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Australia investigates excessive pay practices

The public inquiry into the regulatory framework around remuneration of directors and executives of companies regulated under Australia’s  Corporations Act continues and a draft report is in preparation. Some 79 initial submissions have received by the Productivity Commission inquiry. Public hearings will be held in Sydney, Melbourne and Brisbane during June and July 2009.

Some of the more notable submissions received to date include:

  • The Australian Shareholders Association called for the chairman of the remuneration committee to automatically face re-election at the next meeting of shareholders in the case of a rejected remuneration report, noting that it was the place of shareholders to hold boards to account. Its analysis of Australia’s top ten companies for the period 2006 – 2008, shows that only two companies (Westpac and Woolworths) recorded higher growth in profit than executive remuneration. Four companies recorded negative growth in profit while increasing remuneration by over 10% during the period.
  • The Australian Council of Superannuation Investors has called for company disclosure on the use of remuneration consultants and a ban on executives hedging incentives not yet vested. It also supports the proposal by the Australian Government to require a shareholder vote on termination payments in excess of one year’s pay.
  • The Australian Council of Trade Unions has called for chief executive salaries to be set at ten time the average workers’ pay.
  • The Australian Bankers Association stated: “Boards should be autonomous in setting executive remuneration policies. …  It is inconsistent to require and expect bank boards to take full responsibility for remuneration practices and performance outcomes, but then have the board’s autonomy materially limited by regulation.
  • Shareholder activist Stephen Mayne considered that two Government proposals – requiring shareholder approval for termination payments and a proposal regarding the tax treatment of equity issued to executives – should be supported. He considered also considered that the non-binding vote on the remuneration report was working well as companies were better explaining remuneration policies. He proposed that voting at ASX300 companies be made compulsory for the major retail and industry superannuation funds and called for a move to a fully electronic and auditable direct voting system for shareholder meetings. He also called for the end of the exemption for the CEO from the requirement for directors to retire by rotation.

Submissions were also received from some of Australia’s leading companies:

BHP Billiton cited the existing non-binding vote on the remuneration report when calling for no significant change. It believes the non-binding vote “has evolved to the point where it functions as a front-line regulator of “excessive” remuneration practices”. It added that “there are now many examples of companies changing their remuneration practices either following a high “Against” vote on the Remuneration Report, or even prior to the vote – in recognition of shareholder and governance advisor concerns voiced in the lead-up to the AGM. It has been a catalyst in prompting greater consultation by companies and significantly enhanced engagement by shareholders”. It did however call fore the abolition of the requirement to disclose the remuneration of the five highest-paid executives of the group and of the company.
Macquarie Group recommended five principles to the Commission in adapting a principles-based approach to influencing executive remuneration:
  1. Allow organisations the flexibility to reward executives and professionals  appropriately while recognising risk;
  2. Ensure appropriate governance processes continue to exist for setting executive remuneration;
  3. Encourage organisations to structure executive remuneration in ways that are aligned with long-term shareholder interests;
  4. Ensure consistency of the overall remuneration framework over time; and
  5. Minimise the unintended consequences of intervention.

Earlier in 2009, the Australian Government announced reforms aimed at curbing excessive termination payments or “golden handshakes”.

Further Background

The Commission, in undertaking the review shall:

  • Consider trends in director and executive remuneration in Australia and internationally, including among other things, the growth in levels of remuneration, the types of remuneration being paid, including salary, short-term, long term and equity-based payments and termination benefits and the relationship between remuneration packages and corporate performance.
  • Consider the effectiveness of the existing framework for the oversight, accountability and transparency of director and executive remuneration practices in Australia.
  • Consider, in light of the presence of large local institutional shareholders in Australia, such as superannuation funds, and the prevalence of retail shareholders, the role of such investors in the development, setting, reporting and consideration of remuneration practices.
  • Consider any mechanisms that would better align the interests of boards and executives with those of shareholders and the wider community.
  • Consider the effectiveness of the international responses to remuneration issues arising from the global financial crisis, and their potential applicability to Australian circumstances.
  • Liaise with the Australia’s Future Tax System Review and the Australian Prudential Regulation Authority in relation to, respectively, any taxation and financial sector remuneration issues arising out of this Review.
  • Make recommendations as to how the existing framework governing remuneration practices in Australia could be improved.

A final report is due before the end of 2009.

What do you think?