Joe Hockey (North Sydney, Liberal Party, Shadow Treasurer) Share this | Link to this | Hansard source

The Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Bill 2011 before the House today deals with a range of measures which further empower shareholders when it comes to the setting of executive remuneration policies for the company which they of course ultimately own. This bill implements a range of recommendations of the Productivity Commission review into the issue of executive remuneration in Australia which was released in January last year.

Throughout the debate the coalition has been vocal about executive remuneration and has consistently expressed support for measures which empower shareholders as owners of companies when setting remuneration for executives. Given this, I can state from the outset that the coalition will be supporting all but one of the measures in the bill. There is one issue on which we will be moving an amendment, and I will discuss that a little later.

The coalition understands the importance of these measures to Australian shareholders in providing transparency for the process of setting executive remuneration in Australian companies. The bill before us proposes changes to seven key areas of the Corporations Act 2001—an act I introduced into this place as the minister responsible in 2001. As a reminder to the House, we had to get a referral of power from the states to the Commonwealth for the Corporations Act. That was the first major referral of power from the states to the Commonwealth since the power for income tax during World War II. So there has only been one substantial referral of power—this a good education for you, Mr Bradbury—since World War II, and it was in relation to the Corporations Act 2001.

The seven key areas of these proposed changes to the act are of interest to the House. The first is the two-strikes test. The first provision strengthens the non-binding vote of shareholders on executive remuneration with the two-strikes test. These measures are designed to give some teeth to the non-binding shareholder vote in the first instance where a no vote of 25 per cent or more on the remuneration report is ignored by the board of directors. The remuneration report in the year following a no vote will require the company to provide an explanation of the board’s proposed action in response to the no vote and, in the instance where no action is taken, require the board to explain why no action has been taken.

The second strike occurs in the following year if a no vote is again recorded in relation to the remuneration report. When this occurs, the legislation requires there must be a vote to decide if the directors will be required to stand for re-election. This vote will require a simple majority to pass, and if passed the spill meeting must be held within 90 days. There is currently no existing provision within the Corporations Act which enforces action against a board that subsequently proceeds with a remuneration report where a no vote from shareholders has been recorded.

When the Productivity Commission recommended the two-strikes change in its review on executive remuneration late last year, it found that the current arrangements tend not to provide sufficient power to shareholders if they are unsatisfied with the company’s remuneration policies, sufficient incentives or consequences for unresponsive boards and incentives on companies to respond to shareholder concerns. So this will be a significant step forward for empowering shareholders. The coalition hopes these measures will indeed encourage further transparency in relation to remuneration reporting from boards and further accountability on behalf of directors when it comes to setting those remuneration packages.

The coalition will be moving an amendment in relation to the wording of the no vote. The intention of the amendment is to improve the representation of total shareholder views, because as the legislation stands it is possible for a no vote to be triggered against a remuneration report by less than 25 per cent of all available votes that can be exercised. We consulted widely on this, and the view is that it was wiser to deal with the issue through an amendment to the proposal before the House now. Therefore, we are going to look to adjust the wording in this provision so that the vote required is 25 per cent of all available votes.

The second key issue in this bill deals with changes relating to the use of remuneration consultants in determining directors and executive remuneration. As it currently stands, there are no provisions within the Corporations Act dealing with remuneration consultants. These changes largely relate to the disclosure of use of consultants as well as the approval process for engaging those consultants. The use of external remuneration consultants in the industry is widespread. The Productivity Commission’s report cited a survey which found 67 per cent of boards sought advice on remuneration for the position of chief executive officer. In another survey, 83 per cent of boards stated that they sought independent advice when negotiating contracts with CEOs. The new provisions contained within this bill relating to the use of consultants will be far reaching.

The first change relates to the approval process for engaging remuneration consultants. Such engagements will now need to be approved by the board or the remuneration committee of the company. This change ensures the independence of consultants engaged in providing assistance on remuneration settings for executives and directors. Where remuneration consultants have been engaged and the company that they are advising is a disclosing entity, remuneration consultants will now be required to declare that they are independent and that recommendations have been made ‘free from undue influence by key management personnel’. Effectively, the concern was that it would be the chief executive whose remuneration was to be assessed who would be engaging the consultants, thereby creating a potential conflict of interest for those consultants.

Companies’ remuneration reports will now be required to disclose information relating to the consultant. The company board will be required to state whether or not the advice provided by the consultant has been made ‘free from undue influence by members of the key management personnel to whom the recommendation relates’. These measures unequivocally ensure the independence of consultants engaged by companies in the setting of remuneration for those key individuals. That brings Australia into line with other key jurisdictions globally when it comes to the use of remuneration consultants. The coalition welcomes these changes.

The third of the seven measures contained within this bill relates to the prohibition of key management personnel and directors along with their closely related parties from participating in the non-binding vote on the remuneration report. This was a recommendation put forward in the Productivity Commission’s finding and will serve to eliminate the conflict of interest which exists when directors and executives, along with their closely related parties, vote on their own packages. The only exception to this will be where key management personnel hold proxies on remuneration resolutions and have been directed to vote on an absentee’s behalf. This recommendation will be supported by the coalition. It is a prudent measure which improves corporate governance through the removal of what should be an obvious conflict of interest.

The fourth measure contained within this bill relates to another recommendation, which was to prohibit directors and executives hedging their exposure to incentive remuneration. Currently, the law requires companies to disclose the policy relating to the hedging undertaken by directors and executives in relation to their remuneration. This new measure will prohibit the practice altogether. We will be supporting this measure as, from our perspective, the executive remuneration of key management personnel should be closely linked to their performance and the performance of the company they lead.

The fifth measure prevents companies from using the no-vacancy rule to block the election of new members to the board despite there being board vacancies. The Productivity Commission’s report stated that this change would: ‘enhance current arrangements to enable greater contestability by reducing unwarranted barriers to entry for non-board endorsed nominees, improve shareholders’ oversight and influence over board composition, and provide encouragement for boards to improve board accountability and transparency’. The coalition views these, at face value, as sensible but we do have some reservations. The reservations are obvious: if a board chooses to keep some positions vacant and have a smaller board than may be possible, then sometimes that is not a bad idea.

David Bradbury (Lindsay, Australian Labor Party, Parliamentary Secretary to the Treasurer) Share this | Link to this | Hansard source

They can do that!

Joe Hockey (North Sydney, Liberal Party, Shadow Treasurer) Share this | Link to this | Hansard source

The parliamentary secretary at the table says that they can do that, but it will remain a grey area. I hope that the detail of the bill is enough to satisfy those who are in dispute over this matter. The boards will have to obtain approval from shareholders in the event that they wish to enforce a no-vacancy rule, which will in turn improve the accountability of the board. I think that is the provision that the parliamentary secretary was referring to. Having said that, there is still an area of concern—until the right person arrives, sometimes it is appropriate to have a vacancy on a board.

The sixth measure contained within this bill deals with the issue of cherry-picking. This is essentially the practice where proxyholders who are not the chair are able to pick and choose the resolutions on which they wish to exercise the proxies they hold. The Productivity Commission recommended that this be changed so that the proxyholders must exercise all their proxies for each resolution, in order to improve the transparency and effectiveness of shareholder voting on remuneration. Again we see that even though this is a very prescriptive measure there is some sense to it.

The final measure contained within this bill is one that will make the financial reporting process for companies less onerous. Hear, hear! This is a change to the remuneration reporting disclosures so that only key management personnel of the consolidated entity will need to be disclosed. Currently, there is overlap in the remuneration report disclosures and this measure will simplify the process for reporting purposes, and we support that.

These prescriptive measures would not be warranted if corporate Australia actually engaged in better self-governance. The general public are concerned about what they deem to be excessive remuneration. On the coalition side we welcome people who are incredibly successful and we welcome the fact that people are properly rewarded for success. There was a massive growth under the previous, coalition government in shareholder ownership numbers in Australia. Particularly through privatisation programs, we saw a massive number of ‘mums and dads’ investing for the first time directly in shares. The Labor Party started that process with the first tranche of the Commonwealth Bank. But it continued with the privatisation of the GIO and then a number of other initial public offers of government entities.

The second great moment of increase in the volume of shareholders in Australia came with demutualisation. I was a beneficiary of demutualisation, both at the AMP not long after the privatisation of GIO, and at NIB, which demutualised not so long ago. Thankfully, both times I immediately sold my shares; I do not think either of them have ever seen those prices again.

Having said that, we have seen the empowerment of Australians through investment in shares. In fact, governments, and our government in particular, have provided incentives. It was the previous Labor government that created dividend imputation, and that was an incentive for people to own shares. It was the coalition government that effectively halved capital gains tax. It was the coalition that abolished stamp duty on the transfer of shares. It was the coalition that gave the great bulk of Australians the opportunity to invest in shares for the first time through the privatisation of Telstra. The fact is that those opportunities to invest in shares, whether the shares go up or the shares go down, empower individuals and ensure they have a diversified asset base, apart from what would, for many people, be their own home.

We have seen very significant growth in superannuation. I heard the other day we now have more than $1.8 trillion in Australia in superannuation, which I think now makes us the country with probably the fifth- or the fourth-largest funds under management in the world. I understand we have just passed Canada, which is quite a phenomenal achievement. We welcome that; it is very important. With that massive change in the nature of everyday investors, the fact that more and more everyday Australians are investing in shares, the scrutiny of Australian companies is even greater.

And one of the great comparative advantages we have as a massive recipient of foreign investment is our regulatory stability. We will have debates across this chamber, and perfectly reasonable debates, about regulation and taxation and so on. I would think there will probably be a couple today in question time. But I would say to you, Madam Deputy Speaker, it is so vitally important that everyday investors can have confidence in the integrity of their investment. And that is why we need to have a strong, reliable and consistently enforced Corporations Act, and that is why we need to provide appropriate protections. Not too much, because there is a risk in life—from my perspective it is vitally important that people who engage in investment undertake risk, because that ensures that the investment is more prudent, as my colleague at the table, the member for Mackellar, would know. It is vitally important that with risk comes reward and that we do not overly tax the reward. That is a very important formula.

Having said that, we need to ensure that there is an appropriate minimum level of protection for shareholders and investors. And they have to believe that the directors are acting in the best interests of the company. Now of course that is one of the key pillars of the Corporations Act; directors have a fiduciary obligation to act in the best interests of the company. That of course includes best interests of shareholders. But at the same time there is growing anxiety on both sides of this House that remuneration of senior executives in Australia is at times removed from the reality that many people would expect. It is shareholders’ money. They are entitled to see their chief executives being paid whatever is appropriate. I cannot say with any certainty whether $100,000 or $100 million is appropriate remuneration. That is a matter for the shareholders.

But what we collectively agree in this place is that shareholders should be properly informed and that shareholders should be properly empowered. And if they have the information and they have the opportunity under the law to exercise their entitlement, to speak out about the remuneration of senior executives, then so be it. And that is why there is bipartisan agreement. There is concern. A number of my colleagues have—and I perfectly understand it—a concern that this is an additional layer of regulation, that at some point the regulation tsunami has to be stopped—and there is plenty of that at the moment. But where there is corporate governance failure, it is the responsibility of the parliament to step in.

I said something recently that a number of my colleagues on both sides of the House would not agree with in relation to women on boards. But as I pointed out in an opinion editorial in the Australian, we are concerned about corporate governance issues more generally. I do not want to be prescriptive about things. There is incredible reluctance that this parliament should go down the path of being prescriptive about remuneration or prescriptive about constitution of boards or about any area of the regulation of private enterprise. But where there is corporate governance failure in entities that have up to one or two million shareholders, those people need to be spoken for. It is about good corporate governance.

I have said this before publicly. I remember getting a phone call from Mr Kerry Packer. He pointed out a particular provision of the then new Corporations Act that he said was overly onerous in the appointment of directors. He was quite right; it was a heavily prescriptive provision. He said, ‘Son, it’s going to be very hard to get good directors when you have this additional regulation.’ I pointed out that he was right, but every time there is a corporate failure in Australia, the general public, the media, political opponents always call out for more regulation, not less regulation. There is no-one reminding people that you have to accept some personal responsibility for failure. If you invest in a company and the company falls over there is going to be some pain, but that is a risk you take in order to get the reward you want. Of course everyone wants to maximise the return and minimise the risk. That is the endgame. But we cannot continue to default to regulation to minimise the risk, because ultimately that regulation, once it becomes so onerous, diminishes the reward.

It is widely regarded throughout the investment community that the safest investment is a government bond. It might be in Australia, but there are some countries in the world where it is not such a good investment. In fact, I remember Mike Milken saying to me that he was told by the CEOs of the various banks in the US in the 1970s and 1980s: ‘You know, Mike, governments don’t collapse. They don’t fall over. That’s why it’s okay for banks like Citibank, Bank of America and others to lend money to governments, because, don’t worry, those bonds will never fall over.’ Mike Milken went back when they all did fall over. When South America started defaulting, he was buying the debt for 6c, 7c and 8c in the dollar and he was cleaning up, because governments do default. But the perception is that there is less risk associated with government investment. Therefore, there is inevitably going to be less reward. Although, again, if you want a modern equivalent, look at the bonds of Greece. The risk is higher, the reward is higher—certainly higher than Australia and a number of other jurisdictions.

Having said that, the bottom line here is: the government cannot continue to increase regulation, because it diminishes the overall reward associated with investment in the private sector. I think we need to be mindful of that whenever we come in here and, even in a bipartisan manner, support additional regulation on Australian business. The best way to support business is often for the government to get out of the way. But there needs to be some rules of the game. It is not much different to sport: if everyone knows the rules and the rules are fair and keep the game flowing, then it will be an entertaining game and everyone will enjoy it and more people will participate. But if the rules become so onerous or so confused or so open to misinterpretation, as I see in my beloved rugby from time to time with the scrum rule—you know what?—it is going to diminish the event. If we continue to prize Australian private sector enterprise, which we in the Liberal Party and the National Party are so dedicated to, then we have to find ways to reduce regulation, not to add to the additional burden.

On this occasion we are backing this initiative to give confidence to Australian shareholders that the remuneration-setting processes in Australian companies are true, fair and transparent. I remind the House that, when we going to committee, we will be moving an amendment in relation to the wording of the no vote, which occurs in the two-strikes test. Otherwise, and bearing in mind what I said before—that this is additional regulation that we are a very, very reluctant to support but we are supporting it for the reasons I have outlined—I commend the amendment bill to the House. I commend to the House the amendment we will make at a later time.

Andrew Leigh (Fraser, Australian Labor Party) Share this | Link to this | Hansard source

Corporate reform encourages innovation and entrepreneurship, and Australian corporations such as Qantas and Billabong, Westfield and CSR have had a long history contributing to the nation’s prosperity and continue to underpin our economic growth. Great managers are critical to business success. At their best, successful managers create jobs and ensure that employees have rewarding careers. The job of politicians is to ensure that we continue to attract great managers, including some from overseas, yet to make sure that pay does not become detached from performance.

When I speak with my electors, their concerns are not primarily about pay packets but what that great social commentator Mark Knopfler called ‘money for nothing’. It is fine to be well paid if you are delivering, but golden handshakes, salaries that encourage excessive risk-taking and pay packets that go up merely because the entire stock market is rising are what worry Australians. As my electors say to me, ‘If the firm is underperforming, why should the boss get a pay rise?’

From the late 1980s onwards a number of high-profile collapses dominated the headlines. Overseas we had Enron, WorldCom, Lincoln Savings, EIEI and BCCI. In Australia we had the HIH Insurance Group. In too many of these cases lavish remuneration was a feature of the way the company was managed. Just before Enron’s collapse, Kenneth Lay, as chief executive, was one of the highest-paid executives in the US, earning $5 million a year. Although the Labor Party is a party that has fought for higher wages, it is a failure of corporate governance if such compensation is detached from performance.

In Australia we have seen a steady growth in CEO salaries which has outpaced salaries in the broader community. According to the Productivity Commission and its report, Executive remuneration in Australia, over the period 1993 to 2009 the average earnings of CEOs in the top 100 Australian firms rose by an average of 7½ per cent per year. Over the same period, average salaries across the economy rose by an average of 3.7 per cent a year. In 1993 the average earnings of a CEO in a top 100 Australian firm was about $1 million. By 2009 this had risen to around $3 million.

We can go further back still and look at how these top earnings have changed over the long run of history. While I was at the Australian National University I did work with Tony Atkinson where we looked at how the income share of top income groups in Australia had changed going back to the 1920s. One way of looking at this is to look at the income share of the richest one per cent of Australians. That is a group who in 2007 had earnings of $197,000 a year or more. That top one per cent of Australians in 1921 had 12 per cent of household income. Then we saw a compression: we saw the top earners income share steadily drop until 1980, when that group had about five per cent of all national income. Then we saw a rise again until by 2007 the top one per cent had 10 per cent of household income, double they share in 1980.

We see an even starker pattern if we look at the top 0.1 per cent—the richest 1/1,000th of Australian adults. In 2007, this was a group earning $693,000 a year or more, and their income share of the Australian pie followed a similar trajectory. In 1921, they had four per cent of all household income. That fell till 1980 when they had just one per cent of household income. And then that income share rose again so that, by 2007, the richest 1/1,000th of all Australians again had four per cent of household income.

Too much inequality can cleave us one from another, and leave us a more fragmented society. It is an issue about which many Australians are, I think, rightly concerned. As the Parliamentary Secretary to the Treasurer pointed out in his second reading speech, it is important that our Australian remuneration system be internationally competitive, but it is also important that it is tied to performance—that executives are rewarded for the work they do and the value that they bring to their firms.

We should remember that executives need to be accountable to shareholders. Shareholders, of course, are the owners of the company. They are the ones who have placed their capital on the line. And it is appropriate that they have freedom to choose the executives they want and freedom, within broad limits, to set the appropriate remuneration.

A critical part of this reform is giving shareholders more say over how the pay of company executives is set. The government has been aiming to encourage shareholder engagement through transparent disclosure of how remuneration is delivered. Shareholders need to have the information to convey their views through the non-binding shareholder vote, and to hold directors accountable for their remuneration decisions.

Crises can test us. Sometimes in a crisis institutions are found wanting. And so it was with executive remuneration through the global financial crisis. Australia’s exposure to the global financial crisis was much smaller than that of the United States, due partly to our industrial structure and partly also to the rapid response by the Reserve Bank and by this government through its fiscal stimulus package. But the global financial crisis did highlight to us some of the issues around remuneration structures that focused too much on short-term results, that rewarded excessive risk-taking and risked promoting corporate greed. As I said, most Australians do not mind well-paid CEOs. What they worry about is CEO pay that is detached from performance.

With the legislation put to the House today, we will be empowering individual shareholders so that they have the muscle to take the fight to the institutional and directors’ associates. We are putting forward the ‘two strikes’ rule, where shareholders will be empowered to vote out a company’s directors if the remuneration report receives a consecutive no vote from a quarter or more shareholders at two annual general meetings.

As the parliamentary secretary has pointed out, once this second strike is triggered, shareholders will then be given an opportunity to vote on a resolution to spill the board and subject the directors to re-election. The spill resolution of course requires 50 per cent of eligible votes cast, as would be the norm with most resolutions in a board meeting. If that spill resolution is passed, then a spill meeting will be held within 90 days at which the shareholders will be given the chance to vote on the re-election of the directors, one by one. There have been concerns raised over this measure. But I would point interested members of the community to the extensive consultations that the Productivity Commission and this government have done, and particularly to the consultations around the threshold level of a 25 per cent no vote. The Productivity Commission chose that level on the basis that it was appropriate because it was in line with the 75 per cent majority required for the passage of special resolutions.

This bill also focuses on an issue around the independence of remuneration consultants. People have reasonably argued that, in the past, remuneration consultants have sometimes looked a little like the fox guarding the henhouse. We need to guard against a risk that remuneration committees will simply ratchet up pay one after the other. We need to create opportunities for remuneration consultants to bring the best objective advice as to appropriate remuneration to the company. It should be the case that remuneration consultants are able to confidently go to a company and suggest that the remuneration is too high. This ought to happen in more than a trivial number of cases, and I doubt that it presently happens in many cases.

The bill also contains measures to require boards or remuneration committees to approve the engagement of a remuneration consultant. Those consultants will be required to declare that their recommendations are free from undue influence, and they will have to provide their advice to non-executive directors or the remuneration committee rather than directly to company executives, who are themselves, of course, affected by the report.

In addition, boards will be required to provide an independence declaration stating whether, in their view, the remuneration consultant’s recommendations are free from undue influence. The board will then have to mention their reasons for reaching this view. The company will need to disclose in its remuneration report key details regarding the consultants, such as who the consultants were, the amount they were paid, and the other services that the consultant provides to the company.

Another important set of measures in this bill prohibits closely related parties from voting on remuneration. The bill will address conflicts of interest by prohibiting the company’s directors and key executives, or key management personnel and their closely related parties, from voting their shares in the non-binding vote on the remuneration report. Currently the Corporations Act does not prohibit key management personnel who hold shares in the company from participating in the non-binding shareholder vote on remuneration. This is in order to prevent both real and perceived conflicts of interest which can arise when key management personnel vote on their own remuneration packages.

The bill also prohibits the hedging of incentive remuneration, and that is, naturally, because the hedging of incentive remuneration is at odds with the rationale for incentive remuneration and can undermine the whole purpose for which companies put in place incentive remuneration. The bill also prevents the cherry-picking of proxies. Directed proxies must be voted—a reform which I certainly believe is long overdue.

Naturally, the bill has received considerable support from experts. Les Goldmann, the policy manager of the Australian Shareholders’ Association, said:

I don’t think that shareholders are going to use the power irresponsibly, I think shareholders will use the power very responsibly and only in cases where there is clearly something that the board and the shareholders think the board ought to be accountable for.

We do think the Government, in particular Minister Bradbury, have been very brave in pushing forward with this legislation and we applaud their efforts in that regard and I think that small shareholders and corporate governance area in Australia will be grateful for their efforts for many generations to come.

Stuart Wilson, former CEO of the Australian Shareholders Association, said:

At the outset there doesn’t seem to be an appetite from institutional investors for turfing entire boards. I don’t think it will come to pass. … However, I think the simple threat or embarrassment, or potential for that to happen, will see to it that there will be significant improvements on remuneration in the next couple of years.

He also said:

This has been a topic that’s been discussed ad nauseam for the last few years. The Productivity Commission had a lengthy consultation period—everyone got their say.

Alan Fels, former head of the ACCC, said of the two-strikes test:

This change will make a chairman more careful in making their original decisions about executive remuneration.

Ann Byrne, CEO of the Australian Council of Superannuation Investors, said:

We are pleased that the government has maintained a key recommendation of the Productivity Commission—a ‘two strikes’ test on remuneration reports. We believe that this test will only apply to a small minority of companies who have displayed intransigence and a lack of response to shareholders. Only those companies that continue to put up egregious pay propositions and blatantly ignore the views of a substantial group of shareholders should be concerned with these provisions.

The member for North Sydney wants less regulation generally, but he is unable to point to specific examples of where he would reduce regulation. Like the coalition’s position in the election that they would like to cut spending when their spending package had an $11 billion black hole, the coalition are all talk and no walk.

This bill, on the other hand, is in a great Labor tradition of promoting economic growth with an eye to equity. This bill recognises that capitalism requires checks and balances if innovation is to flourish. We on this side of the House, the party of true small-’l’ liberalism in Australia, believe in markets. Labor is the party that floated the dollar, cut tariffs, brought about major competition reforms and is now using market based mechanisms to price carbon and deal with dangerous climate change. But we also believe in an appropriate role for government. That is why we brought about fiscal stimulus when the global financial crisis hit. And that is why, with this legislation, we are empowering shareholders by providing appropriate checks and balances as a reasonable and sensible means of dealing with executive remuneration.

Debate (on motion by Ms Plibersek) adjourned.