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Thursday, 10 March 2005
Page: 121

Senator WONG (4:01 PM) —I rise to speak on the motion of Senator Chapman to take note of the government’s response to the committee’s report. Surprisingly, I agree with much of what Senator Chapman has to say in relation to the government’s response to the recommendations of the Parliamentary Joint Committee on Corporations and Financial Services. There were a great many recommendations made by this committee in the context of the CLERP 9 bill. By rough calculation, I think 40 of those recommendations have been rejected by the government, eight were accepted, a number were deferred or put on a ‘wait and see’ basis, and, as Senator Chapman has indicated, two have been included in the draft bill which has been put out for consultation.

We on this side of parliament are very concerned by the government’s failure to deal with many of the recommendations of the committee. We believe that these issues have been on the table for some time and the government’s failure to deal with them leaves significant gaps in the regulatory framework. Many of these recommendations were very sensible. Many of these recommendations were recommendations that Labor supported. There were some recommendations where we clearly had a different view, but we are surprised that the government has not even gone for the recommendations proposed by the committee which were, from Labor’s perspective, perhaps a softer option than the recommendations that Labor put up.

One of the areas of particular concern for us is the area of executive remuneration. I wholeheartedly agree with Senator Chapman’s views about some of the government’s thinking, as indicated in the response to this report—in particular, recommendations 10 and 11, which were directed at trying to improve disclosure of the link between executive remuneration and company performance. We are disappointed that that has not been taken up by this government. We find the government’s reasoning in relation to this to be quite obtuse as set out in the report. It seems to us that if it is the policy and legislative position that there should be an appropriate link between company performance and executive remuneration then surely the sorts of things which are referred to in recommendation 10, which recommends that ASIC release a guide about disclosure, and recommendation 11, which deals with the regulations associated with that disclosure of the link between company performance and remuneration, are appropriate. It is not good enough for the government to simply say, ‘We have a broad requirement for this in the legislation, and that is sufficient.’

What is perhaps one of the worst rejections contained in the government’s response to the report was also raised by Senator Chapman. That is the recommendation that, as a general principle, executive directors not be involved in determining their own remuneration. It is quite extraordinary that this government is defending the right of directors to set their own remuneration packages. That is clearly a conflict of interest. I note also that the committee report did in fact allow for an out. It said that, if there were reasonable grounds for a director to set their own remuneration or to be involved in determining their own remuneration, then the prohibition should be drafted so as not to extend to that person. The recommendation itself said that, unless it is not reasonable for you to do so, you should not be involved in setting your own remuneration. So there was an out.

What does the government’s failure to pick up this recommendation mean? Essentially, it means that this government stands for the right of an executive director to be involved in determining their own remuneration, even if there are not reasonable grounds for them to do so. That is what this government stands for: the right of an executive director to be involved in determining their own remuneration, even if there are not reasonable grounds for that to occur. It is an extraordinary position, and I concur wholeheartedly with the chair of this committee about the government’s reasoning on this issue.

It is unfortunate that, in the area of executive remuneration, the government has rejected a number of recommendations that essentially set control and a framework around executive remuneration. Another obvious example of that is recommendation 16, which went to a requirement that payments to directors on retirement or termination should be subject to shareholder resolution. That was not accepted by the government. What that means is, again, less accountability of directors to shareholders. It means that shareholders do not have a say in maximum annual cash payments and any retirement benefits or termination payouts of directors. That is a very unfortunate situation. It seems rather bizarre that the government has refused to put this in. I have read its response where it tries to justify the nonacceptance of this recommendation, and I fail to understand the reasoning behind it. It would seem very sensible to ensure that shareholder resolution on issues such as a termination payment should occur.

In Australia we have had, over some years, examples of inappropriate termination payments to directors. It was in part as a response to the sorts of payments received by George Trumball at AMP or Frank Cicutto at the NAB, which were $13.2 million and $14 million respectively, that the government in fact moved in CLERP 9 to deal with the issue of termination payments. Now the issue has gone politically quiet and we see the government backing away, refusing to deal with an issue that has policy importance, refusing to ensure that shareholders have some say and refusing to ensure that there is sufficient accountability by directors to their shareholders.

It is another example of the government talking up an issue but not actually doing very much about it. I recall the financial press quoting the Treasurer when the last reporting period finished, where the Treasurer was critical of some of the remuneration packages of executives of Australia’s listed companies. In this report we see that the government is simply refusing to accept recommendations for positive changes to the framework. It is refusing to ensure that the framework requires accountability and a bit of a check on executive excess and directors’ excess. That is what is required and that is what is missing in the government’s response.

In the time I have left I will very briefly refer to two other areas where Labor have some significant concerns about the government’s response. One is in relation to analysts’ independence. Recommendation 25 of the committee’s report dealt with the independence of analysts. Labor, in fact, recommended in our minority report what we consider to be a more stringent position than the committee’s recommendation. We are of the view that a hands-off and a self-regulatory approach in the area of analysts’ independence is inappropriate. This is important in terms of the integrity of the information received by the markets, and it is unfortunate the government is squibbing on this issue. The majority committee report, which, on the issue of analysts’ independence, again was not as stringent as where Labor cast itself, has not been accepted by the government. The government has said it thinks the financial services reform changes, including financial services licences, are sufficient regulation on this issue. We do not agree with that. We retain our concerns that the current regulatory framework, insofar as it relates to analysts’ independence, is inadequate.

My final point was mentioned briefly by Senator Chapman. It is in relation to the Financial Reporting Council and the 13 recommendations, I think it was, relating to the improvement of the functioning and transparency of the FRC. All of these were rejected or deferred, despite substantial feedback from industry and business, during the inquiry process, about the importance of reform in this area. In the context of our more recent inquiry into international financial reporting standards, the issue of the functioning of the FRC was again raised. It is very unfortunate from Labor’s perspective that some of the useful recommendations, which were contained both in the majority report and obviously in Labor’s minority report, to improve the transparency, the integrity and the functioning of the FRC have not been taken up by the government.

Debate (on motion by Senator Bartlett) adjourned.