Well, the Productivity Commission’s look at executive pay won’t resolve the arguments on the issue.
Nor will it provide rebuttals to many of the criticisms, especially from small shareholders, who have watched company boards year after year approve outrageously generous salaries and packages, with the full approval of the real powers in corporate Australia, the big institutional shareholders.
But there are a couple of recommendations (see below for a summary) that might force greater disclosure and push the real controllers of corporate Australia, the big institutions, to explain how and why they vote.
Some of the proposed changes will be fought tooth and nail by boards and big business because it exposes them to shareholder censure and forces them to discuss issues with all holders of equity in the company.
While the draft findings say that shareholders would have a greater say on executive pay, it found no real system failure in the setting of salaries for the countries top 200 companies.
It’s not just the tough economic times that have produced complaints about corporate salaries: the moans and groans about Macquarie Group and other high fliers (and some low fliers, such as the former management at Coles) were the subject of a string of complaints from shareholders during the boom years.
For many companies, such as BHP Billiton and Woolworths, plus Westpac, which have done well during good bad and poor, no one would begrudge the salaries paid to CEOs and senior managers and the chairman. These are a trio of well run and well performing companies.
But the really offensive ones are the likes of Allco, MFS, the various Babcock & Brown companies and other former boom time darlings, that continued to reward directors and senior managers, despite the market slump and credit crunch damaging or killing their companies.
The commission was not asked to examine the issue it should have really addressed the issue of why big shareholders are, on the whole complacent or complicit, especially in good times when many of the very generous packages are set.
The report finds there were cases of "reward for failure" and the commission found instances where chief executives were allowed to have undue influence on the setting of pay.
In some instances, boards had also been complicit (gee, that was a breakthrough).
The commission is broadly recommending a greater say for shareholders through strengthened corporate governance, with a greater focus on holding boards to account for ensuring executive salaries are appropriate.
It recommends reforms in five areas, including addressing conflicts of interests and improving shareholder engagement.
It has rightfully rejected calls for a cap on executive salaries, which commission chairman Gary Banks said would be "unwarranted, unworkable and end up hurting shareholders and the economy".
There had been episodes of excess and poor practices, with the report showing that chief executives of Australia’s top 20 companies had average salaries of almost $10 million or 150 times average wages.
The government has already flagged it won’t take action on the issue of executive salaries until after the commission hands in its final report by December 19.
If it accepts the commission’s current recommendations, it could involve significant changes to the Corporations Act, as well as the listing rules of the Australian Stock Exchange. ASIC and the ASX would oversee the implementation of any changes.
One of the key recommendations would give shareholders a greater say on pay by requiring boards to stand down if their remuneration reports are voted down twice at annual general meetings.
If 25% of shareholders vote "no" to a pay deal the board will have to explain itself. A subsequent "no" vote a year later would result in a spill of the board either immediately or at the next AGM.
Another would end the ability of senior managers to hedge the downside risk of holding shares while employed: so called cap and collar financing arrangements which are still common.
And institutions would be required to report on how they voted at corporate AGMs during the year on issues such as pay and related issues.
The Productivity Commission made 15 recommendations.
They were:
1.Improving board capacities: The Corporations Act 2001 should specify that only a general meeting of shareholders can set the maximum number of directors who may hold office at any time (within the limits in a company’s constitution).
2. Reducing conflicts of interest: A new ASX listing rule should specify that all ASX300 companies have a remuneration committee of at least three members, all of whom are non-executive directors, with the chair and a majority of members being independent.
3. And the ASX Corporate Governance Council’s current suggestion on the composition of remuneration committees should be elevated to a ‘comply or explain’ recommendation which specifies that remuneration committees: have at least three members; be comprised of a majority of independent directors; be chaired by an independent director.
4. The Corporations Act 2001 should specify that company executives identified as key management personnel and all directors (and their associates) be prohibited from voting their shares on remuneration reports and any other remuneration-related resolutions.
5. The Co
