House of Representatives Speech- Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009

The Australian people have become accustomed in recent years to reading stories of failed companies and of reading stories of companies that have recorded very substantially reduced profits or, indeed, very substantial losses in particular years of operations. They have become used to reading stories of companies that have reduced profits or substantial losses retrenching very, very large numbers of employees. Equally, in the context of these same stories, they have become used to reading of executives rewarding themselves notwithstanding the failure or poor performance of their companies with excessive termination payments at the very time that the company is on the slide. Almost all Australians who read stories of that nature recoil. There is something wrong about a system where company directors and senior company executives sitting around the boardroom table together can decide, in effect, to reward themselves with extraordinarily large amounts of money. They are not mere numbers, as the member for Fadden would have us believe, they are real dollars, excessive amounts of money, and what this bill, the Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009, seeks to do is to impose some check, some curb, on those kinds of excessive termination payments.

The Australian people have become accustomed in recent years to reading stories of failed companies and of reading stories of companies that have recorded very substantially reduced profits or, indeed, very substantial losses in particular years of operations. They have become used to reading stories of companies that have reduced profits or substantial losses retrenching very, very large numbers of employees. Equally, in the context of these same stories, they have become used to reading of executives rewarding themselves notwithstanding the failure or poor performance of their companies with excessive termination payments at the very time that the company is on the slide. Almost all Australians who read stories of that nature recoil. There is something wrong about a system where company directors and senior company executives sitting around the boardroom table together can decide, in effect, to reward themselves with extraordinarily large amounts of money. They are not mere numbers, as the member for Fadden would have us believe, they are real dollars, excessive amounts of money, and what this bill, the Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009, seeks to do is to impose some check, some curb, on those kinds of excessive termination payments.

In the last two years alone we have seen several high-profile Australian companies—Telstra, Pacific Brands and Qantas spring to mind as concrete examples—which have posted reduced profits or significant losses and which have restructured their operations and retrenched large numbers of employees. At the same time, those very companies, Telstra, Pacific Brands, Qantas—and there is a whole range of other companies that I could name—have continued to pay not only large salaries to their senior managers but often very, very large termination payments which almost everyone looking at them would say are excessive. Throughout the 11½ years of the Howard government nothing was done to rein in this kind of excessive remuneration of executives, and it has been left to the Rudd Labor government to try to come to grips with what, on any view, is a serious problem. It is a serious problem because what we are seeing is a failure of corporate governance; what we are seeing is a disconnect between the performance of a corporation and the way in which its executives are remunerated.

We are all familiar with the notion of bonus pay; we are all familiar with the notion of providing an incentive for good performance. But how far have we gone from a true system of incentive pay or performance pay when, at a time of shockingly poor performance by a company, the senior executives who have been responsible for that shocking performance are rewarded with huge salaries—payments that are in no way connected to the performance of that corporation—and a huge termination payment that is itself unrelated in any way to the performance of the company.

This bill seeks to alter the structure of executive pay and strengthen the regulatory framework that relates to the payment of termination benefits to company directors and executives. Specifically, at the moment, company executives can receive up to seven times their annual remuneration before shareholder approval is required. That represents a significant problem, as there is evidence that there is a lack of shareholder control and oversight. The House should be in no doubt that what this bill is directed at is returning some measure of control to the shareholders of corporations, because that is the mechanism that has been adopted in order to impose some curb or check on these excessive executive termination payouts.

There will be a requirement, if this legislation is enacted, for shareholder approval for termination payments of more than one year’s base pay. That will go some way towards curbing excessive termination payments. There is, on any view, something seriously wrong—and the Rudd Labor government is acting on this sentiment—when executives can walk away with millions of dollars, having engaged in a course of excessive risk taking, having presided over a situation where the company has lost substantial amounts of money and where hundreds or, in some cases, even thousands of employees have lost their jobs as a result of excessive risk taking by those executives. Something is seriously wrong when it takes just three days for some executives to earn what their employees take home in a year.

The government does expect that this legislation will lead to a change in the behaviour of senior executives and the behaviour of the boardrooms of Australia. Because even though it might be said that the mechanism that has been adopted here for shareholder approval will not in itself automatically lead to complete control over these kinds of payments, the fact that approval will need to be sought will ensure that the amount of these termination payments will become publicly known and, in the course of seeking shareholder approval, discussion of the amount of these termination payments will be possible. As always with matters of this nature, as the famous United States Supreme Court judge Justice Louis Brandis once said, ‘Sunlight is the best disinfectant.’ The fact that termination payments will be exposed to public scrutiny, exposed to the scrutiny of shareholders, and that shareholder approval will need to be obtained means there is likely to be a check and some brake on these payments, which at present are not subject to any check.

Currently, there are some requirements for disclosure of the actual remuneration levels of company directors. There is some requirement for disclosure of actual remuneration levels of the five most highly paid executives of corporations but, even there, there is a doubt as to whether those disclosure requirements that have been present in the Corporations Act for many years are requirements that will lead to the disclosure of any termination payments which are the subject of this legislation.

The House should be in no doubt about the amounts of money involved. It is not necessary to name the individual directors who have received very large payments in the millions of dollars. We have heard from a number of speakers identifying particular senior company executives who have received amounts in the millions of dollars. It is better to look at this as a systemic issue, and we need go no further than an article, which appeared in last week’s Herald Sun, reporting on an assessment done by leading corporate governance adviser RiskMetrics, which revealed:

At least $62 million could have gone to shareholders rather than departing CEOs if proposed legislation curbing “golden goodbyes” had been in force.

The research by RiskMetrics also revealed:

… departing chief executives from top Australian companies cost shareholders $80 million in termination deals last year.

And further:

Fourteen CEOs from 13 companies reaped generous payouts, with the average deal worth $5.71 million—almost 1.7 times the average paid over the past three years.

Eight of the CEOs received termination payments that exceeded a year’s fixed remuneration, effectively costing shareholders an extra $62 million.

It is worth quoting what Mr Martin Lawrence, head of RiskMetrics Australian and New Zealand research had to say about this very legislation which is before the House. He said:

… shareholders could have voted down the deals if proposed legislation had been in place.

To finish the quotation of Mr Lawrence:

One of the frustrations people have with executive contracts is that they are not drawn up in the context of deteriorating economic conditions when a lot of them are invoked …

We had the usual bizarre contribution earlier in this debate from the member for Fadden, who would have it that, in some way, this is interventionist legislation or socialist legislation, ignoring entirely that this legislation simply adds to a scheme of regulation of executive salaries, a scheme of regulation of directors’ remuneration that has been in place for many years. And the speech from the member for Fadden failed to understand that context.