HOST:
Parliamentary Secretary to the Treasurer, David Bradbury, good morning.
BRADBURY:
Good morning Leon, how are you?
HOST:
Well thanks, how are you today?
BRADBURY:
Yeah, good thanks.
HOST:
For a long time shareholders and others have been concerned about the manner in which executive salaries have been set and been perceived by many people in some circumstances as being excessive, and of course shareholders have had very little ability to do much about it. What exactly do you propose to do to change that?
BRADBURY:
That's right Leon, we're proposing a range of measures that are contained within an exposure draft of a Bill that we're putting out for consultation today, but it's our hope to introduce this Bill into Parliament early next year, and if we can get it through the Parliament we're looking at having it come into effect from the first of July next year.
Some of the more notable elements of that Bill include the 'two strikes' rule. Now the 'two strikes' rule goes to the very point that you were just making, and that is, as things are at the moment under the current arrangements, shareholders can exercise a non-binding vote in relation to remuneration reports at the annual general meeting.
What that means is that, if shareholders are not happy with the remuneration packages given to their executives, they can vote on them, but under the current arrangements that vote doesn't have any effect.
What we're proposing is that there be a new process instituted whereby if a no vote on the remuneration report is recorded by 25 per cent or more of shareholders at two consecutive annual general meetings that there would then be the ability to force a spill of the board. That would mean there would be a vote as to whether or not the directors continued on as directors of the board.
HOST:
Okay, why that 25 per cent threshold? Surely most people would assume you'd need a majority to say 'no' before something would happen.
BRADBURY:
There's a couple of stages here. First there's the 25 per cent threshold, and I should say that we have implemented the recommendation of the Productivity Commission, which undertook an extensive inquiry into this area, but the first step is the 25 per cent 'no' vote in year 1. That has to be followed up by a 25 per cent or more 'no' vote the following year. Now if you have those two strikes, the next step is that a majority of shareholders have to move for a spill in the board.
So you have the two trigger points of the 25 per cent for the first two years, and even if you get that second strike you still need a majority of shareholders to vote in support of the spill meeting, and then at the spill meeting you obviously need a majority of shareholders to vote the directors out, if that's what you're intending to do.
In terms of whether or not this is going to have much impact, the Productivity Commission in its inquiry had a good look at a number of the existing company votes by shareholders in relation to executive remuneration, and what we see is there are a large number of companies that have recorded 'no' votes of 25 per cent or more and at present, shareholders can express that view and it's really up to directors as to whether they respond or not. In some cases they have, in other cases they've thumbed their noses up at shareholders and really haven't responded.
We believe under these new proposals, these new changes, that there will be a much greater responsiveness from directors because if they don't respond to the will of shareholders then they face the ultimate sanction of being voted off the board.
HOST:
There's also long been something of a concern that, given superannuation funds are major shareholders in many big companies, and in some of them perhaps, institutions hold considerably more shares than ordinary mum and dad investors do directly, that the directors of those funds are themselves part of a club and might be reluctant to vote down remuneration packages for people who might well be their friends.
BRADBURY:
That has been a concern that has been expressed and one of the recommendations from the Productivity Commission went to this issue of institutional investors and trying to ensure that there was greater transparency around the decisions that they take in voting at annual general meetings. Now these are matters that we have provided a response to in the form of our response to the Cooper Review, which the Assistant Treasurer and Minister for Financial Services announced last week. We are looking at working with institutional investors to try and ensure that there is greater transparency to their shareholders, or to the interest holders in the funds they command, so that when it comes to voting on executive remuneration there's a bit more transparency.
But the point you made about there being a bit of a club is something that certainly comes through in the Productivity Commission's analysis and we've picked up on that with some of the recommendations that we're now implementing. One of them in particular is we are now dealing with what is known as the 'no vacancy' rule, which is a rule that has been invoked by directors in the past where they choose not to fill all of the director positions that the constitution allows the company to fill. Now that gives the board enormous power in determining the composition. We have introduced, or we are introducing as part of these reforms, a proposal that says if they want to do that, they can only do that with the approval of shareholders.
We really do believe that these are decisions that require the consent of shareholders. It's their company, they're the ones who've invested the capital and taken on the risk of putting their money into the company, and directors really need to respond to their wishes.
HOST:
I don't think there's any doubt that shareholders should be entitled to at least some greater say in what goes on in the company which they, after all, partly own. Another proposal that's been put forward is the suggestion for superannuation fund members to be able to direct their fund managers how to vote their shares. Is that something that would be practical?
BRADBURY:
That is not something that we are specifically pursuing, and it is a difficult thing to achieve in practice because obviously, superannuation funds by their nature are very widely held in terms of the vast array of interests that have funds locked up in that fund, so that's not an easy thing to do. But of course there are many people out there directing their energy towards trying to improve disclosure and accountability on these fronts and we certainly are very keen to work with all stakeholders to try and achieve that. I think that the necessary and very important first step is making sure that there's transparency and disclosure about what they're actually doing. I think that's the first step. If you can make it very clear what these institutional investors are doing and how they're voting, then there will be greater scrutiny and ultimately, I think, there may well follow further efforts to ensure that those who have their funds invested in these super funds have a greater ability to do that.
HOST:
Are CEO and top level executive salaries too high, and if that's the case, is that actually hurting the way companies operate?
BRADBURY:
I look at some of the salaries that are being paid, and I find it difficult, personally to understand how individuals could be worth as much as some of these figures indicate, but in the end it is a matter for shareholders to determine whether or not the executives are bringing value to their company, whether or not they are contributing to improved performance of the company.
I think these reforms are directed to those situations where there may well be executives that are not presiding over companies that are performing well but are still receiving good benefits when it comes to remuneration packages. One of the reforms that we're proposing relates to this issue of banning hedging by executives. What has happened in some cases, because many executives find that their remuneration packages are linked to the performance of the company, they go off and enter into all of these hedging arrangements so that they're covered even in the event that the company doesn't perform as well as shareholders might be expecting. Now we think this presents an obvious conflict of interest –
HOST:
Kind of like Ricky Ponting betting on the English.
BRADBURY:
Well, look, you could easily bring the Pakistanis into play on this one (laughter)
HOST:
(Laughter)
BRADBURY:
I don't think that'd be something we'd really like to speculate upon but clearly when it comes to these matters, some of the other things we are doing, in terms banning the voting by executives and directors on matters relating to their remuneration, that's just about ensuring that we remove the obvious conflict of interest that exists when these individuals are out there voting on their own pay packets.
HOST:
Some would draw the obvious comparison that they believe that politicians do much the same sort of thing. They don't actually, but people have that perception, don't they?
BRADBURY:
If you have a look at what the arrangements are for politicians, there is a remuneration tribunal, it's an independent body that determines these matters. That's the important point to make – it is an independent body, and one of the reforms that we are trying to drive through here is to ensure that the people making the decisions are independent of those receiving the benefits. That's why we are looking to ban executives voting on their own pay packets, but when it comes to the operation of companies I just re-state the point that I made earlier. These are companies that are owned by the shareholders and we think that it's absolutely imperative that shareholders have an even greater say in determining the outcome of these packages. It shouldn't be left exclusively in the hands of directors, particularly where those directors seek to act against the interests of shareholders.
HOST:
Thanks very much for your time today.
BRADBURY:
Thanks very much, good to talk to you Leon.