House debates

Thursday, 12 May 2011


Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Bill 2011; Second Reading

Debate resumed on the motion:

That this bill be now read a second time.

10:59 am

Photo of David BradburyDavid Bradbury (Lindsay, Australian Labor Party, Parliamentary Secretary to the Treasurer) Share this | | Hansard source

The government would like to thank those honourable members that have taken part in the debate on the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Bill. It is important that we have a system of remuneration that is not only internationally competitive but that also appropriately rewards executives for the value that they bring to a company. At the same time, directors should be accountable to shareholders for the level and composition of executive remuneration. As shareholders are the owners of their companies, they deserve more say over how the pay of company executives is set. While Australia's remuneration framework is relatively strong and has been acknowledged as such by the Productivity Commission, the global financial crisis highlighted a number of issues relating to remuneration structures. In particular it illustrated the dangers of remuneration structures that focus on short-term results, reward excessive risk taking and promote corporate greed.

In March 2009 the government asked the Productivity Commission to undertake a broad review of Australia's remuneration framework. Following a comprehensive inquiry the Productivity Commission found that Australia's corporate governance and remuneration framework is highly ranked internationally. However, it also recommended a range of reforms to further strengthen Australia's remuneration framework. The government supported and further strengthened the majority of the recommendations. This bill implements many of these recommendations and introduces measures that will empower shareholders to influence the remuneration decisions of their company.

The bill requires company boards to be responsive to shareholder concerns on remuneration issues and, if they fail to do this over two consecutive years, they will be held accountable by having their re-election fast-tracked through the two-strikes process. The bill also facilitates the independence of remuneration consultants by introducing requirements about who must approve the engagement of a remuneration consultant and who the remuneration consultant must report to. The bill also ensures that shareholders are able to make an informed assessment about the independence of the remuneration consultant. The bill requires the board and the remuneration consultant to provide a declaration of independence as well as requiring disclosure of key details, such as the fees the remuneration consultant was paid.

The bill also contains a number of other important measures. The bill prohibits the company's directors and key executives or key management personnel and their closely related parties from voting their shares in the non-binding vote on the remuneration report. This will address the conflicts of interest that arise with key management personnel voting on their own remuneration. The bill prohibits key management personnel from hedging their incentive remuneration. This will ensure that remuneration remains linked to performance. The bill prevents boards from declaring 'no vacancy' without explicit shareholder consent. This will ensure that the board cannot operate in a closed shop fashion and will provide greater scope for shareholder oversight on issues like executive remuneration. Finally, the bill prevents proxyholders from cherry picking which proxies they exercise, which will enfranchise shareholders who choose to vote by proxy.

The government will also be moving amendments that would delay the application date of three of the bill's measures from 1 July to 1 August 2011. These measures are the prohibition on key management personnel and their closely related parties from voting their shares in the non-binding vote on remuneration, the prohibition on exercising undirected proxies on remuneration related resolutions, and the prevention of cherry picking of proxies. The amendments provide transitional relief to firms facing difficulties in their preparations during May and June for annual general meetings scheduled for July 2011 because the bill remains subject to parliamentary consideration. As the delay in application affects only three measures, the broad policy purpose of the bill would continue to be applicable from 1 July 2011. The coalition have circulated some amendments which they have proposed and I would like to turn my comments to those amendments now.

Photo of Tony SmithTony Smith (Casey, Liberal Party, Deputy Chairman , Coalition Policy Development Committee) Share this | | Hansard source

Madam Deputy Speaker, I raise a point of order. To assist the House, we are about to move to consideration in detail, where we have the allotted and scheduled time in which to do that. If the parliamentary secretary wants to do it twice, that is his business.

Photo of Sharon BirdSharon Bird (Cunningham, Australian Labor Party) Share this | | Hansard source

The member has made his point.

Photo of David BradburyDavid Bradbury (Lindsay, Australian Labor Party, Parliamentary Secretary to the Treasurer) Share this | | Hansard source

I think it is important that we put on record the government's position in relation to these matters and, noting the member opposite's comments that there will be further opportunity—

Photo of Sharon BirdSharon Bird (Cunningham, Australian Labor Party) Share this | | Hansard source

Parliamentary Secretary, please resume your seat for a moment. Given that this is a second reading debate, which covers issues more broadly, I am going to allow the parliamentary secretary to continue.

Photo of David BradburyDavid Bradbury (Lindsay, Australian Labor Party, Parliamentary Secretary to the Treasurer) Share this | | Hansard source

Thank you very much. I want to address the question of the two-strikes test, which is at the very heart of these reforms. These are the reforms that would be under threat if the opposition's amendment were to be approved. Under the two-strikes test, as has been indicated, where more than 25 per cent of shareholders vote against a remuneration report on two consecutive occasions, it would then give rise to an opportunity to vote on a spill resolution. If a 50 per cent majority were achieved on that spill resolution, that would then trigger a spill of the board. The two-strikes test is absolutely central to this package of reforms because it is the one mechanism that provides shareholders with leverage in this entire set of arrangements. To emasculate the two-strikes test is to strike at the very heart of these proposals.

The proposition that is being put forward is that the bill as it stands before the House should be amended so that that test should change from applying to 25 per cent of the votes cast to 25 per cent of shares issued. That does not seem like a significant change, but it is a very significant change. If this change were to be adopted, if this amendment were to be adopted, it would strike at the very heart of this package of reforms. It would make it almost impossible for shareholders to spill a board. We certainly do not see the spilling of a board as a first port of call; it should always be an absolute last resort. But we are serious about providing shareholders with an opportunity to spill boards where they have been recalcitrant: where they have failed to respond to the concerns of shareholders over two consecutive years. To move from a position where the 25 per cent is measured against votes cast to a position where the 25 per cent is measured against total available votes—that is, if you do not turn up to vote your vote is counted as being a vote in support of the remuneration report—is to strike at the very heart of this package. The Productivity Commission, in their extensive deliberations on these matters indicated that at present, on average, about 58 per cent of shares are voted at the AGM. Of those 58 per cent of shares voted, under our proposal there would need to be 25 per cent of those people indicating a 'no' vote, casting a 'no' on the remuneration report. If the coalition's amendments were to be adopted and included as part of this package of reforms, the 25 per cent would effectively be a 44 per cent vote.

I know that many contributors to this debate and many stakeholders simply said, 'Increase the 25 per cent to 50 per cent.' We have adopted the recommendation of the Productivity Commission in this regard. It is a non-binding vote, and we believe that 25 per cent is calibrated at the appropriate level. If the coalition are serious about increasing the level they should just come in here and move 50 per cent. They should not try and do it through this backdoor method, emasculating the two-strikes test by indicating that the 25 per cent should be in reference to total votes issued.

There are a couple of good reasons why it would be a travesty if these amendments were to be adopted. The first one is that this whole package is about greater accountability. We want to make boards more accountable to shareholders, but under the coalition's amendments we would actually make them less accountable—we would strip away some of the power that this bill is intended to give shareholders. So on accountability it would be a step backwards. This package above all else is about shareholder engagement. It is about saying to boards: 'We want you to engage with your shareholders and allow them to understand the principles behind the remuneration packages that you are awarding. Let them be fully informed of the dynamics that have driven your decision to award your executives salaries of the levels that you have been prepared to award.' We want more shareholders being engaged as part of this process.

One of the perverse incentives of the coalition's amendments is that they actually discourage boards from engaging with shareholders. To explain this I want to make a very simple point. I said earlier that the Productivity Commission had said that on average only 58 per cent of shares are voted at an AGM. Under the coalition's proposal, if fewer than 50 per cent of shares are voted at the AGM the two-strikes test can have no application; it can never work. What they are indicating—bearing in mind that that 58 per cent is an average, so for every company that has a higher turnout than 58 per cent there are others who will have a lower turnout—is that for those companies the two-strikes test, the very centrepiece of this package of reforms, would have no effect because it could not be applied in those circumstances.

The other point that I would make is that the coalition propose to amend the reference point in relation to the 25 per cent trigger, but they have not proposed to do that in relation to the spill motion. So it is theoretically possible for the threshold for the spill motion to be higher than the threshold for the trigger. That runs counter to the philosophy of this, which is all about the triggers. The non-binding votes are about giving shareholders an opportunity to express a view without spilling a board. But if they express that view on one occasion and they come back to the AGM the next year and they do it again, and the board still does not respond to their concerns, then there must be an ultimate sanction, being the sanction in the form of the spill resolution. I would certainly be putting forward the proposition, through you, Deputy Speaker, that the essence of these reforms will be put in jeopardy if such an emasculation, such a watering down, such a weakening of the two-strikes test were to be adopted.

In summary, this bill will give unprecedented power to shareholders, improve the accountability of company directors on remuneration issues, address conflicts of interest that exist in the remuneration setting process and promote a culture of responsible remuneration practices. I commend the bill to the House.

Question agreed to.

Bill read a second time.