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Nick Sherry

Minister for Superannuation and Corporate Law

3 December 2007 - 8 June 2009

Transcript of 18/03/2009

Interview with Richard Glover

Sydney ABC 702 DRIVE

Wednesday, 18 March 2009

SUBJECTS: Crackdown on executive pay; termination payments; community standards; empowering shareholders; review by Allan Fels

RICHARD GLOVER:

Nick Sherry is the Minister for Corporate Law and Superannuation, he's on the line. Good afternoon, Nick.

NICK SHERRY:

Good afternoon, Richard, good afternoon to your listeners.

RICHARD GLOVER:

Now you had a neat phrase today; you said they used to give executives the gold watch and now they've got the truckload of bullion, I think was the expression.

NICK SHERRY:

Yes. The world has changed dramatically over the last decade and, in many ways, unfortunately so with some of these massive golden handshakes we've been seeing.

RICHARD GLOVER:

What can we do about it?

NICK SHERRY:

Well, I and Wayne Swan, the Treasurer, announced some major reforms to take place to curb excessive golden handshakes. Very briefly, at the moment the - the handshake, if you like, is only put to a shareholder vote where it exceeds seven times a director's annual remuneration. We're going to reduce that down to one year's salary so, if you're proposing a golden handshake of one year's salary for directors it has to be put to a shareholder vote.

Secondly, we're going to expand the number of people from directors to include key executives in the company's remuneration report. And we're also going to tighten up the definition of a termination benefit. What we found is that - again a loophole in the law that's been there for some time - you can classify a golden handshake as a retirement payment and avoid the definition of a termination benefit.

So, we're cracking down on definitions, cracking down significantly on the quantum of payout and expanding who it will cover.

RICHARD GLOVER:

Okay. Look, I imagine you'd have a large measure of support on those things. It is only a small part, though, of the problem. Perhaps you'd agree with me that a lot of the angst that people feel is not particularly about termination payments, it's about, for instance, the $33 million annual salary that somebody like the head of the Macquarie Bank attracts.

For instance the recent debate over AIG, I know it's an American company but they've paid out their executives $166 million despite the fact that it's all government money. Now that is not a termination payment, that was simply an executive bonus scheme.

NICK SHERRY:

I think it is fair to say that the community and shareholders are concerned about both areas. That's why we've acted decisively to curb golden handshakes, and it's important to understand golden handshakes are sometimes made for rewarding failure, the company's tanked and they get a golden handshake.

But certainly the issue of the general level of remuneration it's - it's gone up 400 per cent in the last decade. We've got Professor Allan Fels to identify how we can shake the tree, so to speak, and reform this area.

One point I would want to make, though, and we look at these bonus payouts in America and the UK, we have to acknowledge that in America and the UK in the financial sector these banks have had an enormous direct government bail-out of hundreds of billions of dollars. That hasn't been the case in Australia.

So whatever we think about Australia's executive pay in the finance sector at least they've kept the - kept their financial institutions strong.

RICHARD GLOVER:

And they're not using taxpayers' money to pay out to executives, as in the AIG case.

NICK SHERRY:

Exactly.

RICHARD GLOVER:

Yeah. None the less, others might argue that it's a capitalist system and, in the end, if companies want to pay the boss of Macquarie Bank $33 million well that's their decision, it's a capitalist country, it's a free country.

NICK SHERRY:

Well, I think it's important to have accountability on these sorts of issues, particularly given the change and the excesses we've seen develop over the last decade or so.

RICHARD GLOVER:

I'm sorry, but at the end of the day you can't really say to somebody you're not allowed to pay them more than $10 million, can you?

NICK SHERRY:

Oh, we're not capping the pay. What we're saying is the shareholders will be able to put a brake on this activity, and we're confident that when these proposed golden handshakes are put to shareholders, as they now will be when we introduce these significant changes to the law, we're confident that shareholders themselves will put a brake - a significant brake on these payments particularly where unfortunately some company boards have been rewarding failure.

RICHARD GLOVER:

Okay. But that - as we've said, is only one part of the problem, actually. What about the central issue which is excessive remuneration and excessive short-term rewards for short-term performance?

NICK SHERRY:

Well I think they're both - certainly in the community's mind and shareholders' mind - equal. But let's not argue the relative merit of one or the other; I think it's a big issue, golden handshakes.

RICHARD GLOVER:

What can you do about it? I've understood what you're going to do about the other thing but what can you do about the...

NICK SHERRY:

Well, we've asked Allan Fels - and Allan's well known, he's got a tough reputation - to examine the way in which we can change the law on executive remuneration. He'll report back to us in nine months, we're acting...

RICHARD GLOVER:

But what do you see as a possible way of controlling it?

NICK SHERRY:

I've discussed it with Allan Fels. There's a whole range of issues on the table, we're not going to rule anything in or out at the present time, Allan will give us the concrete solutions to act in this area.

RICHARD GLOVER:

Will it again be a matter of empowering shareholders to be able to say - to direct control of executive pay?

NICK SHERRY:

Look, there's all number of different approaches. I'll give you an interesting example of what was raised with me recently. Superannuation fund trustees control 30 per cent of the share market. A lot of those superannuation fund trustees do not exercise their vote directly. Arguably, in law they have a fiduciary duty to act on behalf of the members of the fund and crack down on the excessive remuneration.

RICHARD GLOVER:

Okay, but the culture has been among institutional investors is to leave it to the board. That's what the board's there for, so they've left it to the board.

NICK SHERRY:

Well, in some cases that's certainly true. But shareholders can remove boards, and they should if they're dissatisfied. Secondly, as I've indicated, there are a number of other solutions.

RICHARD GLOVER:

I suppose I want one example, just for intellectual interest, one example...

NICK SHERRY:

I've given you - I've given you one example...

RICHARD GLOVER:

But how do you - you're saying change the culture, but how do you do that by law?

NICK SHERRY:

Well, in the case of superannuation funds, which is an area of great interest to me because I obviously have that as a responsibility, trustees generally don't vote their shares. If we change the law to require them to vote their shares I think we'd see a significant behavioural change. But Allan Fels will assess that, and other issues.

RICHARD GLOVER:

Okay. When does he report, Minister?

NICK SHERRY:

He has to report within nine months.

RICHARD GLOVER:

Okay. We'll see what he says. But, Nick Sherry, thank you very much for your time.

NICK SHERRY:

Thank you.