Supplementary remarks - Senator Andrew Murray: Australian Democrats
Corporations Amendment (Repayment of Directors’
Bonuses) Bill 2002
Context
This Corporations Amendment (Repayment of
Directors’ Bonuses) Bill 2002 has a relatively narrow aim – to permit liquidators
to reclaim unreasonable payments made to the directors of insolvent companies.
That is a desirable objective, although the
Committee Inquiry has clearly indicated significant shortcomings in the Bill.
The Opposition in the House of Representatives
outlined additional considerations in determining whether payments to directors
and senior executives are reasonable. They proposed a number of amendments
which addressed important issues. If they reproduce these in the Senate we
will consider them with a sympathetic view.
The Bill
was prompted by the collapse of One.Tel but it needs to be considered from a
wider perspective than that.
This legislation has to be seen in context.
Executive and Director remuneration is a matter of great public and private
interest. It lies at the heart of investor confidence and faith in the
credibility of corporations and the share market.
It is a matter of great public interest because the
extravagant greed of many directors and executives has not only caused a justifiable
public outcry, but has also contributed to major company failures and market
shocks.
It is a matter of great private interest because
shareholders have been robbed by the syphoning off of their funds through board
approved salary package rackets.
Market confidence has been badly affected in the
long-term. The new and very large cohort of ‘mum and dad’ investors have been
taught that they can not trust auditors and accounting standards, and that they
can not trust directors to do their job and to do the right thing.
In the eighties and early nineties the opprobrium
landed on entrepreneurs, who were by definition few in number. Now it is the
corporate bureaucrats, the professionals, a whole class of business people and
their advisers who have lost public trust.
At the heart of the matter are a series of
connected failures:
- Neither board practice nor the law prohibit
arrangements where there is a conflict of interest. Those who benefit from
devising clever concealed and costly salary/bonus/option packages (the
executive and director mates on the board) are also those who approve those
packages;
- Full disclosure of executive and director packages
to shareholders and the market has been poor and the bare minimum, despite
legislation[1]
which explicitly encouraged it;
- Boards do not have independent directors.
Directors are subject to the patronage of dominant executives or owners. Good
democratic processes for director election are rare. Far too often it is still
a mates arrangement;
- Accounting and auditing standards and practices
have been deficient;
- The regulators (ASIC, the ASX and the ASB) have
been weak in their efforts.
The debates of 1997 and 1998 which led to the
greater disclosure of pay packages was a result of the Democrats and Labor
recognising that management and boards were conspiring to enrich themselves at
shareholder expense. They rightly saw that the danger of creating acceleration
in remuneration from disclosure was outweighed by the right of shareholders to
judge pay and performance and to have a say in determining pay for performance.
Disclosure is an essential part of governance and
is an essential market mechanism.
Unfortunately neither the law nor the regulators
were up to the task of defeating the greedy. Hence the need for more changes
to the law.
In commenting on new draft ASX guidelines for
disclosure of executive pay packages, an Australian Financial Review editorial
said: “[the previous guidelines have been] notoriously porous and have
allowed companies to hide details of incentive and retirement benefits until
the lucky executives and directors have banked their cheques.”[2]
The problem with the ASX approach of course is that
it is voluntary. Pathetically, the ASX says those who do not volunteer to
disclose would have to explain why in due course. Talk about being hit with a
wet lettuce!
Many company directors and executives have proven
they are not to be trusted. Greed and self-interest govern their actions. The
only antidote is black letter law to ensure transparency. Shareholders deserve
full information on which to judge pay versus performance.
We welcome the fact that the Government, after 5
years, is finally accepting the need to enforce these remuneration provisions.
They have also come a long way from their earlier positions with CLERP 9.
Hopefully it will herald a new era. The Democrats will try and ensure it is as
tough as it needs to be.
Further, the penalties for non-disclosure need to
be high, and the Regulators put on notice to take an active interest. Companies
have not had the morality that should motivate disclosure, the regulator was
asleep, the accounting standard-setter snail-like, and the determination of
boards to keep their greedy secrets meant they disregarded the present law’s
penalties, and anyway found ways round it.
Alan Kohler
from the Australian Financial Review had this to say: “Companies have been
blatantly breaking the law by signing or maintaining contracts that include
large termination benefits and performance incentives that are not disclosed
each year.”
And “Admittedly ASIC’s PN98 was also deficient
in not specifically requiring accrued termination benefits and long-term
incentives to be disclosed each year, and the Accounting Standards Board took
years to issue an exposure draft...”[3]
Independence
The Joint Committee of Public Accounts and Audit
Report 391[4]
refers to independence throughout its Report. At 1.23-1.30 it has a succinct
summary of independence.
Briefly, independence is determined by the method
of appointment and termination, by the security of tenure, and by
remuneration. It is enhanced by the best features of democracy – the
separation of powers; full access to relevant information; high standards of
process and performance; transparency, disclosure and accountability; and the
full involvement of stakeholders, particularly through democratic elections.
As Report 391 says: “Independence
is important to ensure that a person or group of persons undertake their work
professionally, with integrity and objectivity and free of bias and undue
influence.”
It is notable (and a tribute to the past influence
of board insiders on political insiders I suspect) that Corporations Law still
lacks definitions or criteria for independence.
Hopefully public outrage has now created the right
climate for reform.
Separation of Powers[5]
The issue of
corporate governance is at the heart of managerial and board accountability.
Existing company law is inadequate in terms of corporate governance.
Directors’ duties
are very wide on operational and management matters, and can create situations
where major conflicts of interest, mismanagement and even corruption can go
unchecked. As some of the recent corporate collapses show, directors and
senior management can evade their full responsibilities to the company’s
shareholders.
As a means of
improving this situation, the Australian Democrats propose a separation of
powers - that the law give shareholders of public companies the option of
requiring a separation of the normal business and internal management functions
of the board from the governance functions of ensuring openness, accountability
and good process.
- The main board would
continue to be oligarchic (representing the oligarchy of financially dominant
bodies), elected by share-holding (financial power) and would concentrate on
strategic, business and operational issues;
- A Corporate
Governance Board, elected directly by shareholders, not shareholding, (i.e.
numerical or democratic power) would comprise not more than three non-executive
directors. It should call and chair shareholders meetings; propose changes to
the company constitution; manage the process of electing directors; resolve
conflicts of interest; determine the remuneration and packages of directors
and executive management; and ensure independent advisers by taking the
appointment of auditors and other advisers such as valuers away from the main
board.
Corporate
Democratisation
There is currently a
great disparity between the principles of corporate democracy and the rules set
out in the Corporations Act governing the internal operations of companies.
For example, the existing method of electing company directors on a limited
re-election basis allows dominance by control groups and inhibits the
likelihood of support being expressed for particular directors or independent
directors.
The law does not
enable minority interests to be heard through more accessible internal
procedures, forcing them to rely on expensive and time-consuming formal
procedures like the legal system and the ASIC. Unacceptable discriminatory
practices still apply, and women are still in a small minority as directors.
The Democrats
believe that if the ASX and ASIC do not soon insist on best practice election
processes, then election procedures for companies would need to be legislated.
Related Companies
Corporate
restructuring is used by unscrupulous companies to deprive creditors (including
employees) of access to assets, when a subsidiary collapses. There have been
recent examples of this where employees, and creditors generally, have lost out
where the company responsible for the failure has been a holding company that
has washed its hands of the debts of the subsidiary company.
When companies were
originally conceived, it was intended that they would provide a benefit of limited
liability to their owners – the shareholders. It was not intended that they
would be manipulated to allow the separation of assets in one company and
liabilities in another, resulting in those to whom money is owed having access
to no significant assets to satisfy their entitlements.
In accordance with
recommendations of the Law Reform Commission in 1988, the Democrats propose
making related companies liable for the debts of insolvent companies in limited
circumstances. It would be up to a court to consider matters like:
- The extent to which
the related company took part in the management of the insolvent company; and
- The conduct of the
related company to the creditors of the insolvent company; and
- The extent to which
the circumstances that gave rise to the winding up are attributable to the
actions of the related company.
Labor has supported these Democrat initiatives a
number of times in the Senate, but the Coalition have refused this obvious
reform. Their refusal has benefited the dishonest and immoral.
Corporate Disclosure Rules
In the Democrats view, any substantial salary or
performance package should be disclosed at the time it is negotiated.
This should also apply to any potential redundancy payout and should include
the value of shares and options.
We look forward to the CLERP 9 amendments. With
the benefit of hindsight we have seen boards cleverly avoid our remuneration
amendments through retirement benefits that were not fully disclosed. We
intend to try and ensure that these provisions are strong and enforceable, and
that the clear legislative intent cannot be circumvented by clever remuneration
arrangements.
The Democrats will seek to toughen disclosure
requirements and to financially punish any public company that does not
appropriately - and promptly - inform ASIC and the ASX of the employment terms
of its highly paid executives.
The revelation of the Commonwealth Bank’s $32.7m
payout to Mr Cuffe
once again highlighted the urgent need to improve corporate disclosure rules.
The announcement of this extravagant payment was
another example of shareholders being kept in the dark and treated with
contempt by company directors.
The Board of the Commonwealth Bank should have hung
their heads in shame. The details of the redundancy payout should have been
made publicly available at the time they were negotiated.
Timely disclosure may, in some small way, have
mitigated shareholder outrage, the damage to the Company’s, Mr Cuffe’s
and Mr Murray’s
reputation, and any negative impact on the share price.
Shareholder Approval of Retirement Payouts
The revelation of AMP’s multimillion payouts to
executives and directors highlighted the urgent need to give shareholders the
right to veto massive payments.
The announcement of the extravagant bonus payments
was another example of shareholders being treated with contempt by executives
and company directors.
We need tougher rules to empower shareholders with
the right to decide whether exorbitant payments are appropriate. Due to their
self-interest and greed, many directors have shown themselves incapable of
showing adequate discretion.
For years now, weak company directors have allowed
themselves to be victims of executive greed. Section 200B of the Corporations
Act outlines that a company must not give a person a retirement benefit without
shareholder approval as outlined in Section 200E. However, it seems that major
corporations, the AMP and Commonwealth Bank being the obvious recent examples,
are circumventing the spirit of these amendments.
These rules should be strengthened to allow
shareholders the opportunity to veto payouts, particularly where;
- there has been a significant reduction in the
company value;
- performance criteria have not been met in a
material sense; and/or
- the company has made a loss or there has been a
significant profit reduction.
Senator Andrew Murray
Australian Democrats
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