Nick Sherry (Tasmania, Australian Labor Party, Assistant Treasurer) Share this | Link to this | Hansard source

I move:

That the committee not insist on the Senate amendment disagreed to by the House of Representatives.

The Senate has had time to reflect on the amendment proposed by Senator Xenophon. The amendment would have the effect of removing an important exception where the termination benefit represents a genuine payment by way of damages for breach of contract. It would require such payments be subject to shareholder approval irrespective of the amount of the payment. In practice, it would mean, as Senator Xenophon has acknowledged, that virtually all termination benefits, regardless of their size, would require shareholder approval. Even a legitimate payout of $1 would require the approval of shareholders at a general meeting. This is unworkable and, as such, the government does not support the amendment.

The government has introduced the Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009 to improve corporate accountability and, in doing so, it has struck an appropriate balance between empowering shareholders and providing companies with adequate certainty. The bill allows companies to offer reasonable termination benefits below the specified threshold. The amendment, however, would create significant uncertainty. It would mean that adequately designed termination benefits below one year’s base salary could not be offered with any degree of confidence.

The exemption for a genuine payment by way of damages for a breach of contract is an important exemption which recognises that a director or executive may be entitled to compensation for the early termination of the contract for service. The removal of the exemption ignores the fact that termination benefits can legitimately represent compensation to an innocent party for breach of contract. The amendment has the potential to increase the need for litigation in order for a director or executive to obtain a reasonable termination benefit. Such litigation can be costly and time-consuming. Ongoing legal disputes may also have a negative impact on the reputation and value of a company. The government is not prepared to accept this unintended consequence.

It is appropriate that a sensible and mature approach be taken. I am pleased to say that opposition senators have been given the chance to reflect on the amendment. Treasury officials have been made available and I am pleased that the shadow minister has accepted the invitation to be briefed on the implications of the amendment. The bill is sound. It has been subject to extensive public consultation. It significantly strengthens the current regulatory framework relating to termination benefits to empower shareholders to reject excessive payments. These are very important provisions to ensure that regulations keep pace with community expectations. I ask and urge senators to support the bill in its current form.

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

I thank Senator Xenophon for yielding the call. The opposition will not be insisting on the amendment moved by Senator Xenophon and originally supported by the opposition. As Senator Sherry noted, since voting for Senator Xenophon’s amendment the shadow minister, Mr Chris Pearce, has had an opportunity to seek legal advice and has been offered a Treasury briefing. Although I understand legal interpretation may not be beyond argument, it does appear tolerably clear that, as drafted, the adoption of the sunset provision would have the unintended consequence of restricting the ability of companies to provide certainty to their executives during the next three years.

Executive service arrangements entered into over the next three years that provide a termination benefit within the one year’s base pay limit in accordance with the new provisions would not be effective if the proposed sunset provision were adopted and applied to a benefit provided after the triggering of the sunset provision. Accordingly, the effect of the amendment could be that some termination benefits, regardless of the amount of the termination benefit, would require shareholder approval now. This would create uncertainty in the workforce for executives and companies who provide for termination benefits under contracts of employment which extend beyond three years.

The effect of this as a matter of practice and as a practical matter would be that shareholder approval would be required to be sought by companies for most termination benefits that may be paid under new executive service contracts after three years, to provide certainty to both companies and executives. A further unintended consequence, of which the shadow minister has been made aware, is that the sunset provision only regulates certain termination benefits. For example, the sunset provision does not regulate genuine payments of pension and lump sums that are also subject to the new one-year’s base pay limit. As a result of this, executives and companies may seek to restructure their remuneration arrangements to avoid the operation of the sunset provision. The opposition certainly did not intend for the sunset provision to operate that way or to create other possible unintended consequences. For these reasons, and more abundant caution, and subject to the advice received we will not be insisting on the amendment.

Nick Xenophon (SA, Independent) Share this | Link to this | Hansard source

I can count. I think that the numbers are against me in relation to that, to put it mildly. I am grateful to the opposition for at least supporting this initially, because there is an important principle at stake here. The fact is, you can use the mechanism of a creative sunset clause—and I am grateful to the Clerk Assistant (Procedure), Richard Pye, for drafting this particular clause in this way. The intent of this amendment was to force the government to come back to the parliament within three years with an improved bill that included a greater degree of accountability in relation to termination payments.

I welcome the government’s moves in relation to this bill. But given that we are yet to see a final report from the Productivity Commission and that there has been a lot of movement in relation to the whole issue of termination payments, this amendment would have required the government to come back within three years, because if they did not come back within three years everything would have been subject to shareholder approvement and it would have been a much more onerous regime. I want to make it clear on the record that the intent of this amendment was to force the government to come up with a more comprehensive mechanism to deal with termination payments, particularly given that we will see a final report from the Productivity Commission and there will be further developments, no doubt, in the next two to three years in relation to this.

I am pleased that the bill is going through. There was a lost opportunity to ensure that the bill would have an inbuilt mechanism to ensure that it would become tougher in years to come. I am grateful to Minister Bowen’s office for pointing out that the Office of Best Practice Regulation will be looking at how this particular bill works. There is little doubt that a Senate committee, possibly the economics committee, will look at the impact of termination payments and this particular bill in years to come. An opportunity has been lost for further reform. But I acknowledge the numbers. I am grateful to the opposition for at least considering this at the first instance. I look forward to this bill working effectively and doing what it is meant to in the context of the government’s aims.

Question agreed to.

Resolution reported; report adopted.