Paul Fletcher (Bradfield, Liberal Party) Share this | Link to this | Hansard source

The question of remuneration paid to senior executives of large, publicly listed companies is often controversial. It is an issue which raises strong passions in the community, and it is easy to understand why when one sees some instances of very large amounts of money being paid to people when it is a little difficult to understand the value that they are generating. So it is a question that is very easy to politicise, and of course the government that we have today is not one that ever resists the temptation to politicise an issue which is easy to politicise. The bill that we have in front of us now, the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Bill 2011, emerges from an inquiry conducted by the Productivity Commission which, in turn, was commissioned by this government in response to what it perceived to be community concerns about the remuneration of senior executives.

I want to make three points in the time that I have available to me. The first point is to acknowledge that there are instances where people working for large corporations—senior executives or directors—are paid very large amounts of money, amounts which seem very hard to square with the claim that they are generating shareholder value. The second point is that the Productivity Commission inquiry into this complex area is a balanced and fact based inquiry, and it is pleasing that it is in such a state, particularly given, as I have mentioned, the great temptation to politicise these issues. The third point is that the key question which policymakers have to consider is whether it makes sense to introduce further specific regulatory measures designed to address the problem that there are certainly instances of excessive amounts of money being paid and whether the benefits of doing so exceed the costs, which inevitably follow such an additional imposition of prescriptive regulation.

Let me turn firstly to the point that it is easy to identify horror stories of enormous amounts of money being paid to executives of companies in circumstances where it seems very difficult to identify the value that they have purportedly delivered to justify such large amounts being paid. It is clearly the case there are instances from time to time of amounts of remuneration being paid—often associated, for example, with large termination payments—which are out of kilter with community expectations and which attract criticism. There have been a couple of instances that one can think of in the past 10 or 15 years that, as it happens, both involve executives imported from the United States at vast expense, and it is very difficult to identify the benefit that they have delivered to shareholders in their company for the enormous amounts of money that they have been paid.

One such executive was George Trumbull and his years at AMP. More recently, Sol Trujillo at Telstra was paid very large amounts of money, and it is instructive to briefly consider those circumstances. He was hired on a base salary of $3 million, plus a short-term incentive of $3 million. In 2007 his contract was varied so that the $3 million base was maintained, but the short-term incentive suddenly went from $3 million to $6 million. Telstra’s 2007 annual report put his total remuneration level at $11.8 million, vastly more than any other executive of Telstra. A chief executive being paid more than other executives is not inappropriate in itself; but, curiously, his contract allowed him to resign with only 30 days notice, as compared to the standard six-month notice provision in the contracts of all other senior Telstra executives. Of course—lest there be any misunderstanding—Mr Trujillo delivered himself in August 2006 of this immortal observation:

I’m not doing this for the money, right. I’m not doing it for the pleasure, I’ve already had bigger titles than this.

It is fair to say that many Australians were a little bit sceptical about the claim that he was not doing it for the money, and I need hardly remind the House what a dreadful mess he got Telstra into. When Mr Trujillo arrived, the share price of Telstra was $5.20. Today it is in the range of $2.60 to $2.70—I have not checked it today, but a couple of days ago it was at $2.64. So it is very hard to identify the value that Mr Trujillo has delivered, and he was paid enormous amounts. Nobody would contest that there are instances of senior executives being paid very large amounts of money when it is hard to justify the payments in that specific instance.

The Productivity Commission inquiry has given a good, fact based survey of the issue involved here, and I congratulate them on their work. A number of points can be drawn from the report. Firstly, good decisions by chief executives and senior executives can have a very significant, positive impact on shareholder value. In other words, the decisions these executives are making, if they get them right, will deliver very large value to shareholders.

The second point is that Australian corporates operate increasingly in a global marketplace, and that includes the global marketplace for talent. The Productivity Commission acknowledges that point. It is also important to note—as the Productivity Commission does—that, if pay is structured wisely, if there is appropriate performance pay paid to senior executives and if the structure of their contract gives them the appropriate incentives, you can secure the best performance of those executives in the discharge of their jobs and you can also address the problem of ‘agency’. This is the well-known phenomenon where executives of a company can find themselves making decisions which are in their own personal interest rather than in the interests of the shareholders. The ‘agency’ problem is a well-known, long-established problem. One way to deal with it is to have appropriately structured remuneration contracts which put significant amounts of the senior executive’s remuneration at risk—that is, only paid if they actually deliver substantial improvements in value for shareholders.

The Productivity Commission made the point that there are some problems with executive remuneration, particularly where you have, for example, a board which is very compliant with the requests and desires implicit or explicit of senior management. That can be a particular problem in the United States, where it is quite common practice for the chair and the chief executive to be the same person. In Australia that is much less common.

The Productivity Commission also makes this important point: by world standards, corporate remuneration in Australia is not excessive. We remain below levels typically paid in the United States and in the United Kingdom, and payments to executives in Australian companies generally are in line with those in the smaller European economies.

The report makes another very important point: a correlation has been demonstrated between good and bad economic times on the one hand and company performance and in turn the pay of executives. The specific correlation, obviously, needs to be between the company’s performance and pay. What has been demonstrated in the Productivity Commission’s report is that, during the global financial crisis, there was a decrease in chief executive remuneration, reflecting, in turn, poorer company performance.

The Productivity Commission reaches this conclusion—and it is one that I certainly strongly support:

… the way forward is not to bypass the central role and responsibility of boards in remuneration setting, especially through prescriptive regulatory measures such as mandated pay caps.

What then is the appropriate way forward? That brings me to the third issue I wanted to address—what seems to me to really be the key question here: does it make sense to introduce further, specific regulatory measures to address instances of excessive pay and, very importantly, do the benefits of introducing such measures exceed the costs?

Let us be clear: there is no contest on this side of the House that the agency problem is a significant one; and there is no contest on this side of the House that from time to time we see instances of executives being paid very large amounts of money which seem by any standard difficult to justify.  It does not follow from that that any given piece of regulation is a sensible one to introduce. It is true that this Labor government has a huge face in the power of prescriptive microregulation. They have never seen a problem that would not, in their view, benefit from some more guidelines, more reporting requirements, more templates, some regulation, some directives and mandatory standards. They are very keen on all of that. Detailed, prescriptive interference with the day-to-day operations of businesses and organisations of all kinds is very much in line with the philosophy of the Gillard Labor government. Their general line of thinking runs as follows: ‘We’ve identified a problem, part 1. Part 2, we’ve put up legislation which we say offers a solution. Part 3, therefore, it must be good.’ That logic is not correct.

As is the case with all measures, these regulatory measures have a cost, and the cost of those measures must be weighed against the benefit. As you build up an increasing agglomeration of regulatory burdens and requirements on business over a number of years, it has an increasingly deleterious impact. More and more of the time of directors and senior executives is taken up with dealing with regulatory requirements. They are distracted from their main job, which is doing the work of the company and delivering shareholder value. There is an allocation of time, of resources, of energy, of cost. So any regulation ought to be very carefully considered before it is simply endorsed.

In that regard, it is relevant that on the question of excessive corporate remuneration there are already remedies available to shareholders. If they are sufficiently exercised and if that concern rips shareholders in sufficient numbers, they can vote out the board or they can move a resolution binding upon the company. They can, obviously of course, also sell their shares, vote with their feet and invest in companies which have remuneration practices more to their liking.

I do not say these things are easy. I do not say that it is an easy thing to achieve a sufficient number of votes of shareholders to vote out a board, but I say that these remedies are available to shareholders, and shareholders are the ones who have the strongest interest and the strongest incentive to ensure that remuneration levels are set appropriately but not excessively to reward the kind of behaviour that they are looking for managers, but to not be ripped off.

Against that backdrop, it cannot be disputed that the Productivity Commission proposals are quite onerous and prescriptive. Particularly we have got this ‘two strikes and you are out’ mechanism. I note parenthetically that if it were the case that the US bought a baseball from which three-strikes legislation and this variant two-strikes is derived and, instead, gave the batter five strikes or 10 strikes, many pieces of public policy might be quite different. But that is a parenthetical observation.

I make the point that this is quite a prescriptive requirement. If there is a 25 per cent vote against a remuneration report one year and that vote is repeated in the next year, there is then an automatic requirement to spill the board and to call an extraordinary general meeting 90 days later to elect a new board. That is a very detailed and prescriptive piece of regulation. It is consistent with this government’s enormous faith in regulation and intervention. I put to the House that we have not seen much evidence to justify that confidence.

So as a matter of principle on this side of the House, we tend to be more sceptical than the government about the benefits that any regulation will deliver and we tend to be concerned about the costs that will be incurred as a result of the new regulation being imposed. It seems to me that those issues present themselves quite squarely in this case. Nevertheless, as the House has already been advised, we will not be opposing this bill, although we are moving an amendment which we say reduces to some extent the prospect of capricious and unexpected consequences from the ‘two strikes and you are out’ rule. It is a sensible amendment and one that I commend to the House.

Debate (on motion by Mr Perrett) adjourned.

Ordered that the adjourned debate be made an order of the day at a later hour this sitting day.

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

Order! The sitting is suspended until the ringing of the bells.