Nick Sherry (Tasmania, Australian Labor Party, Minister for Superannuation and Corporate Law) Share this | Hansard source

I want to address a couple of remarks to the amendment moved by the Greens. I had only just commenced my contribution last night when we had to adjourn, and I was making the point then that the circumstances in Australia are quite different from those in the United States. I think it is important to point that out. There is no doubt in the United States—and I am not going to go through the details of the US subprime crisis—that among the central elements of the collapse of the US financial system were the perverse incentives and the failure of many senior executives to identify the risk of the very creative financial instruments that they were employing and spreading through not just the US system but the entire world’s financial system and for which they were paid, frankly, obscene sums of money.

I agree with President Obama’s comments last week. I know that his comments were a response to the revelation that many people in the financial sector in the United States who, having had a catastrophic year—banks were falling over and a major insurance company would have collapsed if the government had not bailed it out—were paid, at the end of the financial year, approximately $22 billion or $23 billion in incentives and so-called rewards. I know that President Obama was rightly outraged, as were the vast majority of people in the US, that failure was rewarded. These perverse incentives and bonuses were being paid to varying degrees to individuals who had been involved in what is going to go down as the largest financial collapse in the US since the Great Depression. That is a fundamental difference from what has occurred in Australia.

Fortunately, we have not had the collapse of mainstream financial institutions in Australia. We have had at the edges—Babcock and Brown and Allco Finance Group are examples, and Senator Milne referred to a couple—a very small number of entities to whom, on reflection, given what happened, we can certainly question whether payments were appropriate. But I think we should distinguish between the collapse of large sections of the US financial system and the situation that has prevailed in Australia. Participants in this debate need to reflect on that background.

Nevertheless, the Prime Minister and indeed the Leader of the Opposition, Mr Turnbull, have identified a range of issues and argued that there does need to be improvement with respect to executive remuneration in Australia. This global financial crisis has revealed that there are many financial institutions that pay their employees in a way that encourages them to take large and inappropriate risks, particularly short-term risks. Taking short-term risks fuels a boom and a culture of greed and short-termism. As I have mentioned, we have seen these opaque investment instruments in a search for short-term and what have turned out to be paper results. Financial institutions need to have clear incentives to promote responsible behaviour.

The Rudd government is committed to responsible economic management and this includes acceptable remuneration practices for Australian companies, particularly in the financial sector. The Prime Minister and the Treasurer—and, indeed, I—on a number of occasions have advocated reform of financial sector executive salaries. It needs to be done not just in Australia but internationally. In financial services in particular we are dealing with an international market. Financial institutions need to have clear incentives to promote responsible behaviour rather than some of the unrestrained greed that we have seen. The government believes the Basel rules on capital adequacy should pick this up. Specifically, it thinks regulators should set higher capital requirements for financial firms with executive remuneration packages that reward short-term returns or excessive risk taking—that is, for institutions encouraging excessive risk by employees it should be prudent to keep a bigger buffer of capital to reflect the increased risk. That in turn will be reflected in executive remuneration.

This will be implemented domestically, in conjunction with discussions with our regulators—APRA and ASIC. In Washington on 15 November the G20 leaders agreed that their finance ministers will formulate recommendations on executive compensation. APRA is developing the template and the global financial crisis gives us all cause to reflect on the matters under debate.

Senator Milne has criticised the government for lack of action. I know public concern about executive salaries has been there for many years but it has certainly crystallised over the last calendar year. These issues need to be examined thoroughly and dealt with effectively. The point I would make about the Greens amendment is that there will be reform in this area. However, the Greens amendment—which is the same amendment they moved in October and November last year—is an extremely blunt approach. We do want thorough reform in this area. We want it to be considered. I am very confident that we will see reform in this area during this calendar year. But the proposed Greens amendment is an extremely blunt approach. It does not address anywhere near all the types of issues that need to be considered in an effective response to this issue of executive remuneration. Therefore, we will not be supporting the amendment.

I will give this commitment to the Greens. When we are reaching a point where it may require some regulatory parliamentary amendment, I will be very happy—and as Minister for Superannuation and Corporate Law I do have some responsibilities in this area—to involve you in the discussions that occur about how we respond in a legislative and/or regulatory way to these issues.

Question put:

That the amendment (Senator Milne’s) be agreed to.