The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
Picture of Chris Bowen

Chris Bowen

Minister for Financial Services, Superannuation and Corporate Law

9 June 2009 - 14 September 2010

Transcript of 16/04/2010

Interview with Bridie Barry

SKY Business

Friday, 16 April 2010

SUBJECTS: Government response to Productivity Commission report on executive remuneration.

BRIDIE BARRY:

Minister, thank you so much for your time.

CHRIS BOWEN:

Pleasure, Bridie.

BARRY:

Which of the recommendations has the business community been, I guess, resisting the most?

BOWEN:

Well, it's no secret that the business community has expressed a view, for example, about the 'two strikes' recommendation and the 'no vacancy' rule in particular, I suppose, would be the ones that have received most comment. We think they strike an appropriate balance and we think they have a contribution to make to ensuring improved accountability of boards to shareholders and improved transparency on remuneration matters in particular, so we have adopted those recommendations. In fact, of all the recommendations from the Productivity Commission to the Government we've accepted all except one of them.

BARRY:

Is it possible, though, that this 'two strikes' rule could actually lead to destabilising board changes in Australia?

BOWEN:

Look, I don't believe so. There are already a number of mechanisms for disgruntled shareholders to express their point of view in ways under the Corporations Act: the '100 member' rule is perhaps the most high profile example. Of course, the Productivity Commission recommended that if we have two negative votes, or indeed, a substantial minority of 25 per cent or more two years in a row, then that trigger a vote at the AGM which would then require 50 per cent approval for the board to be spilled at an EGM. I think that's an appropriate mechanism. It would certainly encourage boards to be more engaged with their shareholders on remuneration. Most companies pay attention to their shareholders when a remuneration report is rejected and attempt to improve the situation the next year, but some don't, and this will certainly ensure there's a mechanism in place for those who don't.

BARRY:

So you believe that some of those big bonuses that some executives get, I mean, they could be clawed back under these new rules?

BOWEN:

Well, that's a separate matter, Bridie. I've announced today that we will look at a potential anomaly in the Corporations Act. Where a bonus is paid on the basis of wrong information and potentially fraudulent activity has occurred, financial statements have been misreported and a bonus has been paid as a result, then we would be able to claw that bonus back, the shareholders would be able to claw that bonus back. Now, that has not been an issue in Australia but it is a potential loophole in the law and I think it would be negligent not to deal with it. But it wasn't dealt with in the Productivity Commission report, so accordingly I'm consulting with the business community about how best to deal with that potential anomaly.

BARRY:

Just back to the Productivity Commission's report then, and what the Government's doing with regards to those recommendations, some of the modifications you've been making also include extending restrictions to family members as well as directors. Overall, would you say that your proposals are stricter than the recommendations or are you simply trying to fill those loopholes?

BOWEN:

Well, we've certainly gone further than the recommendations on some matters, and on some matters we've seen a potential for directors – I'm sure a very small minority of directors – to try and get around the rules. For example, the Productivity Commission recommended that directors and executives not be able to vote on remuneration reports. You can foresee the possibility of directors transferring shares to close family members and enabling them to vote, so we want to close off that possibility. Likewise with hedging, and we've extended the anti-cherry picking rule. The Productivity Commission recommended that if a director receives a proxy on a remuneration matter, that they be obliged to vote that proxy. I think that's fair enough and I think it should apply across the board, not just on remuneration matters, so we've extended that as well.

BARRY:

The Commission's nominated industry bodies like the ASX, ASIC, to enforce many of these measures. You want them enshrined in law. Can't ASIC be trusted with these duties?

BOWEN:

No, that's not a correct characterisation, Bridie, with respect. In some cases, the Commission recommended ASX listing rules. We've taken the view on a couple of the issues that that would be more appropriate via legislation, and of course the regulator and enforcer of legislation is ASIC.

BARRY:

There was one recommendation, with regards to taxation when someone steps down, that the Government has rejected. Can you explain to us what this proposal addressed and why you rejected it?

BOWEN:

Well, the Productivity Commission recommended that at the cessation of employment, the leaving of employment, no longer be a taxation point for employee share schemes. Now, we could see where the Productivity Commission was coming from that recommendation. Against that, we received strong advice from the Tax Office and the Treasury that that would open significant integrity issues for the tax base, and also that it would cost at least $230-310 million over the forward estimates. We didn't believe that those two costs were appropriate and therefore the cost outweighed any potential benefit.

BARRY:

Minister, thank you so much for your time today.

BOWEN:

Pleasure, Bridie, anytime.