PARLIAMENT, CANBERRA: I rise to speak on the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Bill 2011. As you would be aware, Mr Deputy Speaker, this bill arises out of the recommendations of the Productivity Commission report into executive remuneration. It reported on 4 January 2010, and this bill aims to implement its recommendations. We on this side of the House support the intent of this bill, and the coalition will not be opposing the bill. However, I have some reservations in relation to it which I would like to outline today. Some of the measures are overly prescriptive and I am not convinced they will actually be effective in addressing the particular problem which we are concerned about.
To properly assess this bill, there are three questions that we should be asking. First, what are the problems that we are trying to fix? Second, are the existing mechanisms sufficient to fix those problems? Third, will the proposals that are on the table in this bill work to fix the problems? I would like to go through each of those three questions in turn.
First of all, what are the problems that this bill is trying to fix? There is a community concern with executive salaries, particularly those for publicly listed companies. There are many senior executives in this country who are earning very large amounts of money on an annual basis. There are about nine people in the banking sector, I understand, who earn above $5 million per annum. In the mining sector, there are people earning up to $15 million or $16 million per annum who are heading up publicly listed companies. The managing director of Coles apparently earns in excess of $8 million.
These are extraordinary amounts of money by anyone’s measure. I personally struggle to see how anyone is worth that amount of money, but a high salary alone does not necessarily mean there is a problem. The owners of a company should be able to pay whatever they believe is appropriate to their executives. After all, it is their company. If the owners of the company believe that their CEO should be paid $500,000, that is their decision. It should not be the job of the government to interfere with those decisions of the owners of companies to determine what the appropriate remuneration is for their executives. A problem only exists if the board, which sets the salary on behalf of the owners of the company, the shareholders, is not acting in the best interests of the shareholders in setting that remuneration—that is, there is an agency problem there or a conflict of interest arises.
The government has not presented coherent evidence that directors of Australian companies are indeed acting against the interests of their shareholders when setting executive remuneration. However, there is certainly a belief that sometimes this is the case, and I believe that it is sometimes the case, particularly when executives are remunerated very highly despite the fact that a business might be collapsing, or when an executive receives a large bonus when that executive may not have had much to do with the performance of a company but rather it is due to, for example, commodity prices increasing or due to a government regulation which has underpinned the performance of that particular company.
That brings me to my second question: are the existing mechanisms available to fix the problem sufficient? As parliamentarians, we need to ensure that shareholders have appropriate degrees of protection and appropriate regulations to ensure that their interests and the interests of directors and executives are aligned. Shareholders need to be properly informed and properly empowered. But what are the existing mechanisms and are they sufficient? Already in the Corporations Act there are several mechanisms. There are the fiduciary duties. Directors have a legal obligation to act in the best interests of their shareholders, and there are some quite significant penalties if they do not do that. Second, there are some protections for minority interests in the Corporations Law. Finally, there is the ability for shareholders to sack directors if they do not believe that the directors are adequately representing their interests or if they have any concern in relation to the actions of the directors.
All of those are available presently. However, for small shareholders I understand that it is difficult to access some of those provisions. However, those provisions in the Corporations Law are the basic building blocks of the law that exist presently. What the Productivity Commission says is that, despite the presence of those existing protections, there is at least the opportunity for perception of conflicts of interest to arise and that this should be addressed directly. I support those intentions. hat brings me to my third question: will the proposals on the table in the form of this bill actually fix the problem? There are seven measures in this bill and, while some of them are worthwhile, I do have reservations about whether they will make a decisive impact and I do believe that there will be some negative impacts associated with some of the provisions. The seven measures, all up, are intended to empower shareholders and prevent any real or perceived conflicts of interest. That intent is a good one, but we need to look at the details to determine whether or not that intent is actually delivered upon and whether or not the downsides of being overly prescriptive will outweigh the benefits.
Some of the seven measures do seem immediately sensible, in fact so sensible that it is surprising that some companies are not enacting these measures already. For example, one of the measures prevents key management personnel and parties closely related to them from participating in non-binding shareholder votes on remuneration and on spill resolutions. Clearly there would be a perception of a conflict of interest if the beneficiaries of the remuneration report were to vote on that remuneration report. So this seems to be a sensible provision.
Second, the bill will prohibit an executive hedging his or her executive remuneration. These days, executive remuneration is structured so that the interests of the executive are very closely aligned with the interests of the shareholders—so, if shareholders do well, the executive should be better remunerated. But there have been instances where some executives have taken hedges on the side such that their interests are less aligned, meaning that a change in shareholder interests will not have the same impact on the remuneration of those individuals. This particular measure will outlaw executives hedging against their remuneration structure. Again that seems like a reasonable and sensible thing to do and again I am surprised that directors would indeed today allow their executives to hedge against the executive remuneration incentives.
I think the cherry-picking rules included in this bill are also sensible as they also will empower shareholders. With some of the other measures, however, I question the impact. I have reservations about whether they will make a significant difference in addressing the problem of unaligned interests between shareholders and directors and I do not think that executive remuneration as a whole will come down as a result of this bill.
There are also some potential downsides to this bill. Overall it does add to the regulatory burden and the measures are very prescriptive. Joe Hockey, when introducing the coalition’s response to this bill, said:
The best way to support business is often for the government to get out of the way.
I think we should always be very careful when introducing new regulations on top of all the existing regulations that companies have to abide by. When you look at some of the measures in this bill, they do appear to be very prescriptive. For example, one of the measures dictates how a company is to engage remuneration consultants. It seems to me that for this parliament to be determining how a company should engage remuneration consultants, or any other consultants, is very prescriptive. Surely it is up to the company to determine how it will engage consultants and the terms on which it will engage them? In relation to that provision, the president of the Business Council of Australia pointed out:
This is inevitably going to distract directors from their most important roles, which are not the minutiae of supervising remuneration consultants, but much more important roles of making wise decisions about business direction, major investments and the like.
The no vacancy rule, one of the seven measures of this bill, also has potential downsides. The principle inherent in that provision is again sound, but there are potential downsides in that it will reduce flexibility in how boards operate. Again referring to the Business Council of Australia, they point out that sometimes there are very good reasons to appoint fewer than the maximum number of directors at a particular time—the board may want to limit expenses, the maximum number may be too large to enable effective decision making or the board may be deliberately waiting for someone with a particular specialist expertise to go onto the board. This measure in the bill is going to force the board to make a rapid decision about a vacancy. I also have some concerns in relation to the two-strikes test and how it will operate. Indeed, the coalition will be moving amendments in this regard.
In summary, having gone through the three questions I think we should be asking ourselves to properly assess this bill—is there a problem; are the existing mechanisms sufficient; and will the proposal fix the problems?—I come down marginally in favour of the bill. I hope it will have the impact intended, but I have my doubts. If it achieves nothing else, however, this bill should send a clear message to corporate Australia that the Australian people and its representatives in this parliament are concerned about excessive executive remuneration and that we do want corporations to be responsible in this regard. If corporations get that message and act upon that message, I think that will have more impact on this issue than any regulations we might introduce in this House.