The federal government will introduce new laws to curb excessive payouts for corporate directors and executives, according to Federal Treasurer Wayne Swan who has also flicked the broader issue of executive pay to an inquiry that will take 9 months to report.
The government says it will move to change the basis of payouts for directors and senior executives to give shareholder more power to approve them.
The question of excess payouts is a live issue in the US and UK, and has been made a big concern here by payments to failed executives in cases like Allco, Babcock And Brown and payments to executives at Telstra and Macquarie Bank.
There’s always the question of failing companies generating more heat than in good times.
The Productivity Commission inquiry will look at the wider issue of executives’ and directors’ remuneration and how it stacks up internationally, whether it is fair and whether it provides value.
It is likely to be the most credible inquiry on the contentious issue for some years as it will be conducted by former competition czar, professor Alan Fells and two senior members of the Productivity Commission.
The announcements and the terms of reference for the inquiry are here.
Public submissions and hearings will be sought, so it will be a chance for all those who oppose the idea of huge executive and board payments to be heard and those who support no government involvement to make their views known.
It will also be a chance for shareholders of all sizes, small, medium and large to have their say.
Those big fund managers who moan to the media, but seemingly do nothing except vote in favour of boards, or abstain, should be quizzed on their previous behaviour.
That means the likes of some members of the federal and state governments who have been making political statements on the issue, as well as Green’s leader, Senator Bob Brown, and Federal Opposition leader, Malcolm Turnbull, and former Federal Treasurer, Peter Costello, will have an opportunity to make submissions and speak.
For some it will be as good an opportunity as they will have to put up or shut up on the issue.
Under the change flagged by Mr. Swan in his statement yesterday, shareholder approval will be required for termination payouts of more than one year’s base pay.
"It is very important that we ensure executive pay is in step with good governance … and meets decent community standards,” he told reporters in Canberra.
Mr. Swan said that under the former Howard government termination payments could be up to seven times a director’s annual pay before there was any shareholder approval.
"Shareholder approval will now be required for a termination payment exceeding one year’s base pay,” he said.
Professor Allan Fels, the former head of the Australian Competition and Consumer Commission, has been appointed to inquire into the issue of executive pay, including links between performance and pay and the process by which executive pay is set.
Mr. Swan said the federal government will amend the Corporations Act to significantly lower the threshold at which termination payments must be approved by shareholders from the current level down to one year’s average base salary.
Currently a director with seven years’ service and an annual average remuneration package over the last three years of $2 million a year would be entitled to receive a termination payment of up to $14 million without seeking shareholder approval.
However under the government’s reform, approval will now be required for any termination payment exceeding one year’s base salary.
The government will also legislate to extend the range of executives whose termination payments can be subject to shareholder approval.
Currently only directors’ termination payments must be approved, however the government will legislate to expand the coverage of shareholder approval to cover all those executives named in the company’s remuneration report.
(They are usually the top five earning executives. Mostly they are the top executives, but not in all cases. In some cases there have been very successful executives included who are not senior managers, but whose remuneration has seen them included in the list in a given year).
Finally the government says it will also broaden the definition of "termination benefit" to catch all types of payments and rewards given at termination.
The changes to the law cannot apply retrospectively and yesterday’s announcement will not prevent existing contracts on termination payments from proceeding.
The government has also today referred the broader issue of executive remuneration to the Productivity Commission, which will provide a final report within nine months.
So watch for a surge in directors and senior executives either quitting and taking their money, or cashing in their bonuses and other payments for new forms of remuneration.
The Productivity Commission is required to provide a final report within nine months.
The review will complement the work already being undertaken by the Australian Prudential Regulation Authority in relation to executive pay in financial institutions.
APRA is supposed to produce guidelines for the financial sector later this year.
