Joe Hockey (North Sydney, Liberal Party, Shadow Treasurer) Share 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.

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