended as proposed by the opposition so as to ensure that its objectives can actually be achieved.

Mal Washer (Moore, Liberal Party) Share this | Link to this | Hansard source

Is the amendment seconded?

Bob Baldwin (Paterson, Liberal Party, Shadow Minister for Defence Science and Personnel) Share this | Link to this | Hansard source

I second the amendment.

James Bidgood (Dawson, Australian Labor Party) Share this | Link to this | Hansard source

The Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009 will amend the Corporations Act 2001 to strengthen the regulatory framework relating to the payment of termination benefits to company directors and executives. These amendments will empower shareholders to reject or veto excessive termination benefits that are not in the interest of the company.

Under the bill, the amount that can be received before shareholder approval is required is reduced to one year’s base salary as opposed to total remuneration. The bill will strengthen the regulatory framework by significantly lowering the threshold at which termination payments must be approved by shareholders. Currently a termination benefit can reach up to seven times a director’s total annual remuneration package before shareholder approval is required. Under the new arrangements, termination benefits for company directors and executives exceeding one year’s average base salary are subject to shareholder approval. It is important to note that boards can still pay departing executives as much as they like as long as it is with shareholder approval. It is the shareholders who own a company, after all.

Most Australians would agree that huge, exuberant golden handshakes, particularly where a company has not performed or where workers have been retrenched, are simply a means of rewarding failure and are absolutely unacceptable—and who can blame them? Indeed, there are media reports stating that shareholders in some of Australia’s biggest companies would have saved up to $62 million last year if proposed new laws that aim to put an end to excessive golden handshakes had been in place

The community expects the government to act and to act decisively, and this government is doing so. We have seen example after example of corporate executives doing little more than raiding the kitty and bailing out when times got tough for their companies. These men and women with positions of responsibility in a company are being rewarded with sometimes millions of dollars without the approval of shareholders, the owners. This is just simply not good enough and definitely not fair, and we as a government will act decisively to make such actions by executives once and for all illegal if shareholders do not agree to it.

In the media there has been some argument that this long overdue move will limit the ability for companies to attract overseas talent. Studies have shown that the vast majority of executives are promoted from within a company, with only 18 per cent of CEO appointments from overseas. The government’s decision to act on improving the accountability on termination benefits follows increasing community concern about the excessive pay practices, particularly at a time when many Australian families are being hit by the global recession. The government is determined to ensure regulation of executive pay keeps pace with community expectations. In addition to lowering the threshold the bill addresses these concerns by expanding the number of company officers for which approval is required. This is good for accountability.

The bill also clarifies and expands the definition of what constitutes a termination benefit by requiring that a broad interpretation of the term ‘benefit’ is given and providing that the substance of the payment should prevail over its legal form. The bill provides businesses with certainty and guidance by including a regulation-making power to specify for the avoidance of doubt whether certain types of payments are or are not a termination benefit.

The bill also introduces an express obligation on the recipient to immediately repay a termination benefit that was given in contravention of the requirement to seek shareholder approval. Furthermore, it introduces significantly higher penalties for unauthorised payments of termination benefits, with potential fines now set at $19,800 for individuals and $99,000 for corporations. This is aimed at holding companies accountable in promoting responsible remuneration packages.

The new arrangements will not apply retrospectively to existing contracts and will apply to all new contracts which are entered into, extended or substantially varied after the commencement date. The key measures of the bill include: one, significantly lowering the threshold at which termination payments must be approved by the shareholders; two, expanding the scope of the provisions to include key management personnel for companies that are a disclosing entity; three, clarifying and expanding the definition of what constitutes a termination benefit; four, prohibiting directors and executives who hold shares in the company from participating in the shareholder vote to approve their own termination benefit; five, introducing an express obligation on the recipient to immediately repay unauthorised termination payments; and, six, introducing significantly higher penalties associated with unauthorised payments of termination benefits.

The amendments are urgent as there is significant community concern about excessive pay practices, particularly at a time when so many Australian families are doing it tough in the global recession. This bill effects changes in the regulatory framework in relation to better empowering shareholders, improving the accountability of company management and in setting remuneration and promoting responsible remuneration practices. The new arrangements will not apply retrospectively to existing contracts before the bill becomes law and will apply only to all new contracts which are entered into, extended or substantially varied after the commencement of the provisions. This framework aims to curb excessive termination benefits paid to company executives and directors and is a win for fairness. I commend this bill to the House.

Judi Moylan (Pearce, Liberal Party) Share this | Link to this | Hansard source

I am very pleased to participate in the debate today on the Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009. The so-called golden handshake practice of large termination payments being made to company executives has generated a great deal of concern throughout the community, especially in recent times since we have seen the collapse of the financial markets. Shareholders of large corporations have every reason to expect us to examine the provisions of the Corporations Act and make sure that shareholders who fund the companies but who are also beneficiaries of the success of those companies have a say in how executive pay is determined and at what level.

In the electorate of Pearce I am sure that the wider public have concerns about what is seen as excessive termination payments. Even before the financial collapse we saw a number of large corporations in Australia who provided very substantial termination payments for top-end executives only to see those companies lose considerable shareholder value under the administration of those individuals, who jeopardised the future of the corporation. In many cases the shareholders—I think, rightly—felt they had little say in some of the arrangements that had been made. So the measures are broadly sensible, the intent is sensible, and I think the public expect us to examine what has been happening and perhaps to deal with some of the worst abuses.

Under this legislation, termination payments will be limited to an executive’s total annual remuneration for one year; under the current arrangements it is limited to seven years total annual remuneration. Termination payments will be subject to the approval of company shareholders, which is a reasonable proposition and, by most standards, is a fairly lenient requirement. This bill seeks to make sure that shareholders in both institutional and retail corporations have some say in the matter. The key objective is to lower the threshold so that shareholder approval will be required where a termination payment is more than one year’s base salary. Clearly, this is a dramatic change with potentially important consequences for some big corporations, and as such it is a change that warrants thorough and informed debate. I agree with the shadow minister, who spoke quite eloquently on this bill, that above all we need to ensure that this legislation does not have a perverse impact on a company executive greeted with a golden handshake—that is, we need to ensure that companies do not load up the upfront payments to company executives without having to meet the requirements of these amendments.

In addition to the changes to the threshold, there are other more technical changes, which also have the propensity to massively alter the remuneration practices of many businesses throughout Australia. Shareholder approval will be required not just for chief executive officers but for an extended array of executives and non-director executives as well. I can well understand the disgust that many people in the community feel when they hear of company executives under whose watch company profits fell and the value of shares seriously declined being given a golden handshake on leaving. These are certainly emotive issues, and I am sure that the government has felt pressured, given the high level of publicity around these issues, to act to address the injustices. But we must also guard against taking a rushed approach, an over-the-top approach, that sees the Corporations Act riddled with a minefield of unintended consequences. Businesses in Australia come in many shapes and sizes—indeed there is no typical company—which is why we must ensure that what is a practical solution to the problems encountered in some corporations does not become a problematic imposition for others. The role of this legislation, and indeed the debate surrounding it, should be to find the right balance between the worthy objective of constraining inappropriate termination payments being made at the expense of company shareholders and the need to ensure that business efficiency is not threatened. The shadow minister made the comment that it is a matter of aligning the interests of directors and shareholders. There has to be a balance.

On 18 March 2009, the government announced the reforms contained in this legislation. It was surprising—it certainly surprised me—that that was the same day that a Productivity Commission report was commissioned to investigate executive remuneration in Australia. The findings of this report may well be crucial to the way that we in this place shape legislation to deal with any inequities or injustices. I am sure that the report of the Productivity Commission will have the capacity to contribute a great deal to informed debate on termination payments, and the report would have assisted us in getting the legislative balance right. It is not so long to wait; we would have done a much better job with this legislation if we had waited for the outcome of the Productivity Commission.

Many of the submissions to the Senate Economics Legislation Committee inquiry into this bill commented that the debates over executive remuneration and termination payments are inextricably linked. It is astonishing that the legislation is being considered now, while the Productivity Commission’s inquiry is considering the following items, because their investigation goes very directly to the heart of this legislation. The Productivity Commission is investigating, firstly, the trends in director and executive remuneration both in Australia and abroad; secondly, the role of institutional and retail shareholders in setting and considering remuneration; and, thirdly, the effectiveness of the international response to remuneration issues arising from the global financial crisis, particularly excessive risk-taking and corporate greed. That third item is quite important. It is a fact that we live in a global environment and business is conducted in a global environment. If we in this place are too out of step with what is happening with our major trading partners in the way that we legislate to curtail certain activities of corporations, we put our own companies at a great disadvantage.

I think we are seeing this thread through a number of debates in this House. Perhaps it is a failing of a new government’s lack of experience. We are seeing it also with the ETS, where there is a willingness to pass legislation in this place before we know what is happening in the United States and before we know the shape of any international agreement. It has the capacity to place our corporations in a position of great risk without actually achieving the kind of outcomes that every man, woman and child in this country would expect. We are seeing a thread here. This is very much a cart-before-the-horse approach and it unfortunately does generate considerable cynicism and frustration with the way in which government operates, not only within the public but also within the corporate sector. It smacks of fairly crude politics—that is, responding to sensational media headlines rather than looking at the real issues and making sure that we are addressing them in an effective way.

Australian businesses, I would imagine, would also prefer to wait—not to stall the legislation, but it is reasonable that they see the shape of the Productivity Commission’s inquiry into executive pay—and would expect us in this place to have a fully informed debate rather than impose on them rushed, ill-informed legislation that only addresses one part of the problem. The timing of this legislation has nothing to do with efficient practices in this place or indeed getting a good outcome that passes the public interest test. Rather it has everything to do with a new government making the most out of the media cycle on public concerns as to executive remuneration. As I said, it is a knee-jerk reaction to sensational headlines. I think that is unfortunate.

I am no apologist for the corporate sector. I have had many skirmishes on behalf of the average constituent in my electorate over the years, but I do think we can be pretty proud of the way in which many of our corporations function, the successes they have, the income they generate and the taxes they contribute. Many of the corporations, I have to say, demonstrate a great public-spiritedness. While we have seen the outcomes of the financial meltdown and the impacts on people in other countries, we have had a rigorous system that has served the public reasonably well in this country. It is not to say that there is not some pain—there clearly has been—but we have done a reasonably good job of striking that balance between public interest and the capacity for corporations to operate efficiently and flexibly.

Nevertheless, we must not back away from a full and frank debate on this piece of legislation as it stands before us today. Here it is; we have it before us. We would rather have waited for the Productivity Commission’s report but we have to now debate it. Whilst the coalition supports the broad objective of this legislation—that is, giving shareholders a greater say—I am not convinced that a number of issues have been dealt with adequately. There are further concerns still as we wait to see what shape the regulations will take. These regulations will have a significant impact on the operation of the legislation, and the failure to incorporate them into the legislation leaves important questions unanswered. Again, this is another indication of a new government at work falling into some of the old traps and putting the cart before the horse.

My key concern with the drafting of the legislation was the move to set the threshold limit according to an individual’s base salary rather than using the existing terminology of total annual remuneration. Clearly, the base salary is a lower figure and thus shareholder approval will be required in an extended number of circumstances. However, the real concern is that the change will distort the manner in which remuneration is now packaged. As the minister said, we may see the ‘golden hello’ at the front of a contract, an appointment, instead of the golden handshake at the end.

It is assumed that the base salary will mean the risk-free payments made to executives and directors. But the Law Council of Australia, in their submission to the Senate Economics Legislation Committee inquiry into the legislation, argued that, for many executives, the base salary makes up less than half of the total remuneration package. There is a growing trend—generally supported by shareholder groups—that executive remuneration should be tied to performance or incentive. With the commercial realities which we face and with the global environment as it is, that is a fairly sensible approach. Such performance based payments would not be considered as part of the base salary, potentially meaning that many executives would only be entitled to half of their annual remuneration as a termination payment before shareholder approval is required.

The other distortion that will potentially arise from this legislation is that, rather than executives being given golden handshakes, as I said, they will get a front-end loading as a signing-on bonus. The Treasury responded to the prediction in the Senate economics committee report that the legislation might produce a distortion, with front-end loading of contracts, by noting that such payments would be listed in the remuneration report and, as such, at least payments will continue to be transparent. That misses the point, because the objective of this legislation, I thought, is to empower shareholders to veto termination payments, not to ensure that they are informed of front-end loaded payments after the fact. It does not make a lot of sense to me. It is good to have transparency, but we want a result here. Whilst it is true that shareholders vote on a company’s remuneration report, this vote is non-binding, so it is for merely persuasive purposes and it is required only for listed companies.

I think we should be favouring a model that does not promote artificial and creative restructuring of remuneration packages, as I said, to create a perverse approach to this. I do not believe for one minute that the majority of businesses would consider doing this to deliberately mislead shareholders, but I think it is entirely foreseeable that the distortion will take place for business efficiency purposes and to provide certainty for executives at the commencement of their employment. I think we have to understand as well that we have been working and continue to work in a very competitive environment in this particular marketplace.

The simplest way to ensure that this legislation does not turn out to be counterintuitive is to amend the threshold provisions so that the total annual remuneration is used rather than the more limited base salary requirements. The legislation is noticeably the product of community outrage. I understand that and I think we have an obligation to do something about it. If the government is not prepared to await the outcome and recommendations of the Productivity Commission, then at the very least it should give full consideration to the amendments being put forward by the coalition. The member for Aston is sensible and I think he is balanced in his approach, and I would like to think that we can have a bipartisan approach to this piece of legislation. The amendments that the shadow minister has put forward are all about getting the balance right, seeing that shareholders have a say and are protected from unscrupulous termination payment arrangements but also ensuring that legitimate business interests are not threatened. These are sensible amendments that will ensure the sensible operation of this legislation. I pay tribute to the work that the shadow minister has done to bring forward thoughtful and well-considered amendments that truly have the capacity to improve this piece of legislation, to give shareholders full rights, to let them have a say in how executive pay is structured. I hope that the minister responsible will give full consideration to those amendments.

Mal Washer (Moore, Liberal Party) Share this | Link to this | Hansard source

Before calling the next speaker, I acknowledge that we have some members from Clancy College here. Welcome to the parliament.

Shayne Neumann (Blair, Australian Labor Party) Share this | Link to this | Hansard source

I speak in support of Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009. I can recall vividly a conversation I had with a fellow one Saturday morning in my mobile office at Brassall shopping centre in my electorate. He told me that he was an ‘average worker’, to use his expression. He said—and I will not use the language in this House that he used to me—that there were executives and directors who parachuted themselves out of failing companies and left their shareholders and the general public aghast at the excessive payments they received upon termination. The sheer outrage of this gentleman, the sheer frustration and fury in his voice that day, I will never forget. But his is not a lone voice. His is a voice of many people in our community who express fury and utter disgust at the many executives, directors and those in leadership positions in some of our biggest companies who at times of great difficulty and global recession, when their companies profits are down and their shareholders are suffering as a result of the dividends paid based on their shareholdings, decide that it is appropriate to take termination payments of an extraordinary amount.

This has been going on for decades. We have seen companies such as Telstra, Pacific Brands and Qantas—there are so many others I could name—where this has happened. We need to get the balance right, as the member for Pearce said. We need to ensure that we keep our best and brightest at home. About a million Australians live overseas, many of them working in top legal firms, banks, finance companies and corporate entities across the world. You can see Australians everywhere as you travel through Asia. There are many in the Middle East in places like Dubai and Hong Kong, in Europe in places like Paris and London, and in New York and other places. We need to make sure that our executives at home are remunerated appropriately and that we can keep our top executives at home, but we cannot have a situation where it is unbalanced. We cannot have a situation where workers struggle day in and day out to get the kind of wages they need—sometimes they negotiate individually and sometimes collectively through their unions—from management in large corporations. These may be in mining, resourcing or other areas like banking or finance. They find chief executives—key personnel in management—who when things go wrong say, like Pontius Pilate, ‘I’ll wash my hands, take a large payout and go and live elsewhere in the lap of luxury.’ Alternatively, they will live with considerable affluence in their retirement or go from board to board. This is so annoying to the general public.

We need to make sure that our executives are paid properly. Their salaries and entitlements and their share in profits and dividends should be appropriate. I agree with the member for Pearce: we need to get the balance right. But it is unbalanced, and there is nothing you can say to my constituents in Blair or the general public that will convince them otherwise. It is absolutely crucial that the Productivity Commission come down with a good recommendation for a new system of regulatory arrangements in relation to directors and executive remuneration. We cannot have a situation where it is not reviewed. It needs to be a wide-ranging review and I commend the government for what it is undertaking in this regard. We cannot ignore international trends, but we need to make sure that corporate greed is stamped out in this country.

We have about four million people working for small business in this country. There are actually more small business operators than there are trade unions. Those people do not have access to these golden handshakes, and they are just as angry at what goes on as the constituent of mine who came to see me that Saturday morning at Brassall Shopping Centre. It is clearly unbalanced.

I am appalled when I see some of the submissions that were made to the Senate inquiry. Many of the companies and business organisations that were so quick to criticise the government—so quick to look at this and so hands-off when it comes to government intervention in this area—were quite happy for legislation like Work Choices to come in and adversely impact upon the salaries, wages and entitlements of average workers. They were so quick to say: ‘Government should have no role in this. We should leave it up to shareholders.’ But, with non-binding resolutions and only 15 instances in the last year out of a possible 300 where shareholders actually passed resolutions rejecting what directors said at AGMs in relation to remuneration, that is simply not good enough.

Shareholders clearly do not have the power they need to under the Corporations Law. It took a long time through the COAG process for the Corporations Law as we know it today to actually come into being. I am sure our founding fathers would have done something very differently if back in the late 19th century they could have foreseen multinational companies and the way businesses would evolve and develop over decades and decades. We cannot have the same sort of robber baron mentality in our corporate sector—in big business, finance, mines, energy and other areas—that we saw in the late 20th century in America and, to a lesser extent, Australia. We need to have fairness, equality and justice when it comes to these sorts of things.

The legislation before the House is important legislation and it accords with the wishes and aspirations of the general community. I believe strongly that the constituents in my electorate of Blair in South-East Queensland would support this legislation, and I am pleased to be speaking on it today. Its purpose is to make company directors and senior executives more accountable. It is important that we link termination payments to fair remuneration. Many times workers leave and get paid their holiday pay, their sick pay and an ex gratia payment because of their length of service. Many times employers and employees have good relations. In fact, it is important that that be the case. I was in business for a long time and I know how important it is to have a good relationship with your employees.

Out of generosity, not charity, and in appreciation of what their employees have done in that business, company or partnership over many years, many employers pay money as a going away present. I have done it myself and I know many employers who do it. But you cannot have a situation where corporate executives take up to seven times their package in remuneration and think that is not going to have an impact on whether shareholders perceive justice and fairness, particularly in circumstances where their dividends are going down as a result of the global financial crisis. When workers know, particularly in areas like catering, cleaning, child care and others, that their salary has suffered under Work Choices and they look at what chief executives get when they decide to take a golden handshake, they are furious. That anger in my view is righteous.

I am pleased that the Treasurer and the Assistant Treasurer, who was then the Minister for Superannuation and Corporate Law, issued the joint media release on 18 March to say that the Productivity Commission would examine the regulation of golden handshakes in this area. It is long overdue, and the previous government should have done it. Whilst quite happy to attack the salary entitlements of workers through Work Choices, they were not prepared to do this when it came to chief executives and key personnel in management in the corporate sector. It says a lot about the motivation of the previous government.

I am pleased that what we have done here is expand the definition of a termination payment to catch all types of payments and rewards provided at termination. Because of the miracles of modern accountancy, corporations can structure their entitlements in such a way as to get around the problems, vicissitudes and challenges of this area to pay large sums of money to executives. It is not just the readers of the Australian Financial Review but also the readers of the Daily Telegraph who are angry about this.

With respect to the base salary, I think that is a worthy amendment. I think that the base salary should be defined in the regulations to give the law flexibility. I accept that, but I think that what we need to do is make sure that the base salary is really a base salary and not one with all the add-ons we have seen key personnel and management in the corporate sector avail themselves of in the past to supplement their golden handshakes.

The clarification and expansion of the definition of a termination payment is extremely important. The regulation giving the power to prescribe whether certain benefits and payments come within the operation of this piece of legislation is also a vital reform. The significantly higher penalties, with potential fines now set for individuals at $19,800 and for corporations at $99,000, are certainly welcome. But the average person in the street would probably think that they are still too low, based on the kinds of golden handshakes some chief executives and company directors have received over the last few years. Particularly at times of challenge and crisis, the Australian public has historically shown that it is keen to ensure fairness, justice and equity in the workplaces and companies of our nation, because we are all in it together. When someone gets a free kick the average person does not like it, and rightly so.

I am pleased that we have seen, in this bill, the widening of the scope of individuals subject to the regulatory framework of this legislation. Extending the application of the law to key management personnel is important because there are many people in companies who decide things. Companies are usually made up of very senior management: often a CEO, a chairman of the board and a board of directors. And big companies have a great deal of administration. We see that in terms of bureaucracy in governments, but we also see that in our big corporations. So clarifying who is captured by the regulatory framework is important, and expanding that to capture other key management personnel is a crucial reform.

We cannot let the status quo continue. It is just untenable in the mind of the Australian public. You cannot have excessive termination payments paid to company executives in circumstances where the average Australian is subject to the rigours of the global financial crisis, CPI increases to pensions have caused pensioners to feel that they are not being paid enough, workers in low-paid areas with a lack of bargaining power have felt that they have been disadvantaged under the previous government’s Work Choices regime and farmers are struggling with climate change—as they are particularly in my area, in the Fassifern Valley and the Lockyer Valley and the rural parts of Ipswich. We cannot have a situation where shareholders feel absolutely and utterly aggrieved at greedy corporate barons taking golden handshakes in circumstances where the companies are failing and their dividends are lower than ever before.

This legislation is important because it is about a timely intervention in the corporate sector. It is about ensuring greater power for the Australian public, and, by legislation, ensuring greater responsibility in our corporate sector. It is about making sure that those who are given the charge of responsibility for not just products, services and goods but the lives of the men and women in their companies and the consumers of Australia are accountable, responsive and responsible in circumstances where we face such a challenge economically.

So I am very pleased to support this bill. I believe it will not militate against ensuring our chief executives stay at home and do not go abroad. I believe that the member for Pearce is wrong in thinking that this legislation is not timely. I think she is also wrong in thinking that somehow the corporate sector should be left alone. I think it is important that we ensure that they are given a very clear message: they need to behave responsibly in all the circumstances. I support the legislation.

Stuart Robert (Fadden, Liberal Party) Share this | Link to this | Hansard source

It is always good to follow the big-government interventionist, the member for Blair. Big government should be the centre of the economy and big government must intervene in what shareholders are doing. Shareholders do not know best, according to the good member for Blair—government knows what is best. The fact that shareholders own the company and are responsible for the company’s direction is irrelevant. Only big government has the solutions. Only big government has the answers. Big government must be the centre of the economy—so Labor would have us believe. But here we are, with another bill before us where big government is here to save the day. Well, let me give you the drum, Member for Blair: big government does not save the day, because the problem with big government—indeed, the problem with socialism—is that, at some stage, you run out of other people’s money.

The government intends to amend the Corporations Act through the Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009, the principle of change being to lower the threshold for shareholder approval for termination payments paid to company directors and certain other persons, from the current seven years total remuneration to one year’s base salary. As we know, termination payments are governed by division 2 of part 2D.2 of the Corporations Act.

Interestingly, though, on 18 March this year, the government announced a Productivity Commission inquiry into executive remuneration more generally. The commission is due to release its draft report sometime this month and a final report by 19 December. In May this year, APRA, the Australian Prudential Regulation Authority, also released a discussion paper on remuneration for authorised deposit-taking institutions. Subject to consultation, it is expected that the final prudential standards will be released again this month and be effective from the start of next year. There are a range of reviews and commissions going on in this area. But, rather than wait for the outcomes of those—that is, have evidence based policy, as Mr Rudd continues to talk about—here we are, legislating. I note, though, that in June 2004 the Parliamentary Joint Committee on Corporations and Financial Services noted thresholds and appeared to raise some issues with them. I also note from reading that report that the Labor members put up a dissenting report calling for termination payments not to exceed one year’s salary. At least they are consistent.

In summary, the bill lowers the amount that a termination payment may be before shareholder approval is required. The threshold will go from seven years total remuneration to one year’s base salary. I note that ‘base salary’ will be defined within the regulations. I note also that the bill intends to extend the act to cover termination payments for all key management personnel, that is, not just the CEO and directors but a whole raft of other senior people. I wonder how many key management personnel there are in Rio Tinto? Are there 100? Are there 1,000? In the case of reporting entities, this consists of all key individuals that are disclosed in the company’s remuneration report. It will be interesting to see what response companies’ remuneration reports will have to this legislation. The bill also prevents directors and executives from voting in relation to their own benefits and, of course, requires that any payments made without approval be repaid.

The big question facing all legislators is: what problem are we trying to fix? What is it that necessitates a move to amend the Corporations Act and increase regulation? This Labor government came to power promising that for every one regulation it would add it would take one away. During the last two years that I have been here, I have seen literally hundreds of new regulations, yet I have not seen one disappear. I look forward to that day, though I fear that day may never come. So let us focus on what the problem that is that the bill is trying fix. The principal justification for the bill, as far as I can see, is community concern. The minister said in the second reading speech:

There is significant community concern about the levels of termination benefits paid to company management. Such payments are given to outgoing company directors and executives at a time when they are no longer able to influence the company’s future performance. The government’s reforms will empower shareholders to more easily reject such payments where they are not in the best interests of the company …

I note that the minister gave no factual evidence of significant community concern. He just rolled it out. On 18 March 2009, the Treasurer referred to community concern about ‘obscene’ and ‘outrageous’ termination payments and the need to ensure that executive pay is in step with good corporate governance, provides correct incentives and meets decent community standards. Again, there was no evidence of obscenity, and the idea of linking current arrangements and saying they are not good corporate governance is simply outrageous.

Let us look at this issue of whether termination payments are indeed excessive. This bill is premised on there being excessive termination payments across the board and community outrage about how excessive they are. There are clearly some standout cases. Mr Owen Hegarty of Ausminerals received a bonus of $8.35 million in 2008. John Anderson of Consolidated Media received $15 million in 2008. Kim Edwards of Transurban Group received $16 million in his final year, including a termination payment of $5.2 million. There are certainly large numbers. There are always cases of large numbers. But let us look at the entirety. Let us look at the whole, because it is less than clear to me that these excessive examples are indeed representative of general practice within business. In 2004, an article in the Australian Financial Review stated:

An analysis …of the latest annual reports released by 50 of Australia’s largest companies reveals that nearly a third of chief executives are entitled to termination payments worth more than the equivalent of 12 months salary, as well as performance-linked bonuses and entitlements to shares and options …

‘At least a third’—let us call that 30 per cent. That means that 70 per cent are not. The minister is putting forward the idea that this is out of control, it is rampant and it is excessive, but the facts seem to indicate that, based on the analysis of the Australian Financial Review, around 70 per cent are less than the equivalent of 12 months salary. I would suggest to the government that that is not excessive and community concern is blowing out, when for the vast bulk of companies it is less than 12 months salary.

The great fear with any legislation is the unintended consequences—the adverse reactions, the implications and the responses to bills. The Senate Economics Legislation Committee received a range of submissions warning that there were likely consequences, that reducing termination payments to one year base salary would have the impact of inflating base salaries for executives. Reading from the Senate committee report, the Australian Institute of Company Directors described the possibility as such:

… attempts to restrict termination payments are likely to result in a “squeezing the balloon” effect, by which we mean artificial restrictions on one component of executive remuneration will cause upward movement in another component.

The Law Council of Australia expressed similar views:

For many executives in large corporations, base salary represents less than half the value of their remuneration package … this proposal will actually limit termination payments to less than 6 months total remuneration, which is likely to be viewed as inadequate compensation for the risks to tenure of executives in these organisations … the likely consequence of the proposal will therefore be to increase base pay levels, both in absolute terms and as a proportion of an executive’s total remuneration.

The Law Council is warning about the use of ‘golden hellos’ when executives commence a new position. How can the government possibly present a bill that would see that adverse consequence—especially when there are a range of reports and commissions going in, with drafts being released this month alone, to look at remuneration?

The Senate committee report also indicates that other submitters warning of possible increases in base salary include such small and inconsequential firms as Ernst & Young, the Business Council of Australia, ACCI, ABA, Guerdon Associates, the Insurance Australia Group and IFSA—all warning the same thing. Even the AMWU warned that treating termination payments in isolation could lead to manipulation in other areas. My concerns echo theirs and I am also concerned that this legislative overreach and the government’s continued intervention in the market will introduce a range of distortions which will not be in the interests of shareholders. Shareholders are responsible for the company’s outcomes. Shareholders are able to make informed decisions about what they accept and what they do not otherwise do. Shareholders are able to turf directors out and force changes. They do not need the government.

I would suggest that this legislation is little more than a knee-jerk response, an appeasement—yes, Mr Deputy Speaker, in our time—to public opposition to ex-gratia payments made to executives. I can only see that the government is acting after the event, as many corporations are already reviewing their policies on how they deal with these types of issues. This legislation is pre-empting what the Productivity Commission is doing and it is rushed. I am not alone in this parliament in saying that corporate Australia have the capacity to deal with these issues themselves. I have confidence in Australia’s corporate frameworks. I have confidence in Australia’s boards to be able to deal with these issues. I do not have confidence that big government and Labor’s intervention will be able to assist, especially where, if the AFR is correct, 70 per cent of corporations in that top 50 already have termination payments below the levels of 70 per cent. There is further evidence that many companies are moving towards a self-regulatory practice on this issue, especially considering the recent downturn in the economy.

These provisions are, of course, widespread. They move from public to unlisted companies and they lower the thresholds, which will capture middle managers serving as directors. The definition of termination payments is broadened, and there is concern that it will catch genuine retirement of long-serving directors. I do not think the unintended consequence of the impact this may have on sourcing, especially of international directors, has been properly considered by the government. I support the amendment moved by the relevant shadow minister in seeking to make this bill more appropriate for the market in which it operates, and I look forward to the government’s response to what is a sensible and significant amendment.

Arch Bevis (Brisbane, Australian Labor Party) Share this | Link to this | Hansard source

I am very pleased to rise in support of the Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009. I think it is a measure long overdue. The people of Australia have for too long observed some at the top end of town who are only too keen to walk away from their corporate responsibilities with extravagant and vulgar parting handshakes at a cost to shareholders and at a cost to the consumers of Australia.

This bill goes a long way to putting some responsibility back into the corporate largess that is provided to some of our highest paid and most senior executives. Significantly, the key measures of the bill lower the threshold at which shareholder approval is required for a termination payment from seven times the annual remuneration package to one times the annual remuneration package.

When we talk about the packages that those in corporate world receive, we need to put some measurement on that, because I do not think most Australians would appreciate just how well paid some of the Australian business community are. The Business Review Weekly in April this year produced a list of some of the wealthiest Australians. That list also included their estimated annual remuneration. At the top of that list—not surprisingly—is Rupert Murdoch, who receives from News Corporation a remuneration of $28 million. But let me just go down the list and refer to a number of others: Frank Lowy from Westfield, with an annual total remuneration of $15 million; Westpac Chief Executive Gail Kelly, receiving $8½ million; Brian McNamee, Chief Executive of CSL, receiving $5.7 million; Bank of Queensland CEO David Liddy, receiving $2.7 million; and Origin Energy Managing Director Grant King, receiving $4.8 million. These are very large sums of money received as annual remuneration. It is interesting to compare them to the remuneration of the head of the government of the nation. The Prime Minister of this land receives a salary of about $330,000. There are plenty of CEOs in receipt of 10 times that and much more.

It is important that we put in place a mechanism that encourages executive remuneration packages to have realistic base salaries and realistic and proper termination payments. Some of the remuneration packages for our most wealthy raise as many questions as they answer and make you wonder whether or not the base salary is indeed a genuine indicator of what they receive. For example, on the BRW list of Australia’s wealthy, coming in at No. 8, not surprisingly, is Kerry Stokes. What is surprising is that Kerry Stokes, who—according to the BRWhad a personal value in 2008 of $990 million to his name, earned only $119,000 a year. One suspects there are some fairly substantial bonuses, entitlements and share allocations that Kerry Stokes receives.

So when we talk about establishing a fair and proper benchmark for payouts, a key to that is having a fair and proper base salary against which it can be measured. But Kerry Stokes is not the only person for whom that question is raised. James Packer, who was listed as our fourth richest Australian, with a value in shares of about $1½ billion and a total value of assets in 2008 of $3.6 billion, had a total remuneration of zero—and, obviously, James Packer is not short of a quid for tonight’s dinner. We need some regulation in this country to encourage some proper accountability of our CEOs and the remuneration packages they receive. This bill will help do just that.

The bill also expands the number of company officers for which approval is required to include the key management personnel of the entity where the company is a disclosing entity. This is at least going to provide shareholders with a greater degree of authority, and at the end of the day it is the shareholders’ money—it is taken from the customers of the business being operated but it is the shareholders’ money—that we are talking about here that is being distributed. The bill retains the existing requirements for the giving of the benefit to be approved by a resolution passed at a general meeting and for the details of the benefit to be set out in or to accompany the notice of the general meeting. It restricts the ability for a retiree or an associate of the retiree to participate in a shareholder vote that includes their own termination payment unless they are acting as a proxy on behalf of another person. And for those in the business community who have complained about this and thought it harsh, it does in fact operate prospectively. This is not retrospective legislation. It does not impact upon existing arrangements.

For too long we have seen payouts to corporate executives in cases where companies have done very badly and where the corporate executives have been shunted off not because they have done an outstanding job but frankly because they have done an appalling job. And we have actually seen golden handshakes in the millions handed out to individuals only to find that the share price rises after the golden handshake has been given and the deadwood has left. In most places of employment where you had not been doing a good job you certainly would not be given that sort of golden parachute—a handshake in the millions. If you happen to be amongst the lucky few in our land, however, that is possible for you. But whether you have done a good job or a bad job it is very hard to justify to shareholders, and I have to say a lot harder to justify to many of the workers in these companies and to the consumers who buy their products, payouts of the magnitude that we have witnessed.

I will quickly mention some of the cases that I think the Australian public would regard as excessive: the CEO of Santos Ltd, John Ellice-Flint, who received a handshake of $16.8 million on the way out the door; John Alexander from Consolidated Media Holdings, who picked up $15 million; Oz Minerals Ltd’s Owen Hegarty, who received $8.3 million; the ASX Ltd’s Tony D’Aloisio, who picked up $7.7 million; Challenger Financial Services Group’s Mike Tilley, who picked up $6 million; and Fairfax former CEO Fred Hilmer, who picked up $4½ million. And so goes  the list of people who have, in some cases, been paid even after shareholders have expressed a view that they should not be paid. These are very large sums of money that are being paid to individuals and not, in all cases, because the corporations have done well. I want to refer to one of those cases from a few years ago. I quote from an article in the Age referring to some of the failed business executives in the National Australia Bank:

Three sacked National Australia Bank executives who last year took the blame for more than $3.6 billion in losses—

let me repeat that: they took responsibility for $3.6 billion in losses—

from the United States-based HomeSide subsidiary have walked away with … A$8.3 million in termination payments from Australia’s biggest bank.

And at the time the NAB chairman, Charles Allen, described the payments as ‘a necessary step.’ I have got news for the NAB: most Australians would not regard it as a necessary step. They would regard it as obscene. To have people who have been found to have created a $3.6 billion loss being told that they are no longer needed but that there is $8 million on their way out of the door is simply indefensible.

One of the things that I find most difficult to reconcile is the attitude of these same executives, and the boards that approve these payments, to such unwarranted largesse at the top end of the town whilst at the same time they mete out treatment to most of their workforce that can only be described as unfair and harsh. We saw it so often over the course of the last four or five years of the Howard government; some of these large corporations to which I have referred were only too keen to force their workers onto individual contracts negotiated without the support or assistance of their fellow workers or trade unions. They were only too keen to drive down their employees’ conditions of service at the same time as they were putting their hands into the corporate till to pay one another millions of dollars as they left these organisations in, in some cases, a worse state of repair than they found them in when they walked in. It is a reprehensible set of double standards, but it was all too common to witness, particularly in the last four or five years of the Howard government. And I have to say it was encouraged by ministers on the other side of this chamber at the time. In fact, it became so bad and so embarrassing that in the final days of the Howard government I can even recall the then Treasurer having to speak out publicly against some of these obscene payouts to directors whose companies had gone backwards and whose share price had fallen through the floor but who were still happy to pay themselves exorbitant amounts of money in the millions.

Australians who have just gone through a difficult period of 12 months because of a global economic crisis and who have been concerned about their own jobs in ordinary Australia, as well as the investors who have seen their money in shares under pressure because of the global economic crisis, have said, I think quite rightly, that enough is enough. This government has heard that voice of the Australian people—the voice of the Australian investors and the Australian workers of those companies. And it has heard the voice of the consumers of their products who at the end of the day have paid the money from which these profits and dividends are derived. The Australian Labor government has heard that call and this bill is dealing with the problem.

The payout that people get at the moment can be seven times the annual salary without reference to a shareholders’ meeting. As I have commented, this bill will reduce that to one times. I want to give some examples of payouts compared to base salaries that we have witnessed in recent years. These are taken from a report by RiskMetrics Group, whom a number of members will be familiar with and who are often quoted in these sorts of debates. AGL Energy Ltd’s Paul Anthony had a base salary of $1.3 million, which is not a bad salary to take home in any event. The termination benefit paid to Mr Anthony from AGL was $5.1 million—a 394 per cent return on his annual income. The Commonwealth Bank’s David Murray had a base salary of $1.9 million, again, a tidy take-home pay, I would have thought. When he left, he managed to get $2.4 million—a 126 per cent return on his base annual salary.

I want to make further mention of David Murray and the Commonwealth Bank. Under his leadership, the Commonwealth Bank’s attitude towards unions in the workplace and conditions of employment reached a low for the Commonwealth Bank, an organisation which for so long has been highly regarded for its ethics both in the marketplace and as an employer. Under David Murray, they had no trouble at all putting the thumbscrews on the conditions and employment remuneration of so many of their workers, but it did not stop David Murray picking up $2.4 million when he exited the Commonwealth Bank.

I have already made mention of Mike Tilley from Challenger Financial. His remuneration package in 2007 was $1.5 million. He received a termination payout of $6 million—a 400 per cent return on his annual salary. Under our law, a payment of that kind when this bill is passed will need to be referred to the shareholders, and so it should. The shareholders are entitled to make judgments on these matters. I also mentioned earlier John Alexander from Consolidated Media Holdings and his remuneration. In the year in question, he had a base salary of $3.2 million. He received a determination payout of $15 million—a 468 per cent return on his annual salary. Fairfax’s Fed Hilmer received a payout that was 300 per cent of his annual salary. He walked away with $4.5 million. Orica Limited’s CEO Malcom received a payout of $4.78 million—315 per cent of his base annual salary. The two final ones that I will refer to are, firstly, Owen Hegarty, who had a base salary of $1.3 million. He got a golden handshake of $8.3 million—642 per cent of his annual salary; and, lastly, Santos Ltd and John Ellice-Flint, whose annual salary was $2.69 million, a substantial salary package. The golden handshake was $16.8 million—625 per cent of his base annual salary.

The Australian public have had enough of this largess. Many ordinary Australian investors, workers and consumers have had to do it tough in the face of the global economic crisis. Many have had to tighten their belts and have had to deal with all of the pressures that this government has also been tackling. Against that background, to see the sorts of obscene payments that have been made without reference to shareholders is simply unacceptable and unfair, and it cannot continue. This bill is a good bill. The government has the support of many of the shareholder associations. I have no doubt that the government has the support of the overwhelming majority of Australians in this respect.

It is disappointing to see members of the opposition stand and try and put up the feeble argument that somehow the government has overstretched on this point. At least the opposition have read the breeze well enough to know that the Australian public will not tolerate a continuation of their regime. At least they understand that the laws that they defended for so long in government are repugnant to the Australian people and they have not sought to maintain those laws, although every now and then you do get that glimmer of Work Choices and their hope that maybe they can return to those sorts of approaches when dealing with Australian workers. I suggest that those opposite do two things: gauge that public breeze a bit better than they have to date and, more than that, actually look at the decency of this proposal.

This proposal will ensure that shareholders’ rights are better protected. It will ensure that some of the closed shop, top-end-of-town largesse, which is indefensible, is at least brought into the daylight. It does not in any way alter the base salary that can be paid; nor, indeed, is it going to stop necessarily any particular given payout on termination. What it does is provide transparency and accountability when folk at the top end of town want to walk out from their senior executive position taking millions with them. They are not decisions that can be made by the mates down at the club on a weekend after the golf game or down in the cigar filled chambers of the Melbourne Club, or someone else; they are decisions that need to be made in the light of day before shareholders meetings. We are going to provide the opportunity for shareholders to do just that.

Mike Symon (Deakin, Australian Labor Party) Share this | Link to this | Hansard source

I rise to speak in support of the Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009 as moved originally by the minister back on 24 June and now before the House today. This bill aims primarily to strengthen the voice of shareholders. After all, they are the owners of the companies. When it comes to the provision of termination payments and golden handshakes for outgoing directors and executives, they should certainly have a say. I think this is especially pertinent to my electorate, where many of my constituents are what the media has quaintly termed ‘mum and dad investors’. But it is also pertinent to the many retirees and superannuation account holders whose savings are invested in publicly listed companies. I very frequently receive correspondence on issues relating to shares and the stock market, and the topic of excessive executive payouts and salaries is raised often. I think shareholders should not be denied a say in how much an executive or director of a company is paid upon termination. Their voice should be their vote.

Earlier on, I was listening to the member for Blair’s contribution and just now I was listening to the member for Brisbane’s contribution to this debate, and I agree that there is enormous community outrage and resentment towards these massive payouts. There are at the moment no defined limits to these payouts, unlike termination benefits that apply to ordinary working people whose termination payments are governed by awards, agreements and legislative instruments. You certainly will not find seven years of salary or wages paid to a worker at the time of termination—not once, not ever. Even when you look at some of the most progressive workplace agreements that actually deal with redundancies you will see they only allow up to four weeks pay per year of service—and many awards and agreements offer much lower levels. If you have a think about it, at an accrual rate of four weeks per year, an employee would have to work for 91 years to achieve a payout of seven years worth of remuneration.

This bill reflects action on the part of the government in the face of long-held community concern regarding exorbitant executive payouts, especially to the executives of underperforming companies. This bill has been put together in consultation with the industry and shareholder groups with the aim of strengthening the existing corporations legislation. Provisions are made in this bill for the protection of genuine leave entitlements, such as annual leave and long service leave, that would always be paid on resignation, as well as super entitlements up to the statutory percentage.

This bill also broadens the concept of who is considered to be key management personnel to a base wider than just directors to now include the five most highly remunerated officers of a disclosing entity. So people such as chief executives fall under the provisions. Importantly, this bill will ensure the shareholder vote cannot be affected by a retiree or an associate of a retiree by restricting them from voting for their own golden handshake. That happens far too often at the moment.

This bill also introduces company and personal fines for organisations that are found to have breached these new provisions. The fines of $19,000 for individuals and $99,000 for companies are a strong reminder of the government’s commitment to the enforcement of this regulatory regime. This bill will only affect new contracts and renewed or extended contracts. There is no provision in this bill for backdating to affect any existing, unaltered contracts.

The Rudd government, importantly, respects reward for effort—of that there is no question. There is no move by the government to cap payouts. Companies will not be compelled to reduce any payment or salary to anyone covered by the provisions of this bill. However, they will need to have any golden handshakes greater than one year’s base salary approved by shareholders—that is, the owners of the company. It is the shareholders after all that have to foot the bill in the reduction in the value of their shares after a large termination payment to a person who no longer works for their company and is of no current or future value to the company. This is an important point, as golden handshakes, as they are euphemistically called—although I like to call them ‘termination payments’—are a payment made to an executive or director after they have left the employ of a company, which can hardly be categorised as the most efficient use of company funds.

The government is installing a greater measure of democracy and transparency in the sector and allowing all shareholders a greater say on the actions of their boards, the performance of their executives and the performance of their company. The provision for this sort of decision for shareholders already exists; however, at the current threshold, it is a ridiculous seven years of total director or executive annual remuneration. This bill brings the threshold into a position which is more in line with community expectations and which will allow shareholders more say. This can hardly be considered a bad thing in this day and age, with the global financial crisis affecting economies across the world at a time when we have just witnessed the very worst of what a lax attitude to corporate governance can allow to occur. Good executives, performing well, will have no impediment to ample reward for their performance. But it seems incongruous to me that executives should be outlandishly rewarded for poor performance, without the opportunity given to the owners of the company—the shareholders—to vote on such a payout.

Recently, my staff and I assisted a number of constituents in my electorate who lost their jobs when Pacific Brands decided to sack 1,850 employees and shift its operations offshore. The Holeproof factory in Nunawading, in my electorate of Deakin, was one of the plants closed by the company. When those employees who are now redundant talk to me about the challenges now facing them, I have trouble measuring that up against the $3.5 million payment that the former Pacific Brands CEO Paul Moore received when he stood down from the company in December 2007. After all, it was under Mr Moore’s direction that Pacific Brands bulked up on acquisitions, leading to an $800 million debt that in part triggered this year’s abandonment of local production and the consequent mass lay-offs. Under the existing act there is no accountability to the shareholders of Pacific Brands—or its employees, for that matter—for Mr Moore’s actions, and he has already walked away with $3.5 million.

The idea that shareholders should have a say is not new either. As we saw in 2008, shareholders of Oxiana, now OZ Minerals, rejected a $10.7 million payout for chief executive Owen Hegarty. When this payout was announced in June 2008, it was assumed that it was a fait accompli and that it would be approved at the AGM the following month. But, in July 2008, the shareholders rebelled and that payment did not happen at that time.

To touch base with the reality of daily life for a while, a worker on an average salary of $55,000 per annum would have to remain at work for 194½ years, if you ignore inflation, to accumulate a sum of $10.7 million. That is mind-boggling when you think about it—in fact it is better than winning Tattslotto and not having to share the first prize. Yet this amount was put forward as being reasonable for a payment to a CEO who was no longer working in that role for the company. No-one could deny that Mr Hegarty had worked at Oxiana over a period of time, and had, I am sure, built value in the company, but the proposed payout was simply more than what the shareholders were prepared to put up with. This rejection of Mr Hegarty’s golden handshake was heralded by stock market commentator Stephen Mayne as a ‘red letter day for shareholders’. But, of course, there is more to that story—and, as the member for Brisbane said earlier, Mr Hegarty later collected $8.3 million for leaving. That is still an enormous sum of money in anyone’s eyes.

In the past week we have heard the news that the outgoing chief executive of Fairfax had his $762,000 base payment for five months work topped up with a $4.1 million golden handshake. This, of course, is in the same year that Fairfax reported a loss of $380 million. This payout to Mr Kirk came after remuneration details in last year’s Fairfax annual report indicated that Mr Kirk was entitled to a $2 million termination payout. Was there any explanation for this given to shareholders? No, there has been none forthcoming--not until the annual general meeting in November, according to Fairfax chairman and prominent Victorian Liberal identity Ron Walker. By that time the former chief executive, Mr Kirk, and the $4.1 million will be long gone. Under this bill, Mr Kirk’s payout would have been capped at a far lesser amount before a shareholder vote was required. Obviously, that opportunity to be heard would be far more palatable to shareholders than the unexplained $4.1 million payout that Fairfax sent Mr Kirk away with.

These are all examples of high executive payouts for poorly-performing companies. But there are also examples of large payouts in other companies, and I suppose I cannot speak on a bill such as this without talking about the former CEO of Telstra Sol Trujillo. He walked away with a payout of $3.76 million. I will go into this a bit more later on, but Telstra is a company that has performed a little better than some of those others I recently mentioned. But I never hear from my constituents about how well Telstra are doing or the outstanding service they give. In fact I hear the opposite. The feedback I get from constituents is about their burning anger that they are being slugged $2.20 to pay their telephone bills at a Telstra shop or a post office.

Let’s think it through. There are no surprises here—the money for these executive payouts has to come from somewhere. As the member for Brisbane said before, at the end of it all it is going to come from a customer—it is going to come from an ordinary person who has to stump up more money so that some fat cat at the top of the tree can walk out the door with more money. Interestingly, in the case of Telstra’s payment to Sol Trujillo, despite the size of the payment it would actually be below the thresholds proposed by this bill. Why is that? Well, that is due entirely to the size of Mr Trujillo’s base salary of more than $13 million. It certainly raises the related issue of executive remuneration, which I shall leave for another time. That is certainly something worth talking more about.

Recent research compiled by the RiskMetrics Group indicates that amongst the top 100 companies payouts of golden handshakes under the new regime proposed by this bill could have reduced by as much as $47 million for last year alone, if you take out statutory entitlements. Of the 13 top 100 companies that had a CEO depart during the 2008 financial year, all received payments of some sort, but, importantly, five of those 13 did not involve payments that would have triggered the need for a shareholder vote because the executive termination payouts did not exceed one year’s salary. So there is in my mind some sort of standard that already operates there at the moment. I suppose there is some defence of that standard by those companies. These five companies—Aristocrat Leisure, BHP Billiton, Bluescope Steel, Downer EDI and Westpac—show that what is proposed in this bill is not that far removed from current good business practice.

The RiskMetrics report found that three out of the 13 Top 100 companies had estimated potential savings in excess of $10 million should the shareholders have had the right to vote on these golden handshakes. It is not right that those very few people at the top of the tree dictate their own terms and conditions, not only when they are there but also when they are leaving, without reference to shareholders. I welcome this long-overdue reform to excessive executive and director termination payments and I commend the bill to the House.

Graham Perrett (Moreton, Australian Labor Party) Share this | Link to this | Hansard source

I am pleased to speak in support of the Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009. Most ordinary Australians are fed up with the largesse of executive salaries, and particularly the inequality of excessive termination payouts. Over the last few years we have heard of too many examples of executives and company directors walking out the door with obscene amounts of moolah. If you flick back through the business pages of any newspaper over the last few years, you will see some examples of this. For example, Transurban CEO Kim Edwards walked away with $13.3 million. Santos gave John Ellice-Flint a parting gift of $16.8 million. Sol Trujillo received a $3 million termination package after he earned more than $30 million in the job as Telstra CEO. If I can judge his performance on the comments made to me by my constituents, the mum and dad investors, they were not happy with that arrangement at all, especially when you look at the way Telstra shares have performed over that time.

Oxiana paid out $10.7 million to Owen Hegarty despite shareholders voting against the move. Great Southern paid $2 million to former chief executive John Young when he retired in February 2008, and of course after that investors lost some $1.8 billion in this failed company. There were obviously some flawed arrangements in that company. Great Southern made up nearly 50 per cent of the MIS sector, so many mum and dad investors lost out and many rural communities were destroyed when Great Southern went down the gurgler, yet $2 million was paid to the former chief executive, John Young, not too much earlier.

Such payments illustrate that this sector is out of control. They represent irresponsible corporate behaviour of the worst kind. What is particularly offensive to most ordinary Australians is that many of these payments have been made in the face of dwindling share prices and falling company profits—or, in the case of Great Southern, to the executive of an entity that was about to go kaput. In the midst of the global financial crisis, it is just not fair for retirees and mum and dad investors to watch their investments plummet while the failed CEOs and executives can leave with the so-called golden handshakes, when in reality few of them would actually deserve even a fake gold watch. President Obama recently put it this way:

… what gets people upset—and rightfully so—are executives being rewarded for failure.

I could not agree more.

It would have been easy to leave this issue in the too-hard basket, as the Howard-Costello government had done. However, the Rudd government is determined to do something about it. So the bill before the House amends the Corporations Act 2001 to beef up the regulations that govern termination benefits paid to company directors and executives. In doing so, the bill empowers shareholders to reject massive termination payouts that are not in the interests of the company. Under the Howard government system, an executive could receive up to seven times their annual salary before there was any shareholder approval required, and it is easy to see how quickly payouts can blow out when a director can receive seven times his package without any appropriate shareholder approval. This bill drastically reduces this threshold from seven times an annual remuneration package to one times the average annual base salary—surely a much more sensible, common-sense approach. This measure alone will go a long way to rein in excessive payouts.

When we look back historically at the way CEOs and executives have been paid, it is a horrifying arithmetical progression. I will not go back to the 1950s, when the situation was much better than it is today, but let’s look back to 1990, which is not that long ago. For Queenslanders, the Broncos had only been around for two years, to put it in context. Between 1990 and 2005 the average cash remuneration of a CEO in one of the top 50 listed Australian companies rose by 564 per cent to $3.4 million, which is 13.5 per cent per annum adjusted by inflation. But, if you look at average full-time earnings, they only rose by 4.2 per cent per annum. Here we are comparing apples with apples. If you look from 1990 to 2009, the top CEO pay ballooned from 18 times average full-time earnings, as they were in 1990, to—what do you think would be appropriate in 2009?—74 times. Obviously things are a little bit out of control.

But let’s not stop there. Let’s also have a look at the actual results of these companies. If they were performing at rates commensurate with those increases perhaps you could quieten down shareholders, but that is not the case. In fact, if you analyse the performance of companies against three criteria—return on equity, share price change and change in earnings per share, which anyone would agree are real measures of how a company is performing—researchers found that high and excessive pay levels actually coincide with a lower bottom line. It is counterintuitive, almost. This is from research by Dr John Shields from University of Sydney’s school of business. He said:

If you look at the numbers, it is accurate to say the more you pay a CEO the worse the company performs and the less you pay the better it performs.

It is obviously the principle they work on when paying politicians!

The bill will also increase the number of company officers for which shareholder approval of payments is required, to include key management positions as well as directors and senior executives. This is a good safeguard. It provides for additional accountability and, most importantly when it comes to corporate affairs, transparency. The bill also attempts to block any loopholes emerging by clarifying and expanding the definition of a termination benefit. It requires a broad interpretation of ‘benefit’. The bill also includes a regulation-making power to clarify, whenever there is doubt, whether payments are termination benefits or not.

Any termination payment made without shareholder approval will be required to be paid back immediately. Wouldn’t you love to see that—someone sitting down to write a cheque to give back to the corporation, to give back to the shareholders? I would like to see that. Obviously, it is not enough to have the carrot; we also need the stick. The arrangements are backed up by tough penalties for unauthorised payments, including $19,800 for individuals and $99,000 for corporations. These new arrangements will apply to all new contracts entered into, extended or substantially varied after this bill comes into law.

It takes courage for a government to introduce legislation like this. Ridiculous executive pay packets and golden handshakes have unfortunately become the norm in a culture of entitlement and greed in some sectors of corporate Australia, but that does not mean that we cannot turn this culture and that atmosphere around. We can drive a stake into the heart of these corporate vampires. Gordon Gekko must die! This bill is a response to an overwhelming feeling in our communities that these inequalities are just not right. It also sends a strong signal to corporate Australia: we and the Australian community are watching what you do. We expect you to be responsible and we expect you to treat your workers and your investors in the same spirit that you treat your CEOs. Ordinary Australians demand nothing less from the Rudd government, so I commend the bill, proudly, to the House.

Tony Zappia (Makin, Australian Labor Party) Share this | Link to this | Hansard source

I welcome the opportunity to speak in support of the Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009. This bill will amend the Corporations Act 2001 to strengthen the regulatory framework relating to the payment of termination benefits to company directors and executives. The key measures of this bill include significantly lowering the threshold at which termination payments must be approved by shareholders; expanding the scope of the provisions to include key management personnel for companies that are not disclosing entities—this means it is not just CEOs that are covered by these provisions but also other senior executives who are on similar types of contracts; clarifying and expanding the definition of what constitutes a termination benefit; prohibiting directors and executives who hold shares in the company from participating in the shareholder vote to approve their own termination benefits; introducing an express obligation on the recipient to immediately repay unauthorised termination benefits; and, finally, introducing significantly higher penalties associated with unauthorised payments of termination benefits. These measures go to the heart of many of the causes of the global recession and the elitist corporate culture that has evolved in recent decades and which appears to be right in the corporate sector—a corporate culture that is driven by greed and self-indulgence and that has contributed substantially to inequality, price abuse and worker exploitation. I will speak to each of these matters in the time that I have.

Gone are the days when a CEO was usually someone who had worked their way up through the company, dedicated their working life to it and had the long-term interests of the company at heart. Today senior executives move frequently from one organisation to another and are generally on performance based contracts, taking with them huge payouts every time they move on. There is now very much a focus on the short-term result, which can end up in, amongst other things, the reckless behaviour that led to the current global economic crisis, or organisations whose long-term prospects are worse than when the executive started. At the same time the performance driven culture has created out of control and unjustified income disparity between executives and workers with respect to both salaries and termination payments. To highlight this point, I want to quote some statistics from the USA. Whilst these might be US statistics, I would expect that similar trends have occurred in Australia. Regrettably I do not have the Australian statistics, because I am not sure that a similar survey has been carried out. Data from the United States shows that in 1965 the average wage of a CEO was 51 times the minimum wage. By 2005 this ratio had grown to 821 times the minimum wage—that is, from 51 times to 821 times. That is the kind of change we have seen.

At a time when Australia has seen massive improvements in our health, education and economic position, the inequality between CEO and worker salaries is greater than ever. A key measure of this bill prohibits directors and executives who hold shares in the company from participating in the shareholder vote to approve their own termination benefit. An independent board of directors is expected to be part of the checks and balances within a company structure, yet we have seen several examples in recent corporate history in Australia of company directors acting to protect their own financial situation rather than that of the company and its shareholders. Directors of HIH Insurance served time in jail because they were providing misleading information to shareholders. This was the largest corporate collapse in Australian history, and the directors were providing misleading information on the company’s true financial position. They compromised their judgment by trying to protect the value of their own shareholding in the company. Directors of both ABC Learning and Babcock and Brown had significant shareholdings in their companies that had been purchased using margin loans. How can a director act independently when they are concerned that the loan they used to purchase shares may be cancelled by the bank if the share price drops below a certain level? These practices are dishonest, they are fraudulent and they must cease.

We have also seen several instances of this in the past 12 months in the United States, where CEOs and executives of firms have been given massive payouts while their company required a bailout from taxpayer money. Many of these so-called golden parachutes were paid from taxpayer dollars. The CEOs of Merrill Lynch, Lehman Brothers, Citigroup, Fannie Mae, Freddie Mac and AIG all received massive payments either as termination payments or, incredibly, as bonuses as government bailouts were being provided while the firms were being wound up.

This bill increases transparency and empowers shareholders to reject excessive termination payments. In Australia there are similar examples of excessive CEO golden handshakes and remuneration packages. According to a story written by Emma Connors in the Australian Financial Review in 2008, in the five years to 2006 the average base pay for a CEO of the top 100 listed companies jumped from $888,407 in 2001 to $1.8 million in 2006. The average annual bonus paid also more than doubled, reaching $1.66 million. Contrast those payments with those of working Australians. In the same period, from 2001 to 2006, the minimum wage increased from $413 per week to $511 per week. So, in a period when the average base pay of a CEO more than doubled, the minimum wage increased by only 24 per cent. Bonus payments also more than doubled for the same period. The departing Oxiana CEO Owen Hegarty was paid $8.3 million. The departing Telstra chief Sol Trujillo was paid $3.7 million in addition to the Telstra shares he was given. I understand that Sol Trujillo’s total salary package for his final 12 months was $9 million. This is despite Telstra’s share price falling around 40 per cent during his time—from above $5 in 2005 to around $3 in 2009. At the same time Telstra laid off around 20 per cent of its workforce under Sol Trujillo’s tenure, leaving some 10,000 Australians out of work.

Paul Moore, former CEO of Pacific Brands, received $3.48 million in termination payments when he resigned in 2008. Sue Morphet, the current CEO of Pacific Brands, received a pay increase from $700,000 to $1.8 million at the same time that 1,800 workers in her company lost their jobs. And there was $12 million paid to departing Qantas CEO Jeff Dixon in 2008. Interestingly, at the 2008 annual general meeting of Qantas 40 per cent of Qantas shareholders voted against the remuneration report that included this $12 million payout. These payments can only be described as greedy.

In today’s edition of the Australian Matthew Denholm has written about Tasmanian company ACL Bearings, which went into receivership last month. Jeremy Partridge, a worker at the company for the past 23 years, talks about the voluntary $100 a week pay cut he and other workers took in an effort to protect the long-term interests of the company. During the time when workers were cutting their pay by 20 per cent and moving to a four-day week, two directors were paid a total of $665,000 in redundancy payments. To add to this insult, the receivers of the company have advised that there is no money left in the company to pay the entitlements the workers are entitled to under their workplace agreement. I will quote Jeremy Partridge here. He said:

We’ve been shafted. They’ve walked away with the money and we got next to nothing.

I certainly understand and empathise with his sentiments. You can understand how workers at ACL Bearings feel betrayed by these two directors of the company putting their own financial interests first. I understand that this company also got some taxpayer assistance to try and keep it afloat.

In September 2008 the US government bailed out AIG using $182 billion of taxpayers’ money. AIG then used this taxpayer money to pay $185 million in bonuses to executives in March 2009. There was nothing legally the US government could do to stop them using taxpayer money in this way. It was only public outcry that forced some executives to forgo these bonuses. I refer to the US cases because we live in a global economy and we know full well that whatever is happening in other parts of the world is clearly going to happen here in Australia as well. We have seen similar situations in Australia with administrators of companies working to recover bonuses from directors of such companies as OneTel and ABC Learning. The measures in this bill mean that if a termination payment is made in contravention of the requirement to seek shareholder approval, the money must be repaid immediately. Failure to do so will result in significantly higher fines of $19,800 for individuals and $99,000 for corporations. These measures shift the balance away from the directors and executives to the taxpayer or the shareholder whose money is being used to pay the bonuses.

Earlier I referred to a corporate culture which underlies price exploitation and working conditions. I also referred to the performance based contracts today’s executives are placed on, performance measures which are inevitably tied to the bottom line of the annual profit and loss statements of firms. The profit focus of company executives inevitably leads to the two consistent strategies that we see from these profit driven executives, squeezing more out of their workforce through measures such as unpaid longer working hours, wage control, reduced staff numbers or contracting out services. Nothing original, no innovation—just ruthless and insensitive cost cutting.

The opposition we frequently see from CEOs to wage increases or better working conditions—or their support of the failed Work Choices laws—is not driven by national productivity improvements but by the personal gain and individual greed of executives whose own incomes rise as company profits rise. Contracting out services or outsourcing achieves a similar objective, except that the contractor, usually a small business operator, is squeezed to the hilt. And if the contracting business goes down the smaller contractors are often sent bankrupt and pushed to the back of the queue of creditors trying to recover money from the failed company. In the long term, the most productive organisations are those that invest in their workforce rather than exploit them. But when all you are interested in is short-term results, there is the behaviour I have just described.

I now turn to the second matter I referred to earlier, and that is the exploitation of consumers. Bottom line profits are also affected by prices charged. That is particularly so when consumers have little or no choice because the business they are dealing with has a monopoly or limited competition for the product or service being provided. There could be no better example of that practice than in the recent decision by Telstra to charge customers $2.20 for paying their accounts with cash. This matter has already been raised in the House by my colleague the member for Braddon. This new fee can only be described as a rip-off. Cash is legal tender, guaranteed by the government, and now Telstra has imposed a charge if customers use it. It has done because it can—not because it is right, not because it needs to, but simply because the new Telstra CEO wants to impose a fee, obviously to increase Telstra’s profits. One can only speculate why, but I will leave that to the imagination of the Australian people.

Constituents in my electorate of Makin who have contacted my office about this matter are outraged at the $2.20 fee, and understandably so. If they pay their accounts through their bank they are likely to be charged a bank fee. If they use a credit card they incur a credit card fee. So, whichever option they choose, it is likely to incur an additional cost. Payment of accounts is part of the administrative costs of every organisation and should be costed into the operational overheads of a business. One wonders what other charges Telstra proposes to add on in the future. And would the company act so inconsiderately if it did not have a monopoly?

The last point I make is how executive payments have contributed to the global financial crisis. It is my view that they have contributed to the global financial crisis because senior executives were hell-bent on short-term profiteering, thereby exposing industries and financial organisations to extreme risks—risks driven by unrealistic expectations and poorly assessed proposals and schemes and risks which would never have been taken if executives assessed the long-term outcomes of their decisions rather than the short-term profits. They do that because they know that they are only there for the short term and they do that because they know full well that by the time the consequences of their actions are exposed they will have moved on and be working elsewhere. They will have moved on having taken their own handsome remuneration from those organisations—all based on performance criteria which are underpinned by the bottom line profit of the company or firm that they are working for. Those kinds of practices, and practices which I referred to earlier, are not only dishonest but in some cases fraudulent. When we see some of those practices it is not surprising that some of those executives have ended up in jail. What is even more concerning and disturbing is that even as their failed organisations were going down senior executives were squandering company funds on lavish self-indulgences.

I heard the shadow spokesman refer to performance based criteria in contracts and the fact that this kind of bill may be a problem for such contracts. I have some experience in sitting around a table trying to determine whether a CEO has met the performance criteria that were expected of him. It is my absolute and clear conclusion that performance based contracts are nothing but a sham. Trying to determine and measure true performance is near impossible when in most cases the performance criteria are usually set in advance of the person being employed and are set in a way which would make it almost impossible to refute the CEO’s or executive’s claim that they have achieved their performance targets. So they become nothing more than a sham and nothing more than an opportunity for CEOs and executives to claim additional payments from the companies or firms that they work for. I am not persuaded by the opposition’s concern about that point; nor am I persuaded by the other matters that the shadow spokesman raised in his response to the bill.

This bill may well not solve all the problems that I have referred to and it may well not fix all of the concerns that I have with the way many CEOs and executives operate, but it is a welcome start. It is a start in the right direction. It is a start that I believe will be widely supported by the Australian people and, more so, a start that I believe that the Australian people would be expecting of this government. I commend the bill to the House.

Mark Dreyfus (Isaacs, Australian Labor Party) Share this | Link to this | Hansard source

The Australian people have become accustomed in recent years to reading stories of failed companies and of reading stories of companies that have recorded very substantially reduced profits or, indeed, very substantial losses in particular years of operations. They have become used to reading stories of companies that have reduced profits or substantial losses retrenching very, very large numbers of employees. Equally, in the context of these same stories, they have become used to reading of executives rewarding themselves notwithstanding the failure or poor performance of their companies with excessive termination payments at the very time that the company is on the slide. Almost all Australians who read stories of that nature recoil. There is something wrong about a system where company directors and senior company executives sitting around the boardroom table together can decide, in effect, to reward themselves with extraordinarily large amounts of money. They are not mere numbers, as the member for Fadden would have us believe, they are real dollars, excessive amounts of money, and what this bill, the Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009, seeks to do is to impose some check, some curb, on those kinds of excessive termination payments.

In the last two years alone we have seen several high-profile Australian companies—Telstra, Pacific Brands and Qantas spring to mind as concrete examples—which have posted reduced profits or significant losses and which have restructured their operations and retrenched large numbers of employees. At the same time, those very companies, Telstra, Pacific Brands, Qantas—and there is a whole range of other companies that I could name—have continued to pay not only large salaries to their senior managers but often very, very large termination payments which almost everyone looking at them would say are excessive. Throughout the 11½ years of the Howard government nothing was done to rein in this kind of excessive remuneration of executives, and it has been left to the Rudd Labor government to try to come to grips with what, on any view, is a serious problem. It is a serious problem because what we are seeing is a failure of corporate governance; what we are seeing is a disconnect between the performance of a corporation and the way in which its executives are remunerated.

We are all familiar with the notion of bonus pay; we are all familiar with the notion of providing an incentive for good performance. But how far have we gone from a true system of incentive pay or performance pay when, at a time of shockingly poor performance by a company, the senior executives who have been responsible for that shocking performance are rewarded with huge salaries—payments that are in no way connected to the performance of that corporation—and a huge termination payment that is itself unrelated in any way to the performance of the company.

This bill seeks to alter the structure of executive pay and strengthen the regulatory framework that relates to the payment of termination benefits to company directors and executives. Specifically, at the moment, company executives can receive up to seven times their annual remuneration before shareholder approval is required. That represents a significant problem, as there is evidence that there is a lack of shareholder control and oversight. The House should be in no doubt that what this bill is directed at is returning some measure of control to the shareholders of corporations, because that is the mechanism that has been adopted in order to impose some curb or check on these excessive executive termination payouts.

There will be a requirement, if this legislation is enacted, for shareholder approval for termination payments of more than one year’s base pay. That will go some way towards curbing excessive termination payments. There is, on any view, something seriously wrong—and the Rudd Labor government is acting on this sentiment—when executives can walk away with millions of dollars, having engaged in a course of excessive risk taking, having presided over a situation where the company has lost substantial amounts of money and where hundreds or, in some cases, even thousands of employees have lost their jobs as a result of excessive risk taking by those executives. Something is seriously wrong when it takes just three days for some executives to earn what their employees take home in a year.

The government does expect that this legislation will lead to a change in the behaviour of senior executives and the behaviour of the boardrooms of Australia. Because even though it might be said that the mechanism that has been adopted here for shareholder approval will not in itself automatically lead to complete control over these kinds of payments, the fact that approval will need to be sought will ensure that the amount of these termination payments will become publicly known and, in the course of seeking shareholder approval, discussion of the amount of these termination payments will be possible. As always with matters of this nature, as the famous United States Supreme Court judge Justice Louis Brandis once said, ‘Sunlight is the best disinfectant.’ The fact that termination payments will be exposed to public scrutiny, exposed to the scrutiny of shareholders, and that shareholder approval will need to be obtained means there is likely to be a check and some brake on these payments, which at present are not subject to any check.

Currently, there are some requirements for disclosure of the actual remuneration levels of company directors. There is some requirement for disclosure of actual remuneration levels of the five most highly paid executives of corporations but, even there, there is a doubt as to whether those disclosure requirements that have been present in the Corporations Act for many years are requirements that will lead to the disclosure of any termination payments which are the subject of this legislation.

The House should be in no doubt about the amounts of money involved. It is not necessary to name the individual directors who have received very large payments in the millions of dollars. We have heard from a number of speakers identifying particular senior company executives who have received amounts in the millions of dollars. It is better to look at this as a systemic issue, and we need go no further than an article, which appeared in last week’s Herald Sun, reporting on an assessment done by leading corporate governance adviser RiskMetrics, which revealed:

At least $62 million could have gone to shareholders rather than departing CEOs if proposed legislation curbing “golden goodbyes” had been in force.

The research by RiskMetrics also revealed:

… departing chief executives from top Australian companies cost shareholders $80 million in termination deals last year.

And further:

Fourteen CEOs from 13 companies reaped generous payouts, with the average deal worth $5.71 million—almost 1.7 times the average paid over the past three years.

Eight of the CEOs received termination payments that exceeded a year’s fixed remuneration, effectively costing shareholders an extra $62 million.

It is worth quoting what Mr Martin Lawrence, head of RiskMetrics Australian and New Zealand research had to say about this very legislation which is before the House. He said:

… shareholders could have voted down the deals if proposed legislation had been in place.

To finish the quotation of Mr Lawrence:

One of the frustrations people have with executive contracts is that they are not drawn up in the context of deteriorating economic conditions when a lot of them are invoked …

We had the usual bizarre contribution earlier in this debate from the member for Fadden, who would have it that, in some way, this is interventionist legislation or socialist legislation, ignoring entirely that this legislation simply adds to a scheme of regulation of executive salaries, a scheme of regulation of directors’ remuneration that has been in place for many years. And the speech from the member for Fadden failed to understand that context.

Harry Jenkins (Speaker) Share this | Link to this | Hansard source

Order! It being 2.00 pm, the debate is interrupted in accordance with standing order 97. The debate may be resumed at a later hour. The member for Isaacs will have leave to continue speaking when the debate is resumed.