Peter Slipper (Fisher, Liberal Party) Share this | Link to this | Hansard source

The original question was that this bill be now read a second time. To this the honourable member for Aston has moved as an amendment that all words after ‘That’ be omitted with a view to substituting other words. The question now is that the words proposed to be omitted stand part of the question.

Darren Cheeseman (Corangamite, Australian Labor Party) Share this | Link to this | Hansard source

I rise to speak on the Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009. This is about Labor again trying to clean up the mess left behind by the Liberals when they were last in government. This bill arises from the Liberals’ decade in power when they did nothing about clear accountability issues, such as executive remuneration as it spiralled out of control.

It is about clearing up the mess that was left to us by the previous government through the period from 1996 to 2007. This is one piece of legislation that I believe has the overwhelming support of the Australian people. It is legislation that I am 100 per cent committed to. Working Australians have been outraged to hear time and time again of reports of executive salaries that have spiralled out of control—and doubly so when the executives got paid just before a company crashed or the company’s performance petered out on the stock exchange.

As usual, it takes a Labor government to fix up these excesses. The bill will amend the Corporations Act 2001 to strengthen the regulatory framework relating to the payment of termination benefits to company directors and executives. Whilst it is hard to fix all the issues because of their complexity, this bill puts in place solid reforms that will make company executives, CEOs and company directors more accountable.

The three key measures of this bill include lowering the threshold at which termination payments must be approved by shareholders, expanding the scope and provisions to include key management personnel for companies that are a disclosing entity and clarifying and expanding the definition of what constitutes a termination benefit.

I want to say upfront that there are thousands of decent, fair-minded company directors, CEOs and executives who care about the standards that they set. I know many people in the business world who have very high principles, who work very hard and who do give a damn about the people that they employ. But it is equally true that there are many motivated mainly by greed, who jack up their own pay at every opportunity—often at the expense of ordinary workers. There are people who hide this, who try to obscure their remuneration via all sorts of mechanisms.

The core elements of this bill are a clear indicator of this. Because of the behaviour of many executives, we are having to, as part of this bill, prohibit directors and executives who hold shares in their company from participating in shareholder votes to approve their own termination benefits. You would think that this sort of behaviour would not occur. You would think that people would see the clear conflict of interest and, of course, declare it and also exclude themselves from the vote. But that is not so. Greed overrides principles in the corporate sector of many companies on too often a basis.

As part of this legislation, we are introducing an express obligation on the recipient to immediately repay unauthorised termination benefits. We are introducing significantly higher penalties associated with unauthorised payments on termination benefits. These are provisions the former government should have immediately put in place when they saw the stories of excessive greed unfolding over a decade. But they did not. If the Howard government had not refused to act, these sorts of laws would have been in place during the collapses of the global recession that we are currently enduring, where we saw many major companies collapsing, with executives still walking away with truckloads of dollars.

These amendments are urgent as there is significant community concern about executive largess, particularly at a time when many Australian families are being hit hard by the global recession. The new laws will expand the definition of a termination benefit, including a requirement for a broad interpretation of the term ‘benefit’ and a requirement that the substance should prevail over its legal form.

We are trying to put an end to some of the slippery little schemes executives put in place to assist them. This will include, for example, amounts paid as voluntary out of court settlements. The changes do provide the powers to prescribe whether certain types of benefits are to be given in connection with a person’s departure from office. For example, a payment made in connection with retirement, loss of office or position includes the automatic or accelerated vesting of options and any payments in lieu of notice.

We are significantly increasing penalties for breaches as part of this legislation, with potential fines for individuals set at $19,800 and for corporations at $99,000. However, as is usual in laws of this nature, the new arrangements will not apply retrospectively to existing contracts. It will apply to all new contracts once this legislation gains royal assent.

Whilst there are many examples of good executives, there are also many examples of very average executives, with average principles. In Australia I have to make mention of outgoing Telstra Corporation Chief Executive, Sol Trujillo. Poor old Sol was totally committed to driving down costs. He and other executives threatened and browbeat the workforce, forcing individual contracts on workers and driving down conditions of employment. Then it was, ‘See you later, mate.’ He took a $3 million termination payment on top of his $13.4 million base salary. I thought that was outrageous. I think he thought he was being modest! That was when he was sacking thousands of workers and driving down their conditions of employment through the course of his reign in that office. He was not a particularly principled man in my view. He was out of touch.

When this issue comes up, we always hear the Liberals trot out the hoary old line that companies are forced to pay these salaries and benefits because the market determines executive pay. If we do not pay this, as their argument goes, we will lose our top executives. That is what the Liberals say. I believe that is absolute rubbish. I believe there are many highly qualified executives who are smart, honest, trustworthy and do want to work for Australian companies. My view is that the sort of person who wants these executive payments to continue has a question mark over them from the start.

What did Sol Trujillo achieve at Telstra for his $13 million a year plus? The answer in my view is virtually nothing. He made the service worse, none of the big reforms that were needed happened, and he intimidated and demoralised his workforce. He, like so many other brilliant executives, relied on the very blunt and very dumb management tool of sacking workers at every opportunity. There are plenty of recent other examples that we can draw upon. Sol was not alone in this. Pacific Brands sacked 1,800-plus workers but did not address the core problem, which required responses other than the simplistic sacking tool most highly paid executives often resort to. Pacific Brand’s CEO left with a golden handshake of $3.4 million as the company got worse and worse.

Everyone also knows the shocking excess of Mr Owen Hegarty of OZ Minerals. He got a bonus payment of $8.35 million, which from memory was around six times his normal base salary. I would have loved to see Mr Hegarty stand in front of everyday shareholders and argue his case. These examples, in all likelihood, would not have happened if we had put in place these legislative arrangements some time ago. At the very least, they would have had to go through a much more rigorous process to defend their salaries.

The Australian people overwhelmingly support what Labor is doing. Australians do not support amoral profiteering and thinly disguised greed. They support a decent day’s work for a decent day’s pay, as they have always done. This bill is about introducing fairness and proper process into all areas of the corporate world, and it is another example of a good Labor bill. I commend this bill to the House.

David Bradbury (Lindsay, 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. This is one of the more important bills that I have had the opportunity to speak on. It is important that this parliament pass this bill because it is above all other things about restoring some sense of justice in the way in which our mixed market system operates. We have seen over the last period some of the excesses. We have also seen how some of those excesses have contributed to the global financial crisis and the global recession that has followed. There needs to be some alignment between the success and profitability of companies and the remuneration of those charged by the shareholders with responsibility of running those companies. There is no question about that.

There are fundamentally two reasons why the measures contained within this bill are necessary. The first one is that termination payments, the ones that we have seen, have been excessive. The second one is that, far too often, these payments have been no reflection of and have had no alignment to the profitability of the companies which those directors, executives or management personnel have been charged with the responsibility of running.

I saw an example in an article written by Clancy Yeates which appeared in the Age of 25 June this year, and I would like to quote that example. The article covered some of the aspects of this bill, but also dealt with what I believe are some of the more egregious examples of these so-called golden handshakes being awarded. In being awarded, they have made a mockery of the principle that there should be some alignment between good practice, performance and the rewards that are on offer for those involved in running these companies. The article says:

In April last year, Transurban paid departing managing director Kim Edwards $5.2 million two months before the company halved distributions and raised capital from shareholders.

So there we have a termination payment in the order of $5.2 million, made only a couple of months before the company which this particular individual was charged with the responsibility of running halved its distributions and then called upon shareholders to provide additional injections of capital. To me, there is something fundamentally wrong with a system that allows a decision of that nature to be taken, and taken without any shareholder involvement in approving it. There is another example cited in the article, relating to the architect of the ill-fated merger between Oxiana and Zinifex to create OZ Minerals. The individual concerned there was Mr Hegarty, who received $8.35 million when he resigned. By any community standard, these amounts of money are phenomenal.

I want to just put that into some context. If we go back to the most recent figures that were collected on this, in the 2006 Australian Bureau of Statistics census, we see that in my electorate of Lindsay the median household income—not individual income; household income—was $57,876 per year. Just to put that into some perspective: if you managed to pull in $57,000 and you worked for 42 years—assuming you worked from 15 to 67, as will soon be required—then we are talking about an income across your lifetime of $2.4 million. Clearly, there are some problems with trying to make an assessment of what a lifetime income would be, based on current year analyses. But we can see the scale of the discrepancy between what an average working person in my electorate can expect to earn through the course of their lifetime compared to the amounts of money that are involved in these one-off termination payments.

Let us also not forget that when an executive or director leaves a company with such a termination payment, more often than not they walk away with the capacity to continue to earn an income by various other means. So it is not as if this is a final payment to set them up into retirement. And even if it were, it would be a pretty generous one. But, in many cases, the individuals concerned go off and take up other appointments or posts and continue to generate incomes of a scale that is truly phenomenal.

I have had a look at figures for some payouts over the years. I see that when Chris Cuffe from the CBA group’s Colonial First State left in 2003, his final payout was $32.75 million. At the time, his base salary was $2.82 million. We see that the final payout to Peter Smedley of the Colonial group was around $20 million. John Ellice-Flint from Santos got a final payout of $16.8 million; his base salary was $1.5 million. These are extraordinary amounts of money. Mr Gilbertson from BHP Billiton got $12 million for six months service as the CEO, and a $1.5 million indexed annual pension, for life, for 32 years with the company. Well, at least he contributed 32 years with the company. But that is an enormous payout. His base salary was $2 million. Of course, his base salary is in the same ballpark as the lifetime earnings of a family on the median household income in my electorate. That is just to put this into scale.

I would like to turn to some of the substantive provisions of the bill. It is important to note that this bill is not about setting controls and prohibiting companies from paying termination payments that might be considered excessive. But it does require a lowering of the threshold at which those payments will need shareholder approval. The threshold will be reduced from what it is currently, which is seven times the annual remuneration package—which is a larger and more expansive definition than base salary—to one year’s average base salary.

Let us look at the justification for that—and I think that there are strong grounds for it. The first point to make is that I see—from having a look at some of the submissions that were made to the Senate Economics Legislation Committee that inquired into this matter—that there was universal agreement. There was consensus that the current level, of seven times remuneration, is excessive. So the regulations that have been in place, and certainly were in place for the entire period of the previous government, are now universally acknowledged to have been excessive. And some of the payments that I just read out were clearly made during the course of the previous government. It would be fair to say that there was not an appetite for any serious reform of these matters when the previous government was in place.

The 12-month threshold is also something that can be seen as referring back to the findings of a Labor minority report on an inquiry by the Parliamentary Joint Committee on Corporations and Financial Services in 2004. That minority report noted that termination payments for executives and directors exceeding one year’s salary should be subjected to shareholder approval. That was a benchmark that was set back in 2004, and clearly there are other justifications for setting it at 12 months.

I note that the Senate Economics Legislation Committee considered the comments of Treasury on this matter. Treasury referred to the RiskMetrics data which was released in November of last year which indicates that the average CEO across the S&P/ASX 100 companies receives just over $3.4 million, or 201 per cent, of their salary as a termination payment. Based on that data Treasury found that 20 of the 33 CEOs included in the sample that was considered by RiskMetrics would exceed the proposed new threshold, with the rate expected to decline for smaller companies. Treasury’s conclusion on this point was:

Based on this research, it would appear that between approximately 50 to 60 per cent of termination benefits would be captured by the new threshold, which Treasury considers to be an appropriate level.

I certainly consider it to be an appropriate level.

It is instructive to make the observation that Professor Peetz made in some of evidence that he gave to that inquiry. He reflected upon the disparity between even setting levels at one year and the requirements under the Fair Work Act that would apply to any other employee. Under the National Employment Standards, those provisions in the Fair Work Act provide that, in general, employees will be entitled to one to four weeks notice of termination or payment in lieu, depending on their length of service. So the disparity continues to be a very large one, and a little bit of perspective needs to be maintained by the people that argue that a threshold of 12 months base salary is too harsh or in some way draconian.

Another aspect of the bill is that it expands the scope of those company officers for whom such shareholder approval will be required. This is a very positive development. It expands the range of the individuals concerned to bring some alignment with the list of individuals that would otherwise need to be acknowledged in the remuneration report as part of the annual reporting process of companies. Another reform contained within this bill is the clarification and the expansion of the definition of a termination benefit. The essential underpinning of this element of the reforms is that the determination of the termination benefit is intended to be as broad as possible. Of course, there is also a provision to allow for a regulation-making power to specify particular types of payments as being included within that definition.

Another aspect of the bill involves a prohibition on retiree directors or key management personnel from participating in a shareholder vote in relation to the decision taken in relation to their own termination payment, unless, of course, they are exercising proxies on behalf of others. Notwithstanding these reforms, we will be retaining the existing requirements that the termination benefit be approved by a resolution passed at a general meeting and that the details of the benefit be sent out or accompany the notice of the general meeting—important notice requirements.

Another aspect of the reforms is that there will be a new express obligation introduced. The obligation will be imposed upon the recipient of a termination payment to repay the benefit where the termination benefit was paid in contravention of the requirement to seek shareholder approval. In the context of these reforms and in the context of the existence of these rules in the first place, it is only fair that there be such an express obligation. These reforms also increase the penalties for breaches of these provisions to $19,800 for individuals and $99,000 for corporations. Of course, the new provisions are not retrospective.

It is also important to reflect upon one of the arguments that are made by those opposing these reforms—that is, this measure in some way inhibits our ability to compete internationally in the global marketplace for business leaders. In this regard, I draw the House’s attention to an article by Clancy Yeates in the Sydney Morning Herald on 25 June this year which read:

But other research suggests the hunt for talent may not be as global as companies claim. A recent survey of 300 companies by the proxy advisers RiskMetrics found 57 per cent of chief executive replacements came from within the company, with 18 per cent recruited from overseas.

Those figures certainly tell a slightly different story about the source from which individual executives are recruited. The suggestion that this in some way is going to inhibit our international competitiveness is a claim that is vastly overblown.

It is important to remember that, in the context of economies throughout the globe coming to terms with this common problem of executive salaries and the excessive nature of some of the payments that have been made, there will be continued global cooperation to ensure that, in the end, there are standards that are applicable not just in this country but throughout the world to ensure that there is some alignment between performance and reward.

In conclusion, I would make the following observations in relation to the opposition’s stance on this particular matter. If the shadow minister has telegraphed the view of the opposition, as I think he has, the opposition believes that these proposals are too harsh and too draconian, but, at the end of the day, they are unlikely to oppose them. Maybe I am giving the opposition too much credit in this regard, but that was certainly my impression from listening to the shadow minister’s comments earlier. Even though there is now an acknowledgement from those on the other side that the seven times threshold for the remuneration of an executive or director was excessive, there was absolutely no effort on the part of those on the other side to take any action in their 11½ years in office—and I have to say that some of the more outrageous payments were made during the period of the previous government. So there was no effort. I see that the shadow minister is strenuously objecting, but the fact that these requirements continue to exist on the statute book today tells a very simple story, and that is that those on the other side failed to correct what was clearly an anomaly—and some would say it was a loophole.

We are seeking to redress this anomaly with this bill, and I am confident that it will have the support not only of the House but also of the other place. It is important that we take these steps and that they be complemented by the work of the Productivity Commission and the government’s response to that inquiry. What we are talking about here is restoring some sense of fairness to the way in which our economy operates and ensuring that, while those who contribute to a company’s profits do receive due reward for their contribution, there is some alignment between their contribution and the profitability of the company they are involved with.

Chris Bowen (Prospect, Australian Labor Party, Minister for Financial Services, Superannuation and Corporate Law) Share this | Link to this | Hansard source

I would like to thank all the honourable members who have taken part in the debate on the Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009. The global financial crisis has highlighted the importance of ensuring that remuneration packages are appropriately structured. There is, quite understandably, increasing community concern about excessive pay practices, particularly at a time when many Australians are being hit by the global recession. Clearly, shareholders need to be empowered to reject excessive termination payments that are not in the company’s best interests.

The reforms in this bill will substantially improve the current framework relating to termination benefits in a number of ways. This bill will substantially reduce the threshold for shareholder approval, which will give shareholders the ability to scrutinise and reject excessive termination benefits. It will also expand the scope of individuals covered by the regulatory regime, improve the integrity of the shareholder vote, facilitate the recovery of unauthorised termination benefits and substantially increase the relevant penalty provisions.

The reforms have been the subject of extensive consultation, which the government has been responsive to. It is true to say that there were concerns raised in relation to the original regulations that were issued, but many of those issues have been worked through in a constructive fashion between the government and concerned stakeholders. The final regulations supporting the bill were issued by me last week following wide-ranging public consultation. The regulations provide a definition of ‘base salary’, clarify and expand the types of benefits that are or are not subject to shareholder approval and prescribe the circumstances in which a benefit is given in connection with a person’s retirement.

The government has responded to shareholder concerns by deciding not to change the timing of shareholder voting arrangements. We are confident that these reforms will ensure Australia’s continuing international competitiveness. Globally there are no consistent requirements covering the payment of termination benefits. Australia’s approach ensures that our regulatory regime remains at the forefront of international best practice.

I now turn to the amendment moved by the member for Aston and his comments in the second reading debate—and I am glad that he is in the chamber. The member for Aston said at the beginning of his remarks that the bill is in many ways sound. He then used his 20 minutes to argue that it was not sound. So I am not sure where he is coming from. I recognise that the opposition has many positions on some issues, but it is unusual for a shadow minister to outline many positions in one speech.

My attention has also been drawn to the comments of coalition senators in the consideration of this bill by the Senate Economics Legislation Committee—and I always read very closely the Senate committee reports on legislation that I am responsible for. The coalition senators said:

… we are aware that:

• this legislation is a kneejerk reaction to appease public opposition to ex gratia payments made to executives to remove them from office;
• the government is acting after the event insofar as companies are already reviewing their policies in this area …

They are critical of the government for going down this road. But perhaps most interestingly they say:

Coalition senators share the view of many that presented or submitted evidence to the inquiry that the bill has elements of regulatory overreach.

If that is the position of the coalition, that is fine; if that is where they stand, that is fine. But I find it very difficult to align the comments of the member for Aston and the coalition senators with the position of the Leader of the Opposition. On 27 February 2009 the Leader of the Opposition said:

We have proposed a very simple, concrete reform which would deal with this—

he is talking about executive pay—

and that is to make senior executive salaries only able to be increased or varied with the approval of shareholders.

He went on to say:

Now, at the moment the senior executives’ remuneration package goes to the shareholders and they can give an advisory opinion on it but it’s not binding. We say change the law so that the shareholders vote.

The Leader of the Opposition added:

All you need to do is change the law so the senior executives, the chief executive and say the next two or three people, their salaries must be approved by the shareholders. Yes or no, if the shareholders approve it well, it’s their company, they can pay their staff, high and low, what they wish.

So the Leader of the Opposition says: ‘Put it all to shareholders. Let’s put the whole lot to shareholders: the complete remuneration package, everything they get paid, including the termination pay.’ Then coalition senators say: ‘This is regulatory overreach. This is a knee-jerk reaction. What is the government doing?’ Who is running this party, Madam Deputy Speaker? I ask you. Is it still the policy of the opposition to put all remuneration of the directors and senior executives before shareholders? Is that still opposition policy? If so, will somebody please send an email to coalition senators? Will somebody please let them know so that they do not make ridiculous statements like this in dissenting reports on government legislation? Will somebody please tell the shadow minister so that he does not move amendments which conflict with his leader’s position? His leader’s position is that all remuneration should go before shareholders.

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

Madam Deputy Speaker, I raise a point of order. I ask the minister to come back to the bill before the House.

Danna Vale (Hughes, Liberal Party) Share this | Link to this | Hansard source

Minister.

Chris Bowen (Prospect, Australian Labor Party, Minister for Financial Services, Superannuation and Corporate Law) Share this | Link to this | Hansard source

I know the shadow minister does not want to hear this but it is an important point. The member for Wentworth, who is to my knowledge still the Leader of the Opposition—he was at two o’clock, last time I checked—has the policy that all remuneration should go before shareholders. The shadow minister, the member for Aston, has an amendment which waters down the government’s position and which says that less should go before shareholders than what the government’s position is. So who do we believe: the Leader of the Opposition or the shadow minister? I actually think the shadow minister is not a bad bloke, but where does the coalition stand on this policy? Is it the Leader of the Opposition’s or the shadow minister’s position? I am not sure which is the case and the House cannot know.

Perhaps when this goes into consideration in detail the member for Aston could enlighten the House as to whether the position of the Leader of the Opposition that I outlined a few moments ago is still coalition policy. It was that all executive remuneration goes before shareholders: salary, benefits, termination benefits. The government has said: ‘We don’t accept that. We don’t think that is a good idea.’ Dare I say we think that is regulatory overreach. We think that probably would not work. So we have come up with a modest but important measure to deal with what we see as a significant mischief, which is excessive termination pay, termination pay which is not linked to company performance. The community, with some just cause, gets very concerned when they see executives leaving a company that has been in difficulty—and often the chief executive or other executives must take some responsibility for that—and yet they get very substantial payments, without approval by shareholders.

The government has said: ‘Why don’t we reduce the level of executive termination pay that needs to be put to shareholders from seven years of total remuneration to one year of base pay? If the company really feels that payments higher than that are justified, if the company really feels that it can be warranted and explained to their shareholders, then put it to the shareholders.’ We are not saying they cannot do it, we are not saying we are going to outlaw it, we are not putting on a cap. We are saying, ‘Convince shareholders.’ The member for Aston has foreshadowed an amendment in consideration in detail which states, ‘We think we should make it total remuneration, not just base salary.’ So he would reduce the number of things which go to shareholders for a vote. Base pay at this level often represents about 30 per cent of total remuneration, so this would be a substantial watering down of the government’s position, and we will not accept the opposition’s amendment today. The opposition may well have to consider their position in the other place and they may well have to consider to vote for this legislation as it stands or to vote it down. Their position will be open for scrutiny by the Australian people.

We hear, as I say, many positions from the opposition on many things, but in my view this one takes the cake. The Leader of the Opposition is, as we all know, prepared to say anything and do anything for a cheap, populist stunt. He came out earlier this year and said: ‘I am tough on executive salaries. I will ensure, if I am Prime Minister of Australia, that they all get put to a vote; every last cent of an executive’s remuneration will need to be put to a vote of shareholders.’ And his shadow minister moves an amendment today to water down what we think is a moderate and sensible measure. We do realise you need to strike a balance here. You do need to ensure that Australia remains internationally competitive when it comes to attracting executives. But what we need to do is not go into regulatory overreach, as those opposite would propose to do, by putting it all to shareholders—or maybe it is their position tonight not to do as much as we would do. I am really not sure.

This is a controversial matter, and I recognise that people have people have different views. I recognise that the Australian Institute of Company Directors supports the opposition’s position. That is fine. Or can I say they support the member for Aston’s position. I do not think they support the member for Wentworth’s position. I somehow think that the company secretaries support the government’s position that this is an appropriate reform and that the regulations have dealt with their concerns. The company secretaries have said that the regulations deal with their concerns and they support the passage of the legislation. So it comes down to this: if a company thinks that executive termination pay higher than one year’s base salary can be justified, then put it to shareholders. Let the shareholders decide. The opposition tonight, at seven o’clock on 9 September, have a position that shareholders should decide less than they would be able to decide according to the government’s position. The opposition’s position up until recently was—and somehow or other, in their warped logic, it may continue to be their position—that all executive remuneration should be put to shareholders. But how you could achieve both positions at once is really quite beyond me.

Ms Anna Burke (Chisholm, Deputy-Speaker) Share this | Link to this | Hansard source

The original question was that this bill be now read a second time. To this the honourable member for Aston has moved as an amendment that all words after ‘That’ be omitted with a view to substituting other words. The immediate question is that the words proposed to be omitted stand part of the question.

Question agreed to.

Original question agreed to.

Bill read a second time.