Labor members minority report
1.
Introduction
For Labor, this bill
provides an opportunity to put a legislative spotlight on excessive executive
remuneration.
Labor supports the
principle that unreasonable payments to directors should be clawed back once a
company becomes insolvent. However, this bill does not go far enough – as it
fails to address the issue of excessive executive remuneration when a company
is solvent.
Also, there are a
number of loopholes that exist in the bill that Labor has attempted to address
by moving amendments in the House.
2.
Loopholes
The bill provides
that a liquidator can reclaim an ‘unreasonable director-related
transaction’ made within four years of a company appointing a liquidator.
The definition of
what constitutes an unreasonable director-related
transaction creates a loophole for certain benefits which escape this
definition. The definition does not capture all transactions between directors
and companies. In particular, the bill only refers to payments made by the
company and not to benefits received by the directors. The effect is that
options issued to a director are clearly captured by the
definition but any profit made on the exercise of those options is not
captured.
The Labor members
urge the Government to support Labor’s amendments which amend the definition of
‘unreasonable director-related transactions’ to capture
this benefit.
The second loophole
in the definition is that it is up to the courts to determine when a payment is
considered unreasonable.
To give this
legislation some real teeth, the Labor members recommend that the Government
support Labor’s amendments to proposed section 588FDA which set out the
circumstances which the court should have regard to in determining whether a
transaction is unreasonable.
Under Labor’s
amendments, the court would be required to consider the following:
- The payments and benefits received by directors
relative to payments and benefits received by employees in the company;
- Whether the payments or benefits were subject to
appropriate performance criteria; and
- The time the payments or benefits were received—in
particular, their proximity to the time at which the company was placed into
administration or liquidation and whether the company was insolvent at the time
they were received.
The Committee’s view
that the proposed criteria in the bill are consistent with existing legislation
misses the point.
The purpose of
Labor’s amendments is to provide greater guidance to the Court as to the
circumstances that the Court should consider in determining whether a
transaction is unreasonable.
3.
Scope of the Bill
Executive
Remuneration
A large number of
submissions, including submissions from the ASA, AICD, ACTU, CPA and ICAA,
noted that the bill was too narrow as it failed to address executive
remuneration.
The Committee’s view
that such issues are being considered in CLERP 9 and the exposure draft of the Corporations
Amendment Bill is feeble. The CLERP 9 paper released by the Government
fails to adequately address executive remuneration - in spite of its 205 pages.
The only proposal in the CLERP 9 paper on executive remuneration is that the
IASB standard requiring expensing of share options will have the force of law
on adoption by the AASB, in the second half of 2003. The exposure draft of the
Corporations Amendment Bill, is similarly bereft. It proposes minimal
changes that mostly relate to the disclosure and valuation of options and
non-cash benefits.
The
Howard Government refuses to legislate in relation to executive remuneration,
and instead has adopted a self-regulatory approach.
In
contrast, Labor has tried to amend section 300A of the Corporations Act
by moving amendments to this bill that require
companies to publish details of board policy on executive remuneration
including performance conditions, the methods used to assess whether the
performance conditions have been met, discussion of the relationship between
the company’s performance and the board’s policy and graphs showing shareholder
return for the past five financial years.
Labor has also moved
amendments that allow shareholders to vote on the board policy on executive
remuneration - through an annual
non-binding resolution on executive remuneration at annual general meetings.
The Labor members
urge the Government to re-consider this opposition to Labor’s amendments in
relation to this bill, which enhance the disclosure requirements in relation to
executive remuneration under section 300A of the Corporations Act.
Subsidiaries
Although
not strictly relating to this bill, Professor Baxt
from the AICD raised a number of issues in relation to the provisions in the Corporations
Act relating to executive remuneration.
One of those issues
relates to the directors’ duties in the context of a consolidated group.
Professor Baxt
said:
“One of the problems
that we had with the first version of this legislation was that it did not seem
to catch the situation where payments were made not to the directors of a particular company
but to another company that was related. Whilst the definition of associate
might arguably pick this up, arguably it does not. The government has already
before it a report from CASAC or CAMAC, as it is now known, dealing with
corporate groups and the way in
which that particular area should be dealt with. It has not responded to that
report and it has not deal with those issues in the broader sense, so we have
these problems spreading out as we get more and more complexity in the way in which the law is
developing.”[1]
In relation to this
bill specifically, Professor Baxt
said:
“The way this bill
is drafted, I think that if a payment were made to a director of a partly owned
subsidiary it might not be caught by this legislation...my initial reaction ...is that
those sorts of payments would not be caught. If we are talking about evil here
– if I can be a bit colourful – then those sorts of payments would not be
caught. It would be terrible if we found that someone got off. We see so many
cases of people getting off
because there is a technical flaw in the legislation and the court says,
‘Sorry, there is no case to answer’. We saw that recently in a tax issue.”[2]
The Labor members
are of the view that:
- The Corporations Act should be amended to
ensure that the provisions relating to executive remuneration apply to
directors (and key executives) regardless of which company in a corporate group
they work for.
- Consideration should be given to whether amendments
are also required to this bill to ensure that unreasonable payments made to a
director of a partly owned subsidiary are caught by the bill.
Officeholders
The
Labor members support the Committee’s recommendation that the bill also apply
to senior executives who are not directors.
4.
Date of Commencement
The bill will only
apply to transactions entered into on or after the bill receives Royal Assent.
Any payments made to directors before this date will not be captured.
The Committee has
said that the provisions of the Bill
should not be retrospective on the basis that the Treasurer has said that to
avoid constitutional doubt, the legislation should apply prospectively.
However, advice from
the Parliamentary Library is that whilst it is a principle of statutory
interpretation that in the absence of a clear statement to the contrary, an Act
will be assumed not to have retrospective application, there is nothing in the
Australian constitution to prevent Parliament from enacting retrospective laws.
The Labor members
are of the view that the legislation should commence from the date of the Prime
Minister’s announcement that the law would be amended, that is, from 4 June
2001.
5.
Other matters
The Labor members
are concerned about the lack of consultation that took place in relation to
this bill and recommend that the Government comply with their obligations under
the Corporations Agreement 2002, to expose bills relating to the Corporations
Act for public comment for at least three months before introduction.
Senator Jacinta Collins
Labor Senator for Victoria |
Senator Ruth Webber
Labor Senator for Western Australia |
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