18 March 2009

Interview with Derryn Hinch, 3AW Drive Program

Note

SUBJECTS: New laws to curtail excessive termination pay; termination retirement benefits; all executives in remuneration report

DERRYN HINCH:

This one will send some tremors through the financial businesses because, you would have heard on the news, the Rudd Government is going to introduce new laws to curb, they say, excessive executive payouts. The Treasurer Wayne Swan had a press conference with Alan Fels today, and also Nick Sherry who is the Minister for Corporate Governance. And they announced that the multimillion dollar golden handshakes and termination payments will be curtailed. They claim they have the power to do that and that they will do that. The Productivity Commission will also be looking into it as well.

On the line now is the Minister for Corporate Governance, Nick Sherry, good afternoon.

NICK SHERRY:

Good afternoon to you and your listeners, Derryn.

DERRYN HINCH:

Thank you. Now, the Government will introduce new laws to curb excessive executive payouts. That's good news for a lot of people. The obvious question, how?

NICK SHERRY:

Well, there are a number of changes we'll be making to the law, major reforms on golden handshakes. What occurs at the moment is that the directors of a company can be paid up to seven times the directors' total annual remuneration when they retire.

Firstly, we're going to reduce the payout figure down to one times remuneration but their base pay, their base pay only. So it's a double hit, if you like, it's a double reduction. One times base pay is the limit in respect to directors.

Secondly, we are going to extend a new law. It won't just apply to directors, it will now apply to all the executives covered in the company's remuneration report...

DERRYN HINCH:

Well, that's a point I was going to raise because directors often only get directors' fees whereas senior executives, they are the ones who get the big golden handshakes.

NICK SHERRY:

Well, exactly. And - so we're going to spread the coverage of the new law beyond just the...

DERRYN HINCH:

Have to talk over you there, Mr Sherry. I'll get back to you. We just want to go back to our seismologist about this earthquake here.

[Unrelated items - earthquake discussion, advertisements]

And back with Senator Nick Sherry talking about the Government crackdown on golden handshakes.

Senator, directors sometimes only get directors' fees. It's the other executives who get the really big money.

NICK SHERRY:

Well, exactly. And - so we're going to spread the coverage of the new law beyond just the directors of the company to the principal executives in the company's remuneration report. So they will be covered.

And we're going to crackdown on a loophole. The definition of termination benefit, it's interesting how this has come to light. What's occurred is that some operators have been classifying these payments as retirement benefits and avoiding the law altogether. And we're going to tighten up on the definition of a termination benefit to include any payment to anyone in these circumstances.

DERRYN HINCH:

One of the problems I see for you here, and also President Obama is finding this in the United States, is that - with some of their multimillion dollar payouts to failed companies, and their executives. One of the problems you're going to face is that somebody may have a contract that says, if I leave in the next three years - as of today - if I leave in the next three years I'm entitled to five times, 10 times my annual salary...

NICK SHERRY:

Well...

DERRYN HINCH:

... and that's in the contract. Nothing you can do can stop that.

NICK SHERRY:

Well, it is more common that a termination payment is decided shortly before termination. That is more common. But I would accept that there are circumstances where a termination payment may have been - may be in the contract in advance and we cannot retrospectively apply the law and override the contract...

DERRYN HINCH:

True.

NICK SHERRY:

That's just not possible.

DERRYN HINCH:

Yeah, I agree with that.

Now, you say that shareholder approval will be required. One of the problems you've got there is of course that often directors, and sometimes the chairman, they hold millions of proxies and Joe Blow shareholder doesn't get a look in. And with his proxies he votes to give so and so a multimillion dollar handshake; the shareholder can do sweet Fanny Adams about it.

NICK SHERRY:

Well, generally in the cases that we've looked at where you're looking at big payouts from big companies, sure, the directors and the executives have some shares but it tends to be dominated by the non-director shareholders, non-executive shareholders in the big companies where the big payouts are occurring.

The one area, with my other hat on, of great interest is the role of superannuation funds. Superannuation funds and their trustees control 30 per cent of Australia's major companies, and it's increasing. And there is an argument, and again I've been asking our regulator to look at this, that trustees in terms of representing the members need to be more active and crackdown on this issue as well. And that's an issue that Professor Fels is going to explore for us.

DERRYN HINCH:

Yeah, that's a good one because many people are naive about their super funds. They don't know who actually has it or holds it all, and they don't realise that when they read a headline that somebody's got a huge payout, they don't know that down the food chain that's their money Ralph.

NICK SHERRY:

Well, that's exactly right Derryn. They don't know that indirectly through their super fund they're in fact an owner. So we want to see the trustees in terms of their fiduciary duty it's called, make sure it is clear that they should be exercising this fiduciary duty in a much more direct way on behalf of the fund member who is also indirectly a shareholder. And we've asked Alan Fels to examine this. We think it could be very effective as well.

DERRYN HINCH:

Yeah. Well, we shall watch it with interest and I thank you for your time.

NICK SHERRY:

Thank you Derryn.