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Transparency International Chairperson discusses corporate governance.



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BREAKFAST

20 January 2003

 

 

NELL SCHOFIELD: With the devastating summation of counsel assisting the HIH Royal Commission, you could say that last week wasn’t a good one for the reputation of Australian business, especially when the ACTU used the week to highlight the stratospheric rise in chief executive salaries, on contrast to low-income workers, as part of its push for a rise in the minimum wage. And of course there has been the scathing criticism of APRA, the government’s corporate watchdog. Serious questions are being raised about the way our corporations operate and about the ethics and responsibilities involved in corporate governance.

 

Henry Bosch is a former chairman of the National Companies and Securities Commission, and is now Chair of  Transparency International in Australia. He joins us now on the phone. Good morning, Henry.

 

HENRY BOSCH: Good morning.

 

NELL SCHOFIELD: Let’s look first at executive salaries. The ACTU says they are running at 89 times the average wage. Why have we seen such a blow-out of top corporate wages?

 

HENRY BOSCH: I think it is essentially competition and publicity. When I was a CEO we didn’t know what other CEOs were earning, and there wasn’t a great deal of competition to get the rates up. But once we began to expose and publicise the remuneration of our top people, everybody got to know what everybody else was doing and everybody felt that it was necessary that their salary should be at least as high as the next man’s.

 

NELL SCHOFIELD: Was the blow-out in chief executive salaries exacerbated by reforms in the mid-nineties to make executive pay more transparent?

 

HENRY BOSCH: It was earlier than that. It was one of the first issues that occurred when I became chairman of the National Companies and Securities Commission. The ministers felt that they could exert a downward pressure on pay by making it public. They thought that people would be shamed into taking less—that was in 1985—and I can remember arguing forcefully but helplessly that it would have exactly the opposite effect and, indeed, it has had the opposite effect.

 

NELL SCHOFIELD: So is there a ‘winner takes all’ mentality in corporate Australia?

 

HENRY BOSCH: I think it is not quite like that. No company wants to feel that it is economising on the pay of its top people. It is generally recognised that the top people make a very big difference to the success of a company and it is natural for them to want the best. They, therefore, are prepared to pay a bit more than average, sometimes quite a bit more than average.

 

NELL SCHOFIELD: Eighty-nine times the average wage sounds amazing.

 

HENRY BOSCH: It is. I join in the outrage and the feeling of discomfort at the levels to which it has risen but I think you can say that the contribution that these top people make to the results of a company is many times what the ordinary shop floor workers contribute. It may not be 89 times but it will be quite a lot.

 

NELL SCHOFIELD: You have talked about shareholders taking a greater role in general issues of policing corporate governance; is the issue of grossly high executive salaries just one of the many that shareholders need to tackle?

 

HENRY BOSCH: Oh, it is one and by no means the most important. In fact it is really, in terms of the effectiveness and the results of our corporations, it is a second-order issue.

 

NELL SCHOFIELD: So what is the most important issue?

 

HENRY BOSCH:  The most important issue is accountability.

 

NELL SCHOFIELD: Accountability?

 

HENRY BOSCH: Yes. We didn’t really learn any new lessons in 2001; we just had some old lessons brought home to us, again, in a forceful way, and those are that when people are not held accountable, when they are not under competitive pressure, some of them will be lazy and greedy and will avoid taking the tough decisions; they will subordinate their duty, in the short term, to their own interests, and so the essence of good governance is accountability. Managers have to be effectively accountable to someone who can find out what is going on, and that is mainly the board of directors.

 

NELL SCHOFIELD: The board of directors—yes, what about their role, the company directors?

 

HENRY BOSCH: They are human too, and if they don’t feel accountable, if they don’t feel under competitive pressure, they also will be lazy and greedy and will avoid taking the tough decisions, and so they have to be accountable to somebody else, and that somebody else is, in the main, the shareholders. The law has its place. It is about 20 years since I began to take a close interest in these affairs and in that time the volume of statute law has increased about 10 times. Hundreds of pages of new legislation have been passed and that has mainly been ineffective.

 

NELL SCHOFIELD: So why isn’t corporate governance working?

 

HENRY BOSCH: Well, I think you should say that it is working a very great deal better than it was. The problems that we had in 2001, with the collapse of the dot com boom, were far less in this country than they were in the 1980s. We did learn quite a lot of lessons. The shareholders have taken far more interest and exerted far more pressure than they did in the eighties.

 

It is not very easy to change human nature and it doesn’t happen very quickly. I think we should be quite pleased at the progress that we have made and quite pleased that what happened here was far less than what happened in the United States where they didn’t have such a big trauma, in the eighties, and haven’t learnt as many lessons as we have.

 

NELL SCHOFIELD: Henry, over the last few days there has been a lot of press speculation that a lot of the people responsible for the HIH disaster will not be punished, that the prosecuting body, ASIC, just won’t have the budget to pursue everyone. Is this what you expect?

 

HENRY BOSCH: Oh, yes, absolutely. There is no hope of all of these charges being pressed through.

 

NELL SCHOFIELD: Just too mammoth a task?

 

HENRY BOSCH: Yes. Our legal system allows rich defendants to introduce all kinds of delaying tactics and complications into the defence process and it becomes a very lengthy and very expensive process to bring them to justice.

 

NELL SCHOFIELD: But how important, for corporate governance, is it that people do go to jail for crimes, I guess, like this?

 

HENRY BOSCH: I think that it would make a very big difference if a number of the key players went to jail or, at very least, faced complete exposure in the courts, and I think there is a reasonable chance that that will happen. The exposures that have come out of the royal commission will have made a great impact on the thinking of a lot of people. In the case of HIH and One.Tel, other directors will look at what went on in those boardrooms and say, ‘Well, this wasn’t really up to proper standards and we will have to do a bit better.’ Memories will last a few years.

 

NELL SCHOFIELD: Yes, raise the bar a little bit.

 

Henry Bosch, thanks very much for joining us this morning.

 

HENRY BOSCH: Thank you.

 

NELL SCHOFIELD: Henry Bosch is Chair of Transparency International in Australia.