23 July 2013

Government Keynote Address, Corporate Finance Leaders' Forum

Good morning, and thank you for inviting me to give the Government Keynote Address to the Corporate Finance Leaders' Forum.

Today, I'd like to talk to you about the changes the Government has recently introduced to Australia's executive remuneration and corporate governance framework. And more specifically, how these are designed to promote growth and stability in corporate Australia.

But first, I'd like to provide an overview of our economy.

You no doubt saw the announcement earlier this month that Moody's has confirmed Australia's AAA credit rating.

As Treasurer Bowen said, this is 'another resounding endorsement of the Australian economy and the Government's strong economic management'.

At a time of global uncertainty, the Australian economy remains stable and resilient. We are one of only eight countries in the world with an AAA credit rating with a stable outlook from all three major credit ratings agencies.

Over the past year, our economy has achieved one of the fastest growth rates in the developed world. We have outpaced every major advanced economy, growing at around three times as fast as the OECD average.

This impressive performance is due to two factors - this Government's sound economic management, and the strength of Australia's economic fundamentals. We continue to benefit from low unemployment, contained inflation and sustained output growth.

However, as we know, our economy is going through a significant transition. The resources boom, which has been an important driver in Australia's economic performance, is shifting away from an investment phase and towards a boom in production and exports.

This transition will also see the economy moving away from resources-driven growth towards broader sources of growth, such as household consumption, dwelling investment and business investment outside of the resources sector.

While there is a risk that this transition will be less-than-seamless, low interest rates and the recent falls in the exchange rate are expected to support growth outside of the resources sector.

The Government will carefully manage this transition, ensuring that Australia's economy continues to operate efficiently.

After all, this Government has a proven track record in managing large transitions in the economy. Our high-level economic management saw Australia emerge from the Global Financial Crisis in better shape than any other major advanced economy. And I have no doubt that that experience will equip us to deal with any challenges that lie ahead.

Turning now to the recent changes to Australia's executive remuneration system…

The background to these reforms is the widespread perception in the aftermath of the global financial crisis that the nexus between pay and company performance was breaking down, and that executive remuneration was encouraging excessive risk-taking and rewarding short-term gain.

In 2009, the Government asked the Productivity Commission to examine the framework governing executive pay in Australia. The PC concluded that, while our framework compared very well internationally, there was room for improvement.

The Commission's recommendations formed the basis of the Government's executive remuneration reforms which were passed by the Parliament in June 2011.

You are no doubt familiar with the centrepiece of these reforms - the 'two strikes' test.

The two strikes rule is designed to strengthen the accountability and transparency of Australia's executive remuneration framework by empowering shareholders to have a say in the remuneration paid to executives in the companies that they own.

The test gives shareholders unprecedented power over the pay of company executives.

If the company's remuneration report receives a 'no' vote of 25 per cent or more from shareholders at two consecutive annual general meetings, a resolution supported by a majority of shareholders can force a spill of the board.

We have recently come through the second AGM season in which the two strikes rule has been in force, and it's worth looking at some of the results.

In 2012, only nine of the 108 'first strike' companies received second strikes. But we shouldn't judge the success of the reforms by the number of strikes recorded. Rather, we should look at the overwhelming majority of companies for which strikes were not recorded.

I would like to emphasise that these reforms were developed to drive a culture of change within companies and ensure that boards are held accountable to shareholders for the decisions they make on the level and composition of executive pay.

As owners of a company, shareholders expect executives to be rewarded in line with the performance of that company.

So these reforms are designed to ensure that remuneration remains closely linked to company performance and the value that executives bring to a company.

The fact that so many companies did not experience first or second strikes suggests that Australia's corporate culture is already changing for the better.

We are seeing improved engagement between boards and shareholders, and more transparency around the decisions they make on executive pay.

And we're continuing to see the effect of these reforms on increasing board accountability.

In fact, many boards have made it clear that they're demonstrating restraint in a time of uncertain global economic conditions.

Looking ahead, we can expect remuneration reporting practices to evolve over the next few years in response to the introduction of the two strikes test. We have no plans to change the rule, but we will monitor the changes that companies introduce to improve their communications with shareholders as a result.

While Australia's current remuneration policy settings are sound and working well, we must not allow ourselves to become complacent.

The next step in ensuring that Australia's executive remuneration framework remains at the forefront of international best practice is to promote more transparent disclosure of the details surrounding remuneration.

This will ensure that shareholders have the information they need to convey their views through the non-binding shareholder vote, and to hold directors accountable for their remuneration decisions.

In considering these issues, the Productivity Commission recommended that remuneration reports include a plain English summary of the company's remuneration policies, the actual levels of remuneration received by individuals named in the report, and the total company shareholdings of the individuals named in the report.

In our response to the Commission's recommendations, the Government asked the Corporations and Capital Markets Advisory Committee to examine the disclosure framework around remuneration practices and consider how best to revise the requirements in the Act and supporting regulations.

The Government also broadened CAMAC's terms of reference to include options on how the incentive components of pay could be simplified.

The CAMAC report was publicly released in May 2011. It contained a range of recommendations designed to simplify and improve the quality of remuneration reports, and provide more relevant information to shareholders - while noting that boards are best placed to determine the particular remuneration arrangements that promote the interests of the company and its shareholders.

The Government also released a discussion paper on proposals to 'claw back' remuneration in the event of a material misstatement.

Following on from the CAMAC review, the Government announced the next tranche of proposed reforms on the remuneration disclosure framework for public consultation in February last year.

These reforms are designed to strengthen the transparency of executive remuneration disclosures, and enable shareholders to better understand the company's remuneration arrangements.

In December last year, I released an exposure draft Bill amending the Corporations Act, which set out the Government's response to the CAMAC review and the claw-back consultation paper.

These proposals would implement several CAMAC recommendations designed to further enhance transparency around executive pay, and simplify disclosure requirements in annual remuneration reports.

The draft Bill also included proposed changes in relation to the payment of dividends.

These proposals would allow companies to either declare or pay a dividend… link the dividends test to company solvency… and allow non-reporting entities to calculate assets and liabilities with reference to financial records when applying the dividends test.

The changes were proposed in response to stakeholder concerns about the current dividends test.

Specifically, stakeholders were concerned that the drafting of the current dividends test creates confusion about when the test should apply. The current drafting of the dividends test may require certain companies to apply the dividends test twice, at both the time of declaration and the time of payment.

A second concern was that the interaction with capital maintenance provisions in Chapter 2J of the Corporations Act remains unclear.

And lastly, stakeholders expressed concern that the requirement for companies to calculate assets and liabilities with reference to accounting standards increases the regulatory burden on non-reporting entities that are not otherwise required to adhere to accounting standards.

Submissions on the exposure draft Bill closed in March. The Government received extensive feedback from a range of stakeholders, including professional associations and advisory bodies.

We are carefully considering all the submissions. In particular, I consider there is scope to further refine the dividends test, and to simplify its operation.

I'm also keenly aware of the need to strike the right balance between meeting the needs of stakeholders and increasing the complexity of remuneration reporting for companies. For this reason, I am closely examining the additional reporting that would be required under the Bill, before proceeding further.

I believe that we can get the balance right, at a time when the culture of corporate reporting is undergoing changes -changes which are driven by both domestic reforms and international developments, such as integrated reporting.

The final legislation will build on the Government's earlier reforms to ensure that Australia's executive remuneration and corporate governance framework is fair and effective, and remains at the forefront of international best practice.

On the issue of increased complexity, I would like to highlight the work of the Financial Reporting Council, including its report on Managing Complexity in Financial Reporting, released last year. And I'd also like to acknowledge the valued support the Government has received from the FRC, which continues to provide valuable insight from a range of financial reporting stakeholders, as well as a useful forum for discussion of current issues. I understand that Lynn Wood, Chairman of the FRC, is giving the Industry Keynote address this afternoon.

The final legislation will build on the Government's earlier reforms to ensure that Australia's executive remuneration and corporate governance framework is fair and effective, and remains at the forefront of international best practice.

Before closing this morning, I'd like to outline an important reform to the company tax system - the loss carry‑back initiative.

This reform was recommended by the Australia's Future Tax System review - otherwise known as the Henry Review - to help companies to improve their competitiveness. The initiative received Royal Assent on 28 June this year.

Previously, businesses were only able to carry forward their tax losses to offset future profits and reduce future tax liabilities. The loss carry-back initiative now allows businesses to also 'carry back' their losses.

From the 2012-13 income year, companies will be able to carry back a tax loss of up to $1 million each year to receive a refund of up to $300,000 each year of tax recently paid, in the form of a refundable tax offset.

Losses in the 2012-13 income year can be carried back to 2011-12, and losses in later years will be able to be carried back against taxable profits in either of the two preceding years.

Loss carry-back is available to companies and entities that are taxed like companies. It applies only to companies' revenue losses and is subject to integrity rules, and limited to franking account balances.

By providing more timely and certain access to their tax losses, loss carry-back helps companies to adapt to the challenges of an economy in transition, for example, by re-orienting their businesses either in the face of losses or where transitional losses are likely. It means that businesses can use their tax losses now, when they need to, rather than waiting until they are performing better.

This initiative was developed in close consultation with business representatives and tax experts through the Business Tax Working Group and subsequent consultations. It is estimated to assist nearly 110,000 companies in its first four years, including one in six manufacturing companies and almost 100,000 small businesses.

Ladies and gentlemen, the reforms I've outlined today form part of a broader agenda. They build on the Government's earlier reforms and continue our ongoing work to drive cultural change in corporate Australia.

Better engagement between directors and shareholders, and better understanding of the role of company management and company owners, will drive improved company performance.

These changes form part of a set of sound corporate governance principles designed to improve accountability and transparency, while preserving our international competitiveness - and ultimately, promoting growth and stability in corporate Australia.

Once again, thank you for inviting me to speak with you today.