SUBJECTS: Government response to Productivity Commission report on executive remuneration.
MCLEOD:
Company executives could have their bonuses clawed back if they fail to deliver for investors under tough new proposals designed to rein in excessive pay deals.
The Federal Government is considering the penalty in addition to its sweeping endorsement of the Productivity Commission's inquiry into the way executives are paid and in some cases handsomely rewarded.
The Government is also supporting a recommendation for a two strikes rule that would give shareholders a more powerful voice on deals they regard as excessive.
The Minister for Financial Services, Chris Bowen, is speaking here with our business editor Peter Ryan.
BOWEN:
Well the Government has accepted all but one of the Productivity Commission's recommendations and we have strengthened several of them. I think this package does improve shareholder engagement and shareholder say over pay and it introduces more transparency and minimises conflicts of interest. So this is a good, well balanced and well thought out package which does make a real difference.
RYAN:
Do you believe that this sends a strong message to companies that the potential of having bonuses clawed back will ensure that shareholders get a fair say in the way that companies are run?
BOWEN:
In relation to claw backs, I am concerned that there appears to be an anomaly in the law that where there is a material misstatement in a company's financial statements and that leads to a bonus, there is no capacity for shareholders to get that bonus back if that is proven to be the case later on.
That hasn't been a big issue in Australia, I have to say in fairness, but it has been an issue some places elsewhere around the world and I think it is prudent that we make sure the law is robust as possible. So I am consulting about that. That wasn't part of the Productivity Commission's recommendations; I’m consulting about that and about the best method but I do think there is an anomaly there which needs to be fixed.
RYAN:
How would that claw back provision operate if it was eventually adopted and put into law?
BOWEN:
That is one of the things that we'll be consulting about. It is not a simple measure. It is not a simple matter either but it is appropriate that we flag that this is a concern that we think could well need to be dealt with and we consult about the best way that the law should be drafted.
RYAN:
Another key element is that the Government will introduce legislation which includes the two strikes proposal which does give shareholders a greater voice. How significant is that change?
BOWEN:
I think it is a significant change. There is some in the business community who say it goes too far. I think it is well balanced. It provides shareholders with more of a say over pay.
If the board rejects shareholders' votes twice and indeed if a significant minority of shareholders vote against a board's remuneration recommendations twice in a row, then there is a mechanism by which the board then goes to an election. And I think that will concentrate the minds of directors to ensure that they are taking into account the views of their shareholders when setting pay.
RYAN:
And this is a major change given that up until now shareholders have been able to cast a vote but it has been unbinding.
BOWEN:
Well, that is correct and there are problems, of course, in making a shareholders' vote entirely binding. It would make it very difficult for salary negotiations to occur. I think this is an innovative and interesting way of giving shareholders, frankly, a much bigger say, but still allowing boards the flexibility to negotiate salaries. But they'll need to have one eye to what their shareholders would say about any negotiated outcomes.
PETER RYAN:
This has been a very controversial issue over the last couple of years where there have been excessive termination benefits, or indeed golden handshakes, so do you think that with this legislation and these reforms, that those days will be over?
BOWEN:
Well, together with the other reforms that we have already implemented, that is the reduction in the amount of termination payment that a board can approve without going to shareholders. We have reduced that, very significant, from seven times annual salary to one time annual salary, and that means that shareholders will get much more of a say on golden handshakes.
Golden handshakes, sometimes, termination pay can sometimes be appropriate but if a board can't justify it to shareholders then it pretty clearly is not appropriate.
RYAN:
So should Australians who either directly hold shares, or indirectly hold shares through superannuation, now feel more confident that they will be getting more value for their investment?
BOWEN:
I think they can certainly feel more confident that there is more transparency, more accountability from boards to them, as the shareholders, and then they will have a greater capacity to be involved in pay decisions and that they will have much more information and clear information on which to base those decisions.
RYAN:
Are you concerned though that some of these recommendations might make companies concerned that they won't be able to attract the right talent to some of the top corporate jobs in Australia?
BOWEN:
No, I think we have struck the right balance between the need to ensure accountability, transparency and also our competitiveness in attracting staff. I think these recommendations do strike that balance and I think that they, in no way, will inhibit the ability of companies to negotiate reasonable pay outcomes with their staff.
MCLEOD:
The Minister for Financial Services Chris Bowen speaking with our business editor Peter Ryan.