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Wednesday, 11 May 2011
Page: 3529

Mr STEPHEN JONES (Throsby) (10:23): We are here today speaking on this bill for some important policy reasons that have a deep impact on our nation's character and Australia's egalitarian culture and traditions. Executive pay has seen some exceptional growth since the 1990s—around 13 per cent per year in real terms for the top 100 companies and 16 per cent for companies in the ASX top 50. In 2008-09, the estimated total remuneration for CEOs of the top 20 companies was around $7.2 million, or 110 times the average wage. This rapid growth in executive pay has been occurring at the very same time that these companies have been calling for wage restraint for their own employees and in the economy at large and opposition has been expressed to even modest increases in the minimum wage, while their peak organisation, the Business Council of Australia, was barracking for the coalition's unfair Work Choices legislation, which had, as its sole objective, the driving down of wages for ordinary Australian families.

While we are talking about the salaries of the very wealthy in our society, I want to state that I do not think that it is in Australia's national interest for the gap between top-income earners and low- and average-income earners to continue to increase at the rapid pace that we have seen in recent decades.

The bill before the House may go some way towards reigning in the excesses of executive remuneration, but it will not fix the structural problems arising from the existing income divide in Australia. I do not see how it is in anyone's interest if low-income earners are forced to struggle to feed, clothe, house and transport themselves and their families, despite being in full-time paid employment.

As has been noted recently by the Secretary of United Voice, Louise Tarrant, the recent history of Australia's economic development has seen a seen a restructuring of our economy so that risk has increasingly shifted from business and government to individual workers. This shift of risk has occurred through the loss of security of employment and the erosion of workplace protections such as sick leave, minimum hours and penalties.

Indeed, the coalition's Work Choices laws were designed to accelerate that shift of risk even further on to workers. Yet this transfer of risk has occurred at the very same time as corporate executives have increasingly been rewarding themselves for high-risk strategies, in particular through skyrocketing performance pay. That is why improving the accountability and transparency of executive remuneration is a welcome reform to Australia's framework of corporate governance systems for those of us on this side of the House and the constituencies that we represent. We believe that governments have an important role to play to ensure that our market based economy functions efficiently and effectively. That is because we believe that corporations are created by government, not by god, and the laws under which they operate are the laws created by people in this place and not the laws of nature.

Government regulation ensures that our economy works in the way that best reflects the interests of the broader community, of our interests as a society at large. In Australia we are fortunate to have a robust system of regulation in the corporate and financial sector and the measures in this bill represent further sensible and rational reforms to the corporate sector.

The reforms being put forward in this legislation have come about following a thoroughgoing review by the Productivity Commission. I commend the Productivity Commission for their informative report and their contribution to knowledge in this subject area. In their report on executive remuneration, the Productivity Commission noted that Australia's corporate governance and remuneration framework is highly rated internationally.

Our strong system of corporate governance served Australians well through the global financial crisis and it made the difference between the situation we faced in Australia and that faced by other countries in our region and in the Western world. But it is not the nature of a reformist government like ours merely to be complacent and to rest on our laurels. That is why the Gillard government and the Parliamentary Secretary to the Treasurer, the member for Lindsay, have brought this legislation before the House. It is Labor's view that the marketplace in relation to the remuneration of directors and executives is not working effectively as it could or should be. We believe that the appropriate mechanism to redress this is to increase the accountability of boards to the owners of companies—that is, their shareholders.

The measures in the bill before the House contain a number of provisions that will strengthen the accountability of boards and executives to their shareholders. First, the bill introduces a two-strikes rule that will require a board to better respond to shareholder concerns on remuneration issues. The mechanism for this two-strikes rule will be triggered where a company faces a 'no' vote by 25 per cent or more on its remuneration report for two years running. Where this occurs, and the board has not satisfactorily responded to shareholder concerns, that board will be subject to a 'spill' resolution. If more than 50 per cent of eligible shareholders vote to spill the board, there will be a requirement for the directors to stand for re-election at a subsequent meeting within 90 days.

This bill also contains important measures regarding the treatment of remuneration consultants to ensure better accountability and transparency in their role regarding remuneration matters. Transparency will be enhanced because companies will be required to disclose details relating to the use of remunerations consultants, including the consultant used and the payment made to that consultant for the advice or any other advice provided to the company. I fail to see, as the member for Aston said previously, how this is some form or onerous or burdensome regulation on boards, shareholders or companies at large.

In addition, boards will be required to approve the engagement of remuneration consultants and these consultants will be required to report their remuneration recommendation to the non-executive directors of the remuneration committee of the company concerned. Directors and executives will no longer be able to participate in the non-binding shareholder vote on their own remuneration or on the spill motions. This measure will remove a significant conflict of interest—which has been described by members opposite as completely obvious—between directors, executives and their votes in regard to remuneration matters, and it will also extend to votes by key management personnel and their closely related parties in regard to their undirected proxies.

Another common criticism made of executive remuneration is that it has focused too much on rewarding risk and short-term results rather than the long-term performance of the company. This situation was a particular characteristic of corporate behaviour in the United States in the lead-up to the global financial crisis and, regrettably, I believe it has yet to be satisfactorily resolved there, much to the detriment of American civil society. While the situation in Australia does not approach the level of corporate scandal in the United States, it is nevertheless critical to continue to be vigilant about defending the integrity of our system of corporate governance and to ensure that government regulation is working effectively to achieve its aims.

I think the bill before the House today demonstrates that where a system of self-regulation does not work then further regulatory steps need to be taken to guide market mechanisms towards better outcomes. It is a matter of public record that the existing system of non-binding votes has not had the desired effect on the actions of some boards in regards to the remuneration matters in their companies.

The standout example that I am very familiar with here is Telstra, which notoriously in 2007 was repudiated by an outstanding 66 per cent of shareholders for its handling of remuneration matters. The board at the time blithely ignored the vote and shareholders were powerless to do anything about it. The arrogance of the Telstra board in 2007 was shocking and was rightly condemned by many in the financial media and more broadly. It was ironic that at the very same time that this company was taking a very harsh attitude towards the treatment of remuneration for its own employees and their own workplace rights it was operating with complete disregard to community norms, as expressed by its shareholders, in relation to its own executive pay. I know that the current executive team at Telstra are working hard to redress the toxic culture that had developed as a result of previous management regimes and employment practices, and the blithe disrespect and disregard for community values, and everybody welcomes any move towards a more civilised and mutually respectful corporate culture in that company and elsewhere. I can only wish it well in this regard.

There are alternative proposals that have been talked about in this area. Some say that this regulation does not go far enough, and I must say that at times I have had sympathy with that view. The alternative proposal put by members opposite and foreshadowed in their amendment is that we should lift the bar even higher for shareholders—that is, the triggering of the two-strikes rule should not be based on 25 per cent of the votes cast, which would trigger the spill motion and the requisite action of the shareholders, but that it should be based on 25 per cent of the votes that are eligible to be cast at an annual general meeting of a company. Anybody who has had any experience of the practical operation of annual general meetings of most companies, particularly large companies with a large share registry, will know that this lifts the bar to an almost impossible level because it would be a very rare event indeed where 25 per cent of the eligible votes would be cast in a vote on a matter such as this.

While many of those opposite have risen to speak in favour of the sentiment and the intent behind this bill—to put more regulation and give more control to the shareholders to address outrageous remuneration packages by executives—their proposed amendment to this regulation will have quite the opposite effect. It would neuter the effect of the bill and neuter the ability of shareholders to have any real say in controlling the remuneration packages of their directors and executives.

The social contract in Australia that was the bedrock of our culture and our values has been severely challenged as executive pay has skyrocketed in recent decades. We cannot sit by and wring our hands each time we hear of multi-million dollar salaries being paid to corporate executives which are seemingly unrelated to the performance of their companies and the returns to shareholders. That is why I support the sensible measures in the bill before the House today, and that is also why I support the voices of others within the community in their continued campaigns to ensure fairness, security and dignity for all Australian workers, and that we do everything we can to narrow the gaps between the wealthy, the average Australians and the poor in this country.