TREASURER:
We've got two, I think, important initiatives on the issue of executive pay. And I think as everybody would be aware, there is deep community concern about the issue, particularly in light of recent events, and of course the Government has said that all options are on the table. It is very important that we ensure that executive pay is in step with good corporate governance, provides the correct incentives and meets decent community standards.
As I said before, all options are on the table and today we're announcing one particular initiative in terms of corporate governance. The Government will curb golden handshakes in the form of excessive termination payments and these have become more common and they have become, in some instances, more obscene. Now, under the previous government termination payments could reach up to seven times a directors annual pay before their was any shareholder approval. Shareholder approvals will now be required for a termination payment exceeding one year's base pay. As I said before, I think the community has been rightly offended by some excessive payments and this is an important initiative and the Government will legislate to this effect, because some termination payments have borne no relationship whatsoever to the profitability of the company or to the performance of the executive. So, some of these have been outrageous and it's time action was taken, and the Government is acting.
Secondly, because, as I've said before, this is such a complex area, we've decided to have a Productivity Commission inquiry into the whole issue of executive pay. It is complex. We do want the correct incentives in the system. We do want decent community standards. And to this end, Professor Fels has been appointed as an Associate Commissioner to examine this matter on the Productivity Commission.
I say this to executives that are listening to, or watching this announcement, the Government does expect you to do the right thing by the community and the country and particularly given our circumstances at the moment. We do expect you to do the right thing by the community and the country. And we decided that a Productivity Commission inquiry was the fairest, most comprehensive way to resolve many of the difficulties involved in what is, as we've said before, a very, very difficult debate, a very difficult debate indeed.
We don't think there's an overall solution here with one single initiative. So, a Productivity Commission inquiry with people who are expert in this area is one way to resolve these issues. And Nick will say a few more words about that in a moment, and of course we'll ask Allan to answer questions later on.
But it's very important that we get this right, that we get it right for the long term because trust is so important not just in the economy but in the community. And if there isn't a level of trust between executives and workers and the wider community we cannot build a stronger economy for the future. So, we have adopted, we believe, a responsible approach to resolve this issue and that's why we're moving down the road of the Productivity inquiry into all of the issues associated here.
Now, could I just say a few words about the Australian Business Investment Partnership, because it's become apparent and pretty clear from discussions with the minor parties in recent days that we can't rely on their support to get ABIP through the Senate. So, this means that the sole responsibility for the passage of this measure and the thousands of jobs that depend upon it rests with Malcolm Turnbull and the Liberal Party.
The Rudd Government is not willing to wait. The jobs of tens of thousands of Australians working in the sector depend on this initiative, and we appeal to the Liberal and National parties to show some common sense and get behind this initiative which not only has the full support of the business community but also the support of advisers that we have engaged to work with our Treasury – people who are expert in this area. This is a prudent, responsible measure which is needed because of the times that we are in. We have put in place all of the necessary safeguards that are required given the mandate of this vehicle.
What it now requires is the support of the Liberal and National parties. It requires them to cease their point scoring and their politicking and to support an initiative which is so important to jobs in the Australian economy. I fear that the Opposition Leader is now such an opportunist he'd rather see the commercial property sector fail than see the Government succeed with this plan. Indeed, that has been his attitude right through. He now opposes the first economic stimulus package. He's opposed the second economic stimulus package and he's opposed the Bank Guarantee which has been so important to the stability of our financial sector in recent times. And now he's opposing another critical measure to put in place in our defence against the impact of the global recession on our economy.
So, with those few words I'll just throw to Nick and then we'll take your questions.
SHERRY:
Thanks, Wayne. Just a few more details on the major reform we're announcing on curbing what is know as golden handshakes. What we've seen in the last decade under laws we've inherited from the former government is the retirement gold watch replaced by a truckload of gold bullion. It's what we've seen in many cases. And that's why we believe it's time to take some strong and decisive action and carry out major reform in this area of golden handshakes.
As Wayne has indicated, the current law allows, for company directors, only seven times their total annual remuneration. That will be reduced down to one times their base pay – not annual remuneration, base pay. And invariably in these cases, the annual remuneration is far in excess of base pay. So, the new provision will be effectively a double whammy – a reduction from seven times down to one times base pay, not total remuneration.
Secondly, the law only applies to company directors. We're going to apply the new provisions to all those executives named in the company remuneration reports. So, that's the second significant change. We're expanding the coverage very significantly.
Thirdly, the definition of termination benefit will be changed and it will be changed to cover all payments other than statutory superannuation.
And we've identified a major loophole in current law left to us by the previous government. Pacific Brands have been in the media a lot recently and it's been brought to our attention that the CEO of Pacific Brands left the company with a golden handshake of $3.4 million. I am advised that Pacific Brands called this a retirement payment rather than a termination benefit. Now, this loophole will be closed.
And finally, we intend to introduce on this particular provision, criminal sanctions, strict liability if directors breach the new requirements then we're going to impose the toughest penalties where they breach the new provisions in respect of the golden handshakes. Thanks.
TREASURER:
Over to you.
JOURNALIST:
Treasurer; obviously you are doing what you can within the legislation but this still only requires shareholder approval. If the institutional shareholders who have the majority votes vote for it, it still passes, I mean, you can't do anything about that?
TREASURER:
It is true that if it's voted for, it will get up. There's no doubt about that. But I think there's an entirely different environment around right now and the eyes of the community are on the operations of these shareholder meetings. And I know from talking to many executives around the country that many of them are having a serious rethink about current practices because the outrageous approaches that have been justified in recent years simply cannot be justified in the clear light of day.
So, I think there's a very substantial amount of pressure on many who are operating within the current law to change their practices. We understand it's a complex area which is why we've moved for a Productivity Commission inquiry. What we want to do is get some 21st Century provisions in place across all of our legislation to ensure there can be that trust which is so required between the community, working people and executives.
JOURNALIST:
Have you had a look at how this would have affected some of the really notable big payments of (inaudible), $30 million or so, I'm not sure if he was a director, have you looked at that? And how prescriptive are you in your terms of reference for the inquiry? In particular, how are you going to fine the executives?
TREASURER:
Well, first of all on the terms of reference, they are very wide, but I'll throw to Nick in terms of the specific case. You may want to say something about the terms of reference and we'll throw to Allan then.
SHERRY:
I've given you one example of a loophole in law which we intend to shut. Let me give you two other examples, contemporary examples. In 2008, Owen Heggarty of Oz Minerals received a bonus of $8.35 million, which was 642 per cent of his base salary. I would argue very strongly that if these new laws were in place, he would have found it very, very difficult to have received that particular payment, very difficult indeed. Consolidated Media, John Alexander in 2008 received $15 million golden parachute, 468 per cent of his salary. Again, I would contend that with these provisions in place he would have found it very, very difficult to have received this sort of payment. We believe that the reforms, the significant reforms we've announced on so-called golden handshakes will be effective. We believe they will be effective.
JOURNALIST:
So, you think it would have a trickle down effect on the bonuses paid as well as golden handshakes?
SHERRY:
The issues in respect to bonus arrangements, salary arrangements etc, are matters that Professor Fels will deal with.
TREASURER:
They are all very complex, which is why we are going down the road of having a professional, dispassionate examination of all of these issues. The incentives that are provided in corporate Australia go to the very core of whether we are successful in the long term. We are just experiencing the results of perverse incentives in large financial sector organisations, and as you are aware there is an examination of those incentives going on through the G20 process, APRA is feeding into that because what we've seen in the banking system is incentives which have encouraged excessive risk, and we are all now living with the outcome of that. I'll just throw to Allan then we'll come to you.
FELS:
The inquiry will be an objective look at the facts, for example, the link between pay and performance, the forms of executive remuneration, also the justifications and whether they stand up, the processes by which executive pay is set and also whether there are any steps which should be taken by the Government or by shareholders or by institutions to deal with any problems. There is very strong community feeling about this matter and in particular when failure is rewarded – when people lose jobs and companies do badly and yet big bonuses are paid.
JOURNALIST:
Would you directly link them – exit payments, bonuses – or consider linking those sorts of payments with the shedding of jobs?
FELS:
Well, all issues are on the table. I am totally certain that many people are going to raise this issue at the inquiry so it has to be part of the consideration.
JOURNALIST:
Mr Swan, how can you be sure that by putting a cap on termination payments you might just encourage executives whose skills are in demand to negotiate higher salaries on the way through?
TREASURER:
Well, first of all, it's one concrete step that can be taken now and we can take it confidently. There are a range of other issues that flow through in the total area of executive pay, which is what the Productivity Commission is doing.
JOURNALIST:
Will the cap encourage them to seek higher salaries on the way through?
TREASURER:
Well, that's why…
JOURNALIST:
(inaudible) act responsibly.
TREASURER:
Well, if an executive actually starts out when the contract is signed with the expectation that they're going out the back door with an outrageous payment, it's not justified by performance, there's something fundamentally wrong in the organisation in the first place which is why we are going back to basics through the Productivity Commission inquiry.
JOURNALIST:
Mr Rudd, on the so-called Rudd Bank, you're throwing up your hands in the air saying you don't think you can get any support from the minors to get it through and you're seeking to get cooperation from the Opposition. Are you prepared to meet with Joe Hockey or Malcolm Turnbull to discuss their concerns and possible amendments or are you making a political point here?
TREASURER:
They haven't been prepared to discuss anything with the Government. They said they were in favour of the Economic Security Strategy…
JOURNALIST:
Well, have you asked them?
TREASURER:
Look, I'll come to that because they've got form. They said they were in favour of the Economic Security Strategy on day one and have walked backwards from that every day for months. They opposed outright the second economic stimulus package and in the House last night we saw again, complete and total opposition to the concept. They're not quibbling here about detail at all. They're completely opposed to any action. So, what you've actually got is yet another example of the fact that they want to play politics, they hope the economy tanks and then they'll turn around and say the Government got it all wrong. They have not supported one positive measure to support growth in this economy. Despite them, through our first economic stimulus package, our second economic stimulus package we are supporting growth in the economy, it is supporting employment and we are receiving results far ahead of any of our competitors. That's why we need this measure. We need this measure to support employment in the commercial property sector, and their opposition to it is a threat to employment in the commercial property sector. They'd rather see the commercial property sector fail than the Rudd Government succeed.
JOURNALIST:
Do you know of any foreign banks withdrawing funds from projects in Australia?
TREASURER:
Yes, there is some evidence that foreign banks are withdrawing, but I can't speak to them because these are commercial-in-confidence issues.
JOURNALIST:
(inaudible) of payments to financial institutions who take certain risks. Certainly that's true in the US but can you say that that's true in the Australian financial sector or are you legislating with another with another country in mind?
TREASURER:
Well, first of all, the Financial Stability Forum said that internationally and it has partly based its recommendations on a paper prepared by APRA. I don't think we've seen the excesses in this country, as far I'm aware, that there has been in other countries but APRA is working through that process and any outcome of that process will then be applying in this country.
JOURNALIST:
Treasurer, is it true that apart from the National Australia Bank, the other three major banks haven't said to the Government that they need this facility, and there is a view that in fact they don't want it?
TREASURER:
Not at all. They've all signed up. They all signed on the dotted line and they've been on board for a long time, and they were on board from day one.
JOURNALIST:
(inaudible) is broadening the (inaudible), shouldn't the Government broaden the investment mandate of the investment partnerships? Do you envisage that this facility will invest in the infrastructure?
TREASURER:
No, I certainly don't, and all decisions of the partnership require the support of all partners.
JOURNALIST:
(inaudible) has only been disclosed four times in 49 years and each time it meant recession. What does it mean this time?
TREASURER:
Well, it's proof of the significant impact on this economy of the global recession and the fact that the global recession gets worse by the week. That's why it is all the more urgent that the Liberal and National parties support the Australian Business Investment Partnership.
Thanks.