Helen Coonan (NSW, Liberal Party, Shadow Minister for Finance, Competition Policy and Deregulation) Share 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.