SUBJECTS: Government response to Productivity Commission report on executive remuneration, processing of ATO claims
CHRIS BOWEN:
Well, good morning.
Today I'm releasing the Government's response to the Productivity Commission inquiry into executive pay in Australia. The Government commissioned this inquiry because we wanted well thought out, well considered recommendations on how to deal with this issue. The Commission's recommendations go to improving transparency, shareholder engagement, disclosure and accountability. Of the recommendations made by the Productivity Commission for the Government to implement, we are accepting all but one. We are strengthening several of them.
First I'll go to what I see as some of the Commission's key recommendations. The recommendation to introduce a 'two strikes' rule will be an innovative way to improve shareholder engagement on issues of executive pay without the downsides and unintended consequences of things like binding shareholder votes. The recommendation to enable boards to only exercise the 'no vacancy' rule when it comes to board appointments with shareholder approval will be an important step in improving the breadth of people available to serve on boards and improve corporate governance.
I'll also go through now some of the areas that the Government is strengthening the Productivity Commission's inquiry. The Commission recommended that executives and directors not be able to vote on whether to support a remuneration committee report. We accept this recommendation and we strengthen it to include close family members as well. As part of the drafting of the legislation, we'll also be consulting on whether and how to include trusts and private companies of executives and directors.
Similarly, the Commission recommended that executives and directors not be able to hedge the incentive part of their remuneration package. This is a real, as well as a perceived, conflict of interest. It is not appropriate for directors to be able to benefit from a reduction in the price of the company of which they are directors. We accept this recommendation and again, we'll include close family members within that recommendation.
Recommendation Seven of the Productivity Commission was that cherry picking of proxies be banned in relation to remuneration matters. At the moment, when a director receives a directed proxy, it is up to them whether to vote that proxy. We accept that recommendation; we extend it beyond pay matters to include all matters.
The Productivity Commission also recommended that an expert panel be established on how to introduce more transparency in remuneration reports. The Productivity Commission found that remuneration reports have become too complex, and investors can find the information impenetrable and sometimes misleading. We accept the essence of this recommendation. Of course, we already have an expert panel dealing with these issues: the Corporations and Market Advisory Committee, and we'll be sending a reference to that committee to deal with those matters. In addition, the reference will not deal with remuneration reports alone. The Government recognises the importance of incentives and risk-based pay in setting executive remuneration. However, complex remuneration arrangements can obscure the nexus between remuneration and performance. I'll also be asking CAMAC to provide recommendations on how incentive components of executive pay could be simplified to improve transparency.
Recommendations 10 and 11 of the PC deal with remuneration consultants. A key concern raised by many stakeholders is that remuneration consultants may be placed in a position of conflict if they are asked to provide advice on remuneration of officers who might have the capacity to influence whether they get work in the future. The Productivity Commission has recommended that listed companies be required to disclose the use of remuneration consultants and require any remuneration consultants used to be engaged by the board or the remuneration committee, not by executives. The Government supports this recommendation and will further strengthen it by expanding the range of disclosures required to include such matters as the fees paid by the company to the remuneration consultants and implementing this reform by legislation rather than by Australia Securities Exchange guidance.
I would also deal with one matter not raised by the Productivity Commission. It's been brought to my attention that there may be an anomaly in the law, that where a bonus is based on financial statements of a company and those financial statements are later shown to be incorrect, that there is no capacity for shareholders to claw back that bonus on the basis of misstatements in a company's financial records. I believe that is a potentially significant concern. I do recognise that there has not been any known instances in recent times of this occurring in Australia, but we do need to ensure that the law is robust as possible in dealing with potential fraud in relation to misstatements of financial records and implications for bonuses. Accordingly, we'll be consulting on the best way of dealing with this issue. We'll do this at the same time as we progress the other issues.
I'll also deal briefly now with the one recommendation of the Productivity Commission we are not accepting. The Productivity Commission recommended that cessation of employment no longer be a taxation point in relation to employee share schemes. The Treasury and the Tax Office have given the Government very significant advice this would raise very significant integrity issues with the tax base. We've also received advice that this could cost between $230-310 million over the forward estimates. Accordingly, we've taken the decision that any benefits that would arise out of that change are outweighed by the costs and the risks.
I'll just say a few brief words about the next steps. Legislation will be drafted and released for exposure. It will be introduced this year. The new legislation will be effective on 1 July next year. These steps are well considered and have been built on long consultation by the Productivity Commission and by the Government. Australia already has some of the most robust laws in the world dealing with executive pay and the reforms I'm announcing today will strengthen these further. These strike the right balance between improving shareholder engagement and transparency, and protecting our international competitiveness. The reforms I'm announcing today also need to be seen in context of our other reforms, most notably the significant reduction in the amount of 'golden handshake' that is payable without shareholder approval and the work by APRA on guidance for executive remuneration in financial services institutions.
The Australian people quite rightly want more transparency on executive pay. Australian shareholders quite rightly want more engagement on executive pay. The reforms we're announcing today deliver on that. There'll be some people, of course, who say these reforms go too far. There'll be others who say they do not go far enough. We believe they strike the right balance. We believe they're an appropriate way to improve the shareholder engagement over executive pay and introduce transparency; reduce or eliminate conflicts of interest; and improve the accountability of directors to their companies.
I'm more than happy to take some questions.
JOURNALIST:
[inaudible]
BOWEN:
No, next year.
JOURNALIST:
The Business Council of Australia was concerned about the proposal that company directors face re-election if 25 per cent of shareholders voted against, there was a measure there –
BOWEN:
Yeah, the 'two strikes' policy, yep.
JOURNALIST:
That's the one. I mean, are you guys concerned about a backlash from the business community?
BOWEN:
Well, I know that there are some in the business community who say these measures go too far. The measure that you're referring to is the 'two strikes' policy, which indicates that if there are two years in a row in which more than 25 per cent of shareholders vote against a remuneration report, then there'd be a vote put to the AGM for all directors to go to an election, and that would need to be approved by 50 per cent of the shareholders at the AGM. I think it's appropriate. I think it concentrates the minds of directors on the wishes of their shareholders. I think it's appropriate. I acknowledge and accept that the Business Council and others may have a different view. We've considered those views but we accept the recommendation.
JOURNALIST:
What authority does the Government have to claw back executive bonuses and how will that work in practice?
BOWEN:
Well, as I say, this is a matter for consultation. The potential anomaly has been brought to my attention and I think it would have been negligent not to deal with it, but it would also be negligent to deal with it in an arbitrary manner without consulting, not only with the business community but with legal experts, about how this would work in practice, hence I'm putting this on the public agenda. There'll be a consultation process, most likely through a discussion paper, and options will be issued through that discussion paper.
JOURNALIST:
So Minister, have you got an idea about what will constitute a material misstatement?
BOWEN:
Well, again, that will be a matter for the consultation.
Are there any other questions?
JOURNALIST:
I just wanted to ask a small question – I don't know if you can answer this – but about the backlog of claims that the ATO's currently trying to deal with. Do you know where that's up to or what's happening there?
BOWEN:
Detailed questions would need to be put to the Commissioner and to the Assistant Treasurer. I'm aware that the Assistant Treasurer has been in contact with the Commissioner about this, and I'm aware that the Commissioner is attempting to minimise those. Of course, the Government encourages the minimisation of those, but more detailed questions would need to be put to them.
Thanks very much.