Helen Coonan (NSW, Liberal Party, Shadow Minister for Finance, Competition Policy and Deregulation) Share this | Link to this | Hansard source

I speak, on behalf of the coalition, on the Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009. I will be foreshadowing an amendment to the bill to be moved in the committee stage and I will address some comments in relation to the proposed amendment, in my remarks in this second reading debate, for the convenience of the chamber. The bill before us seeks to amend the Corporations Act 2001 to give shareholders the right to veto termination payments, more commonly known as golden handshakes, to major company directors and senior executives where the payments are greater than one year of the recipient’s base salary. The veto will only apply to termination payments made in relation to retirement from an office or a position held under an agreement or a condition of agreement entered into, varied or extended on or after the commencement of part 1, schedule 1 to the bill, being the day the proposed act receives royal assent. I say at the outset that the coalition broadly supports the objective of the government’s termination payments amendment to the Corporations Law. However, after closer inspection of the practical implications of this bill and its design, the coalition believes the stated intention will be undermined, given the way the bill is currently framed, and also the bill will have unintended consequences.

The original intent of the bill that we are examining today was to lower unjustifiable executive payments and to further align the interests of shareholders with those of directors and executives, as well as to provide appropriate long-term incentives to directors to act in the best interests of companies and, of course, in the interests of their shareholders. However, having looked at how the bill is likely to be implemented, we believe it will have a number of unintended consequences. One such consequence is that it is likely to have what would obviously be a perverse effect of raising executive and director payments on a permanent basis, in other words raising those payments which currently are not at risk or which are incentive based. To put it another way, it will have the unintended consequence of causing base pay to rise. This poor policy design reflects a government making these kinds of decisions on the run. As we have seen, it is a government which enjoys playing popular politics on issues but then has to face the consequences of some real difficulties when it comes to getting down into the weeds and having a look at what the legislative effects will be. Short-term political gain does not always translate into sound policy, and we have seen that approach taken towards such failed policies as Fuelwatch and the famous GroceryWatch, both of which have had to be abandoned.

When looking at the circumstances which have led to the bill being introduced into this place, it is not hard to see how such unintended consequences have arisen. If you act in haste often you miss out on the real effort that is needed to go into drafting bill clauses and provisions that will actually resonate appropriately and have the intended outcomes. It is of concern that no regulatory impact statement has been prepared for this bill. Then there is the fact that the Productivity Commission, which was asked by the government to undertake an inquiry into the current Australian regulatory framework around the remuneration of directors and executives of companies regulated under the Corporations Act, is due to report to the government in December this year, less than a couple of months away, and to release a public report on the matter, which no doubt will inform us all very significantly. Yet the government will not wait to see if the results of this inquiry should be incorporated in some way, shape or form into this bill, so obviously we are having the cart before the horse here and that is what we are currently dealing with.

Such oversights and omissions have been highlighted by coalition senators in additional comments provided to the report on this bill by the Economics Legislation Committee. But it is not just the oversights and omissions which are of concern to coalition senators as there are also various overreaching features of the bill that have been highlighted as a concern, and I think it is important that I mention them. Some of these features include the scope of the provisions which have been broadened to include unlisted companies; the lowering of the threshold provisions which will capture middle managers serving as directors; the broadening of the definition of ‘termination payment’ with the concern that it will catch the genuine retirement of long-serving director employees, those facing redundancies and also the situation of deaths in office; the anticipated impact on departing executives, particularly as to international recruitment, and on firms operating internationally; and the expected compliance costs, a particular burden for unlisted companies. As well, there is the anticipated difficulty of securing senior managerial employees to sit on boards of overseas subsidiary companies. My understanding is there is already a dearth of available suitable candidates for these appointments and this bill will certainly make the situation all the more difficult.

As well as highlighting these overreaching features of the bill, coalition senators have highlighted the potential distortionary effects which have arisen in executive remuneration as new recruits negotiate packages around the revised shareholder approval required framework. As new packages are negotiated around the new framework, there is, we think, the very clear potential for shifting or reweighting of remuneration components so that it achieves certainty or an optimal outcome for the executive. These distortions have been commonly referred to as ‘golden hello’ payments, front-loading or sign-on bonuses, and such distortions are in addition to the expected increases to base salary. Such distortions, or abnormalities, have arisen because of the drafting of the bill and stand in direct contrast to the aims of shareholder groups, who have argued strenuously against the disconnect between executive stakeholders, sharing in the pain and the upside with shareholders.

Having highlighted very briefly concerns which we in the coalition have in relation to the evolution of this bill and how it will impact, I will now move on to various elements of the bill, some of which, as I mentioned earlier, we will be seeking to amend. The bill before us has four key objectives. I want to stress very clearly that we broadly support the objectives of this bill. It is some of the detail and unintended consequences that we point out to the chamber and seek to address.

The first objective 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 2001. This proposed requirement 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 the IFRS. The second objective of 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.

The third objective of the bill provides a facility for minor changes to the Corporations Act 2001, including repayment of unauthorised termination benefits and stronger penalty provisions for contraventions. The fourth objective of 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 will be triggered would be an amount exceeding one year’s average base salary over three years.

The definition of base salary is provided by accompanying regulation. As mentioned previously, it is this aspect of the bill, in relation to base salary, which will have the unintended consequence of causing base salary to rise in order to compensate for the potential loss of incentive based remuneration. We think this clearly defeats one of the key purposes of the bill, which is to limit excessive executive salaries. A lower base pay is more likely to improve the performance of an executive or director as opposed to a situation where they would be remunerated regardless of their outputs and achievements.

The foreshadowed amendment which is being sought by the coalition today in the committee stage seeks to change the definition of one year’s base salary to one year’s total salary as the threshold trigger for a shareholder vote on an executive’s termination payment. The coalition believes this amendment will encourage executive pay and performance to be linked and aligned and will maintain that alignment of shareholder and executive interests. The coalition’s position was announced by Mr Chris Pearce on behalf of the coalition in some media statements on 9 September this year. As we foreshadowed, in our view such an amendment empowers shareholders and improves governance and disclosure but not at shareholders’ expense. Such concerns around the dangers of a creeping base pay have been highlighted throughout the Senate Economics Legislation Committee’s inquiry into this bill and reflects concerns expressed by industry groups, such as the Business Council of Australia, and representations conveyed by Rio Tinto, the Insurance Australia Group, the Australian Institute of Company Directors—the AICD—the Australian Bankers Association and Guerdon Associates, who, of course, are remuneration consultants.

The failure of this bill to link remuneration with performance goes against the principles espoused by the Financial Stability Board of the G20, which, of course, the government is very keen to champion. In addition, the one year’s base pay threshold puts Australia in a position where it will have, if unamended, the lowest base pay thresholds of comparable corporate law in any country. Such a change, we believe, would threaten our nation’s ability to attract and retain talented executives and managers from overseas. We have the very firm view that this is not an incidence where Australia should be trying to distinguish itself from the way in which the G20 and the Financial Stability Board make recommendations and go forward with this matter by having the lowest pay of any comparable country for this purpose.

The coalition will be attempting to address this in our amendment—and I will have some more to say when I move this amendment—to bring to rights one of the major unintended consequences of this bill. Our amendment goes towards ensuring that performance and pay are linked, as, indeed, executive and shareholder interests should be linked. We do hope that the government will not be so stubborn as not to recognise the unintended consequences of the bill the way it is drafted. We hope that it will instead give very careful consideration to the very important amendment that we have foreshadowed for very good and sound reasons and because of the obvious support that it has in the broader community.

The bill’s unintended consequence of causing base pay to rise will make the original intent of this legislation much harder to achieve. We think that is an outcome that the government clearly does not wish to have, and nor would the government wish to see the adverse consequences that would be borne by all shareholders, the very ones that this bill sought to help. Assaults on shareholders are never a good look. In the circumstances of this bill, there is absolutely no reason why there should not be attention given in the committee stage to looking at the plight of shareholders and better aligning their particular interests with those of remunerating in an appropriate way executives in corporations of which they are shareholders.

We do urge on the Senate consideration of the amendment that we will be putting forward. Otherwise, I commend the bill to the Senate. As I say, we do support its objectives and we would certainly hope that there could be some cooperation on the part of the government and, indeed, other senators, to ensure that this issue that we have raised and highlighted is taken seriously and that we look at how we can better improve the legislation. That is exactly what we in the coalition are seeking to do—to get a better outcome from a bill that we think fails on that account, but in circumstances where we support its objectives.

Bob Brown (Tasmania, Australian Greens) Share this | Link to this | Hansard source

We in the Greens support the concept of people being rewarded for their contribution to the nation. But I ask about a nation in which the CEO of the Commonwealth Bank gets, in an average working day, more than the persons who come here late at night to clean our offices get in a whole year. I ask about an Australia in which the growth in CEO pay has increased six, seven, eight or nine times as fast as it has gone up for ordinary workers—who are every bit as committed to and as important a part of this nation’s progress—in the last three or four decades.

We hear—I heard it just then from Senator Coonan—the argument that we have to be able to increase corporate pay and make sure that our corporate executives go from, presumably, millions of dollars to tens of millions of dollars to hundreds of millions of dollars per annum, as we have seen in the United States, in order to keep up with the rest of the world. It is the exact opposite argument to the argument being put forward by the opposition that we must not do what the rest of the world does on an emissions trading scheme; we should let the rest of the world get everything in place before we make any move at all. Here, we have the opposition arguing that we should stay in front, otherwise we will see not a brain drain but a money-chase loss of our executives out of the country.

Of course, the facts do not support that anyway, when you get to look at them. For example, a recent RiskMetrics study found that, between 2003 and 2007, only 17.3 per cent of confirmed departures of executives from the top 50 companies were of those going to other companies. Indeed, only 4.3 per cent were going offshore. The majority of departures were retirements. It was also found in that study that 57 per cent of those replacing senior executives were internal appointments and that only 18 per cent were recruited overseas.

We Greens have been working hard in the last several years—going back into the Howard government’s years and the period before the global recession—to bring some decency into what the Prime Minister has described as the ‘obscene’ payments going to some of the more greedy executives in the corporate system. It is just not reasonable to have corporate executives, rather than being paid for their work, being given totally illogical and indefensible payments, running sometimes into tens of millions of dollars per annum, and with so-called golden parachute severance payments going, in one case in Australia, to over $80 million.

When you get outside the public sector, there is a mythical concept that, in some way or other, these huge payouts, made supposedly to reward executives, are not paid by anybody and that they are part of the profitability of the company. Of course, nothing could be further from the truth. They are paid for by pensioners, shareholders and ordinary workers and through higher prices at the supermarket, in the bank, in the service industries or wherever it might be. This money is being purloined out of the pockets of poorer Australians in the tens of millions of dollars by people, simply because they have the ability to wangle the system.

The figures all show that this process has not only got worse but accelerated in recent decades. What was considered totally indecent in the United States mid last century is now part of the norm in Australia and has been accepted practice for some decades here. We have the situation where CEOs, by dint of where they are, get hundreds of times the pay level of the people who build the buildings, provide the plumbing, check the electrical work, give us the transport systems, work in our schools and do all the basis work that maintains the fabric of society.

As far back as this time last century, President Theodore Roosevelt was warning about the power of corporations over democracy. He said not only that it could be tackled but that it must tackled, and that the corporations must be put in their place. Teddy, as you know, believed in walking quietly and carrying a big stick. Unfortunately, his idea of being able to contain the self-investment of corporations and the power of corporate lobbyists over the body politic has been found to be totally blighted by the passage of history.

Now we are in a democratic system where corporate executives are almost a law unto themselves when it comes to taking obscene—as the Prime Minister has labelled them—payments from the pockets of their fellow citizens, and parliaments have been remiss. I sheet this home directly to the two big existing parties, who have serially exchanged governance at state and federal levels and who allowed this situation to arise.

Thankfully, we now have the Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009 here in the Senate. As we will see in the coming committee stages, the Greens will be amending this legislation. It is a step in the right direction but it is very short of the mark. Last year the Greens attempted a number of times to amend legislation so that golden handshakes could not be as obscene as the Prime Minister described, but serially he and the Leaders of the Opposition—both Mr Nelson and, now, Mr Turnbull—refused to respond to the actions of the Greens in this place. We will be testing the ardour of the government and the opposition in this matter in the committee stages.

I want to make it clear that this legislation is far from the end of the matter. We will be continuing to bring to this parliament measures that will not deny corporate executives a fair go but will have them share a fair go with the rest of the Australian workforce. That is what it should all be about.

We are supporting this bill but we have a series of good amendments which will improve the outcome. Those amendments would give a stronger hand to shareholders, who most directly are disadvantaged by executives being able to take millions unnecessarily but repeatedly out of the companies’ bottom line. It will therefore more fairly compensate the shareholders, who take the risk. We will also be moving to see that, where shareholders have a vote, it is not just indicative but binding. Why should that not be agreed to in a parliament that believes in democracy?

Why is it that the private sector is so far behind in democracy? Why has the private sector rebuffed all efforts to have an improved democracy? Did it not support the war in Iraq to promote democracy? Does it not support the pursuit of democracy, which, we hear repeatedly from our leaders, should be improved elsewhere around the world? I submit that there is far too little democracy in the private sector and it is high time that we legislated to improve that democratic shortcoming. Some of the measures the Greens will be moving in the committee stages will tempt both the government and the opposition to endorse democracy rather than leave things as we have them at the moment, where shareholders are gnashing their teeth and wondering why they take such risk and why sometimes they see such poor results after a series of announcements in the newspapers has indicated that executives are increasing their pay, even where their performance has been abysmal.

Annette Hurley (SA, Australian Labor Party) Share this | Link to this | Hansard source

I think it was the onset of the global financial crisis that saw a renewal of public concern about the trend to large termination payments for senior executives. Despite the more benign financial circumstances in Australia, we here also saw very large termination payments. That rekindled the debate that had previously been had. There were well publicised examples of excessive termination payments, or golden parachutes, paid to senior executives. Particularly companies were drawn to our attention where they had posted reduced profits or significant losses and this served to heightened public anger at what was felt to be a reward for failure.

Under the current legislation an executive can receive up to seven times his or her total annual remuneration before shareholder approval is required. Under the Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009 shareholder approval will be required if a termination payment exceeds one year’s average base salary for directors and all executives named in the company’s executive remuneration report. I wish to emphasise that this bill does not impose a cap on what can be paid as a termination payment, but simply forces a shareholders’ vote if it exceeds the threshold of one year’s base salary. In other words, the executive and the company have to justify the termination payment if it exceeds one year’s base salary.

There has been argument about using the base salary as the point. The coalition have said that this may lead to an increase in base pay and have noted that Australia has the lowest base pay threshold for its executives. Indeed, this indicates the imbalance of executive remuneration in Australia. If we do have the lowest base pay threshold, it means that the bonus and incentive payments form a disproportionate percentage of the remuneration of those executives. This is exactly what has led to the problem in the global financial crisis. These incentives and bonus payments resulted in some executives taking undue risks, putting the company in danger, resulting in poor company performances and then being bought off by the golden handshake.

There is no inherent ill in the base pay rising if this addresses some of the problems with bonus and incentive payments that are unbalanced. This is clearly not a problem in itself. There is provision for a review of this proposal after two years. Shifts in remuneration can be examined at that stage; if there is a problem with the so-called golden hellos or with excessive increases in base pay, they can be addressed at that time. Treasury argued during our hearing that the existing rules in the corporate law for setting executive base salaries would act as sufficient restraint on increasing salaries as a result of this bill. They said:

Such payments are required to be disclosed in the company’s remuneration report, and the company is required to clearly explain the policy for determining the nature and amount of remuneration and a discussion of the relationship between such policy and the company’s performance.

Since the report was brought down, Minister Bowen has released regulations and explanatory material which provide a definition of ‘base salary’, provide clarity around the definition of ‘termination benefits’ to ensure that statutory entitlements are not included as payments requiring shareholders’ approval, and prescribe the circumstances in which a benefit is given in connection with a person’s retirement, which addresses a number of issues that were raised during the inquiry.

In conclusion—I do not want to take too much of the chamber’s time—these excessive termination payments and the broader issue of executive salaries and entitlements have been much debated aspects of corporate accountability standards for some years. I commend the government in taking this action on termination payments, because they have been lacking in transparency, accountability or disclosure due to the ridiculously high and internationally out of touch threshold needed to trigger shareholder agreement. One year’s base salary is a much more realistic value.

With workers and their families facing the real prospect of unemployment and falls in their superannuation returns as a result of the global financial crisis, it is particularly galling that those at the top of the tree could be in an environment where they can potentially reap up to seven times their total annual remuneration as a golden parachute even if their performance has been poor. Given the stark juxtaposition this presents for the people of Australia, I urge all senators to strongly support this bill and give their support to the reassessment of the way that termination payments are treated in corporate law.

David Bushby (Tasmania, Liberal Party) Share this | Link to this | Hansard source

The Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009 represents the government’s first legislative response to the general public outcry about the obscene amounts that are paid to some chief executives when they leave their employment. Every time such an executive moves on from their position and the terms of their final entitlement become public, sometimes including literally millions of dollars, the public rightly question how and why these individuals receive such a significant payout—a payout of a size and scale that most Australians would have no hope of even relating to, nevertheless ever receiving.

Clearly, the issue of termination payments for executives is closely related to their remuneration generally. Indeed, their entitlement to termination payments and their size and makeup are often a specific part of the terms of their engagement and of the size and terms of the overall remuneration package. It is no misrepresentation to say that, if the Australian public have concerns about termination payments, they also have concerns over the size of some remuneration packages as a whole paid to top executives.

This is why I am so disappointed that the government, on the very same day that it announced that it would commission the Productivity Commission to examine the issue of executive remuneration as a whole, pre-empted an area subject to that review—being the part of executive remuneration we are looking at today: termination payments. I must say that the tendency of this Labor government to act on matters that it says it is inquiring into is symptomatic of its approach to and the weight it gives to many, if not most, of the inquiries it commissions—that is, that such inquiries are far more about the perception it wishes to foster in the electorate that it is properly considering issues before making decisions on them than actually finding out the facts.

Of course what the government’s action in respect of the Productivity Commission executive remuneration inquiry and other inquiries shows is that the government has its own agenda and that the inquiries it holds are held, more often than not, at worst, to validate that agenda rather than determine it and, at best, to provide a smokescreen for that agenda. This tactic of holding inquiries to create the perception that the government is consultative seems to have been a clear trait of state Labor governments like the highly controversial state Labor Party governing in New South Wales and, again, state Labor in my home state of Tasmania, and it is a trait picked up with glee by the national Labor government. I guess it is just more evidence that Labor governments at all levels are cut from the same cloth.

But there is no escaping the fact that community sentiment about inequality or unfairness cannot be ignored by governments, and neither should it be. However the consequences of any intervention by government into business affairs must also be considered and balanced against the need for that action. This is because ill-considered government interventions to promote fairness can have perverse effects, sometimes even working against the interests of those very groups whose interests are sought to be protected through the intervention.

This bill has been considered by the Senate Economics Legislation Committee. Coalition senators, of which I was one, broadly supported the objective of the bill. However we were concerned about legislative overreach, that the parliament’s intervention in the corporate sphere in this manner will almost certainly introduce distortions in executive remuneration, and that this could occur to the extent that shareholder interests may not be best served.

Coalition senators also found that there were a number of specific issues regarding this bill including that this legislation appears to be a knee-jerk reaction to appease public opposition to ex gratia payments made to executives to remove them from office. That is, despite it commissioning a full review of executive remuneration it went for the low-hanging fruit of golden handshakes because it saw political advantage in pre-empting the review’s findings. The government is acting after the event insofar as companies are already reviewing their policies in this area. In response to community outrage, consultation with shareholder groups and governance consultants, effectively the market is doing what it should be doing and adapting to properly voiced and highlighted shareholder and community concerns without government intervention.

This is evidenced by the downward trend in executive payouts in the last five years and evidence provided that 12 of the top 20 listed companies already limit termination payments to about 12 months entitlements. There are reported instances of perceived excessive termination payments but we recognise that these decisions are matters for boards and are generally taken for sound reasons, and that the legislation pre-empts the report by the Productivity Commission into executive remuneration, as already mentioned, and is typical of the rushed approach of the Rudd government.

Coalition senators were also of the opinion that Australia’s corporate framework is sound and that the capacity of boards to respond to community concerns is reasonably fluid and flexible. As such, we believe it is right to be cautious about wholesale interference in the decisions of boards, such as that proposed in this bill. As mentioned, we noted with satisfaction the Australian Council of Superannuation Investors study finding that most companies already have policies in place which will deliver termination payments around the bill’ s proposed base pay threshold.

This and other evidence received back the fact that the vast majority of large listed companies—the very same group with the high-profile headline offenders—are self-regulating on this issue, whether that be in response to cyclical changes, cash constraints or, more likely, other drivers such as community or shareholder outrage. Coalition senators also recognised the particular broader importance of oversight of executive remuneration packages in the banking and insurance sectors because of the potential for executives to chase the rewards of short-term risks at the cost of financial stability.

Of course coalition senators also found that there would be a number of adverse effects and unintended consequences of the bill as written. Having expressed our broad support for the signal effect of the bill, coalition senators noted that they are concerned that its passing may have unhelpful consequences for our corporate sector and protested the fact that the legislation has been introduced before the Productivity Commission report into executive remuneration has been released. It is worth noting here that the Productivity Commission was due to release its draft report this month and the final report is due only a couple of months later, in December. That is right: the Productivity Commission, which was commissioned by the Labor government to look at all aspects of executive remuneration, particularly regarding the extent to which it can be considered excessive, is due to report this month. And here we are today debating an aspect of executive remuneration that certainly falls directly within the purview of the PC’s terms of reference. It seems incredible to me that the Labor government could not wait another few weeks to see how the PC viewed the issues around the executive remuneration in its draft report and the extent to which any recommendations it makes is likely to impact on the matters which are the subject of this bill. Now, because the government pig-headedly wants to proceed without waiting for the results of its own inquiry, the Productivity Commission has decided to delay its draft report pending the outcome of this debate. Generally, I would have preferred to receive the full, frank and complete findings of the Productivity Commission on this issue without their being informed by policy decisions of the government.

Coalition senators also shared the view of many that presented or submitted evidence to the inquiry that the bill has elements of regulatory overreach. In its rush to be seen to be legislating in the area of executive termination payments the government has forgone a regulatory impact statement on this bill and, hence, failed to highlight legislative overreach in the bill which, in the view of coalition senators includes a number of instances. The scope of existing provisions is broadened so as to include unlisted companies and the lowered threshold provisions may potentially capture middle managers serving as directors of subsidiary companies particularly those who have accumulated long service and other entitlements. The definition of termination payment is broadened and there is concern that it may catch genuine retirement of long-serving director employees, redundancies and deaths in office. There is an anticipated impact on international recruitment and impact on firms operating internationally. In addition there are expected to be compliance costs, that is, for the holding of general meetings of shareholders to consider retirement packages, which would constitute an additional financial and administrative burden particularly for unlisted companies, and there is the potential difficulty of securing senior managerial employees to sit on the boards of overseas subsidiary companies.

As part of our additional comments in the report, coalition senators also foresaw possible distortion arising in executive remuneration as new recruits negotiate packages around the revised shareholder approval required framework producing what a number of witnesses to the inquiry referred to as the ‘squeezing the balloon effect’. That is, executives will continue to seek to negotiate a package reflecting what they believe they are worth and, if part of the package is limited, negotiations will see other parts of the package inflated to compensate.

This likely outcome was put forward by every business representative organisation based on their own experiences and those of their members, but was also very compellingly put to the committee by Guerdon Associates, an executive remuneration firm. When put to Treasury, their comment was that this would not occur because such increases in other aspects of executive packages would show up on the remuneration reports which go to shareholders.

I seek leave to continue my remarks.

Leave granted; debate adjourned.