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Wednesday, 9 September 2009
Page: 9026


Mrs MOYLAN (11:57 AM) —I am very pleased to participate in the debate today on the Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009. The so-called golden handshake practice of large termination payments being made to company executives has generated a great deal of concern throughout the community, especially in recent times since we have seen the collapse of the financial markets. Shareholders of large corporations have every reason to expect us to examine the provisions of the Corporations Act and make sure that shareholders who fund the companies but who are also beneficiaries of the success of those companies have a say in how executive pay is determined and at what level.

In the electorate of Pearce I am sure that the wider public have concerns about what is seen as excessive termination payments. Even before the financial collapse we saw a number of large corporations in Australia who provided very substantial termination payments for top-end executives only to see those companies lose considerable shareholder value under the administration of those individuals, who jeopardised the future of the corporation. In many cases the shareholders—I think, rightly—felt they had little say in some of the arrangements that had been made. So the measures are broadly sensible, the intent is sensible, and I think the public expect us to examine what has been happening and perhaps to deal with some of the worst abuses.

Under this legislation, termination payments will be limited to an executive’s total annual remuneration for one year; under the current arrangements it is limited to seven years total annual remuneration. Termination payments will be subject to the approval of company shareholders, which is a reasonable proposition and, by most standards, is a fairly lenient requirement. This bill seeks to make sure that shareholders in both institutional and retail corporations have some say in the matter. The key objective is to lower the threshold so that shareholder approval will be required where a termination payment is more than one year’s base salary. Clearly, this is a dramatic change with potentially important consequences for some big corporations, and as such it is a change that warrants thorough and informed debate. I agree with the shadow minister, who spoke quite eloquently on this bill, that above all we need to ensure that this legislation does not have a perverse impact on a company executive greeted with a golden handshake—that is, we need to ensure that companies do not load up the upfront payments to company executives without having to meet the requirements of these amendments.

In addition to the changes to the threshold, there are other more technical changes, which also have the propensity to massively alter the remuneration practices of many businesses throughout Australia. Shareholder approval will be required not just for chief executive officers but for an extended array of executives and non-director executives as well. I can well understand the disgust that many people in the community feel when they hear of company executives under whose watch company profits fell and the value of shares seriously declined being given a golden handshake on leaving. These are certainly emotive issues, and I am sure that the government has felt pressured, given the high level of publicity around these issues, to act to address the injustices. But we must also guard against taking a rushed approach, an over-the-top approach, that sees the Corporations Act riddled with a minefield of unintended consequences. Businesses in Australia come in many shapes and sizes—indeed there is no typical company—which is why we must ensure that what is a practical solution to the problems encountered in some corporations does not become a problematic imposition for others. The role of this legislation, and indeed the debate surrounding it, should be to find the right balance between the worthy objective of constraining inappropriate termination payments being made at the expense of company shareholders and the need to ensure that business efficiency is not threatened. The shadow minister made the comment that it is a matter of aligning the interests of directors and shareholders. There has to be a balance.

On 18 March 2009, the government announced the reforms contained in this legislation. It was surprising—it certainly surprised me—that that was the same day that a Productivity Commission report was commissioned to investigate executive remuneration in Australia. The findings of this report may well be crucial to the way that we in this place shape legislation to deal with any inequities or injustices. I am sure that the report of the Productivity Commission will have the capacity to contribute a great deal to informed debate on termination payments, and the report would have assisted us in getting the legislative balance right. It is not so long to wait; we would have done a much better job with this legislation if we had waited for the outcome of the Productivity Commission.

Many of the submissions to the Senate Economics Legislation Committee inquiry into this bill commented that the debates over executive remuneration and termination payments are inextricably linked. It is astonishing that the legislation is being considered now, while the Productivity Commission’s inquiry is considering the following items, because their investigation goes very directly to the heart of this legislation. The Productivity Commission is investigating, firstly, the trends in director and executive remuneration both in Australia and abroad; secondly, the role of institutional and retail shareholders in setting and considering remuneration; and, thirdly, the effectiveness of the international response to remuneration issues arising from the global financial crisis, particularly excessive risk-taking and corporate greed. That third item is quite important. It is a fact that we live in a global environment and business is conducted in a global environment. If we in this place are too out of step with what is happening with our major trading partners in the way that we legislate to curtail certain activities of corporations, we put our own companies at a great disadvantage.

I think we are seeing this thread through a number of debates in this House. Perhaps it is a failing of a new government’s lack of experience. We are seeing it also with the ETS, where there is a willingness to pass legislation in this place before we know what is happening in the United States and before we know the shape of any international agreement. It has the capacity to place our corporations in a position of great risk without actually achieving the kind of outcomes that every man, woman and child in this country would expect. We are seeing a thread here. This is very much a cart-before-the-horse approach and it unfortunately does generate considerable cynicism and frustration with the way in which government operates, not only within the public but also within the corporate sector. It smacks of fairly crude politics—that is, responding to sensational media headlines rather than looking at the real issues and making sure that we are addressing them in an effective way.

Australian businesses, I would imagine, would also prefer to wait—not to stall the legislation, but it is reasonable that they see the shape of the Productivity Commission’s inquiry into executive pay—and would expect us in this place to have a fully informed debate rather than impose on them rushed, ill-informed legislation that only addresses one part of the problem. The timing of this legislation has nothing to do with efficient practices in this place or indeed getting a good outcome that passes the public interest test. Rather it has everything to do with a new government making the most out of the media cycle on public concerns as to executive remuneration. As I said, it is a knee-jerk reaction to sensational headlines. I think that is unfortunate.

I am no apologist for the corporate sector. I have had many skirmishes on behalf of the average constituent in my electorate over the years, but I do think we can be pretty proud of the way in which many of our corporations function, the successes they have, the income they generate and the taxes they contribute. Many of the corporations, I have to say, demonstrate a great public-spiritedness. While we have seen the outcomes of the financial meltdown and the impacts on people in other countries, we have had a rigorous system that has served the public reasonably well in this country. It is not to say that there is not some pain—there clearly has been—but we have done a reasonably good job of striking that balance between public interest and the capacity for corporations to operate efficiently and flexibly.

Nevertheless, we must not back away from a full and frank debate on this piece of legislation as it stands before us today. Here it is; we have it before us. We would rather have waited for the Productivity Commission’s report but we have to now debate it. Whilst the coalition supports the broad objective of this legislation—that is, giving shareholders a greater say—I am not convinced that a number of issues have been dealt with adequately. There are further concerns still as we wait to see what shape the regulations will take. These regulations will have a significant impact on the operation of the legislation, and the failure to incorporate them into the legislation leaves important questions unanswered. Again, this is another indication of a new government at work falling into some of the old traps and putting the cart before the horse.

My key concern with the drafting of the legislation was the move to set the threshold limit according to an individual’s base salary rather than using the existing terminology of total annual remuneration. Clearly, the base salary is a lower figure and thus shareholder approval will be required in an extended number of circumstances. However, the real concern is that the change will distort the manner in which remuneration is now packaged. As the minister said, we may see the ‘golden hello’ at the front of a contract, an appointment, instead of the golden handshake at the end.

It is assumed that the base salary will mean the risk-free payments made to executives and directors. But the Law Council of Australia, in their submission to the Senate Economics Legislation Committee inquiry into the legislation, argued that, for many executives, the base salary makes up less than half of the total remuneration package. There is a growing trend—generally supported by shareholder groups—that executive remuneration should be tied to performance or incentive. With the commercial realities which we face and with the global environment as it is, that is a fairly sensible approach. Such performance based payments would not be considered as part of the base salary, potentially meaning that many executives would only be entitled to half of their annual remuneration as a termination payment before shareholder approval is required.

The other distortion that will potentially arise from this legislation is that, rather than executives being given golden handshakes, as I said, they will get a front-end loading as a signing-on bonus. The Treasury responded to the prediction in the Senate economics committee report that the legislation might produce a distortion, with front-end loading of contracts, by noting that such payments would be listed in the remuneration report and, as such, at least payments will continue to be transparent. That misses the point, because the objective of this legislation, I thought, is to empower shareholders to veto termination payments, not to ensure that they are informed of front-end loaded payments after the fact. It does not make a lot of sense to me. It is good to have transparency, but we want a result here. Whilst it is true that shareholders vote on a company’s remuneration report, this vote is non-binding, so it is for merely persuasive purposes and it is required only for listed companies.

I think we should be favouring a model that does not promote artificial and creative restructuring of remuneration packages, as I said, to create a perverse approach to this. I do not believe for one minute that the majority of businesses would consider doing this to deliberately mislead shareholders, but I think it is entirely foreseeable that the distortion will take place for business efficiency purposes and to provide certainty for executives at the commencement of their employment. I think we have to understand as well that we have been working and continue to work in a very competitive environment in this particular marketplace.

The simplest way to ensure that this legislation does not turn out to be counterintuitive is to amend the threshold provisions so that the total annual remuneration is used rather than the more limited base salary requirements. The legislation is noticeably the product of community outrage. I understand that and I think we have an obligation to do something about it. If the government is not prepared to await the outcome and recommendations of the Productivity Commission, then at the very least it should give full consideration to the amendments being put forward by the coalition. The member for Aston is sensible and I think he is balanced in his approach, and I would like to think that we can have a bipartisan approach to this piece of legislation. The amendments that the shadow minister has put forward are all about getting the balance right, seeing that shareholders have a say and are protected from unscrupulous termination payment arrangements but also ensuring that legitimate business interests are not threatened. These are sensible amendments that will ensure the sensible operation of this legislation. I pay tribute to the work that the shadow minister has done to bring forward thoughtful and well-considered amendments that truly have the capacity to improve this piece of legislation, to give shareholders full rights, to let them have a say in how executive pay is structured. I hope that the minister responsible will give full consideration to those amendments.


The DEPUTY SPEAKER (Dr MJ Washer)—Before calling the next speaker, I acknowledge that we have some members from Clancy College here. Welcome to the parliament.