Minority Report by Senator
Xenophon
Introduction
1.1
The Corporations
Amendment (Improving Accountability on Termination Payments) Bill 2009 amends
the Corporations Act 2001 to lower the threshold at which termination
payments to company executives (including senior executives or key management
personnel) must be approved by shareholders. It also specifies the types of
benefits which are subject to shareholder approval, requires unauthorised
termination benefits to be repaid immediately, provides that retiree shareholders
cannot participate in a vote on their termination benefit (except as a proxy),
and increases the penalties applicable to unauthorised termination benefits.
1.2
While I
broadly support the intent of this Bill, a number of areas require further clarification.
These areas include the conditions on which considerations of executive
performance are made and the method by which payments are collected. This
minority report addresses these and other areas requiring clarification.
Background
1.3
Submissions
to the inquiry made it clear that the rate of corporate executive payments has
grown at a significantly greater proportion than the average wage over the past
twenty to thirty years. For instance, between 1971 and 2008, the growth in
corporate salaries was around 470 percent, nearly nine times the 54 percent
growth in real average weekly earnings over the same period.[1]
1.4
Today, the
average CEO of a top 100 company reportedly receives a termination payment of
$3.4 million, which is equivalent to twice their annual salary.[2]
1.5
The purpose
of this Bill is to reduce the number and size of 'golden handshake' payouts
made to corporate executives. Specifically, the Bill stipulates that the
condition for shareholder approval of terminations payments be any payment that
exceeds one year's base pay.
1.6
Under current
Commonwealth legislation, corporate executives are eligible to receive up to
seven year's total remuneration without need for shareholder approval. In its
submission to the Committee, Treasury offered the following example:
"For example, a person with seven years service
and an annual average salary over the last three years of $10 million would be
entitled to receive a termination payment of up to $70 million without seeking
shareholder approval".[3]
1.7
Treasury also
referred to a November 2008 report by risk management and corporate governance
analysts, RiskMetrics, which found that "out of a sample of 33 CEOs, only
two (or approximately 6 percent) sought shareholder approval for termination
payments".[4]
Consideration
of executive performance and payouts
1.8
Submissions
to the inquiry highlighted that Australia does not currently match
international standards in reduction of thresholds for executive payments.
Guerdon Associates (which specialises in board and executive remuneration
matters) stated in its submission that "termination payments for North
American executives are typically 2.99 times base salary plus bonus, while the
Europeans... are content to set the level at twice base salary"[5].
1.9
This Bill, by
reducing the threshold from seven year's to one year's salary, will match or
better the accountability standards for termination payments of many
Australia's international competitors.
1.10
However, a
number of submissions to the Committee expressed concern that reducing the
threshold to one year's base salary was too low and would affect Australia's
ability to attract executives of international standard.
1.11
There are also
concerns that eliminating 'golden handshakes' will only result in 'golden
hellos', whereby executives will access increased base salaries on
commencement, increased bonuses in other forms, or other loopholes by which
they will be able to maximise their income.
1.12
There is also
an existing loophole whereby executives can have their termination payment
pre-approved and included within their contract at the commencement of their employment.
1.13
In its
submission, RiskMetrics argues that:
"... the Bill should be
amended to require any advance approval of a termination payment to specify a
maximum dollar cap that may be paid under the authority sought from
shareholders."[6]
It goes on to
explain:
"Without this requirement,
based on RiskMetric's experience, boards may seek to maximise their discretion
to pay termination benefits."[7]
1.14
Further to
this, shareholders should be able to re-approve this pre-determined payment at
termination, where all the criteria for the pre-approved payment is not satisfied
(for example, the executive only serves two years out of their three year
contract) and where the value exceeds the threshold.
1.15
Similarly,
the Bill should allow shareholders to vote on a specific amount at the time of
termination, where the payment is greater than the threshold and where it was
not pre-approved. This will prevent executives from receiving a vote in favour
of a termination payment above the one year's base salary and the Board then
determining how much greater it will be.
1.16
Importantly,
companies should not be able to avoid shareholder rulings regarding executive
payments and shareholder votes should be made binding. In the past year,
shareholders have voted against 15 out of 300 companies' remuneration reports[8],
however the votes were considered 'simply advisory'.
1.17
This was
clearly demonstrated in the case of ex-Telstra CEO, Sol Trujillo, in November
2007, when two-thirds of Telstra's shareholders voted against a pay increase
for Mr Trujillo but this decision was not adhered to by the Board.[9]
Poor
performance
1.18
While I
support the proposed changes in this Bill in relation to shareholder approval
of corporate executive payouts, I believe that the conditions upon which
corporate executive performance is measured should be further clarified, especially
where the reason for departure is due to poor performance.
1.19
In its
submission to the Committee, Treasury referred to studies by Geof Stapledon
which highlighted several instances of large termination payments being made
following a period of very poor corporate performance.
"In 2002, five senior
executives of AMP departed with close to $12 million, despite the fact that
they had been in office while AMP lost more than $13 billion of its market
value."[10]
and,
"In 2003, Southcorp's CEO,
Keith Lambert, departed with a termination payment of $4.4 million, even though
during his 19 months at the helm, Southcorp's shares lost 40 percent of their
value."[11]
1.20
Professor David
Peetz, Professor of Employment Relations, Griffith University, stated in his
submission:
"It is clear that a number
of large payouts were made to CEOs who underperformed, or whose poor
performance was the reason for their departure."[12]
Professor Peetz also referred to
a study by RiskMetrics, which found that "one-third of the nation's top
100 companies in the past three years paid their chief executives a combined
$112 million to 'go away'." [13]
1.21
Shareholders,
by the very nature of their holdings, should be granted greater powers when it
comes to approving and evaluating the performance of their executives. Unless
all performance criteria are met, executives should not be entitled to receive payments
above the termination payment threshold – in the same way as the average worker
does not receive payment for poor work outcomes.
1.22
However it is
apparent that companies are not detailing in full the reasons for departure.
The Australian Council of Super Investors states in it's submission:
"We remain concerned that
companies should be more transparent with their shareholders with respect to
whether executives have in fact resigned, retired or been terminated. There
appears to often be an inconsistency arising where CEO's departures are not described
as terminations, however later disclosures reveal that termination payments
were still made."[14]
1.23
The
definition of 'poor performance' should be more clearly defined, particularly
in relation to whether it is determined by profit and share price in comparison
to competitors, and the executive's performance against these measures should
be presented to shareholders for their vote.
Methods
by which payouts are accessed
1.24
Tax
concessions were created to encourage employee share ownership but have become
increasingly popular for CEOs themselves. According to analyst, Dean Paatsch
from Riskmetrics Australia:
"... tax need only be paid on
a maximum of 20 percent of the value of the share component of CEO pay. Once
the shares are safely ensconced in the hands of the executive, the capital
gains tax regime kicks in to ensure that future gains after one year are taxed
at 22.5 percent."[15]
Mr Paatsch goes on to state:
"It's no wonder that there's
been an explosion in share payments to CEOs – the average share payment to
Australia's top 300 executives is now valued at about $600,000 a year (double
five years ago). If the research about the routine undervaluation of options is
right, that $600,000 ends up being worth about $2.1 million to the executive.
And the tax on this largesse? Well, it seems many executives get to choose
their own rate - and you can bet your life it's not the 46.5 percent top PAYG
rate or, in many cases, even the 31.5 percent rate that the bulk of taxpayers
cop."[16]
1.25
Corporate
executives receiving significant termination payments should be prevented from
using non-taxable bonuses, low-tax bonuses or ‘salary sacrificing' of their
payments to effectively maximise a termination payment above that approved by
shareholders.
1.26
One way to
address this would be to introduce a new high tax rate. Professor Peetz
advocates the creation of a "new, higher marginal tax rate that cuts in at
a substantially higher income range than at present (for instance, $400,000 per
annum) but into which CEOs would typically fall"[17].
He also suggests wealth taxation
on very high income individuals "for example, those with over $20 million
in accumulated wealth"[18]
as a means to address this concern.
1.27
A review of
how executives are able to collect these payments should be carried out to
close any loopholes executives may be maximising to their benefit.
Conclusion
1.28
While I
support the premise of this Bill, I believe it requires amendment if it is to
successfully match its intent.
1.29
The
Productivity Commission is due to release its findings into executive
remuneration in December 2009 and the Australian Prudential Regulatory
Authority is also preparing a discussion paper on remuneration, to be published
in September 2009. The findings from these reports should be considered to make
further amendments regarding termination payments, and the legislation should
include a sunset clause which would trigger a review based on the findings of
these reports.
Recommendation
1
That the Bill not be passed in
its current form.
Recommendation
2
That the Bill be amended so that
shareholders are able to vote on the exact amount of termination payment, not
just in favour of "an amount greater than the threshold".
Recommendation
3
That
the Bill be amended such that corporate Boards are required to specify whether
an executive has resigned, retired or been terminated, and that the reason for
resignation is stated.
Recommendation
4
That the Bill be amended for
shareholders to be required to re-approve termination payments where the amount
has been pre-approved at the time of employment, is greater than one year's
base salary, and where performance by the executive has not been satisfactory.
Recommendation
5
That
the Bill be amended so that that shareholder votes for termination payments are
binding.
Recommendation
6
That
the Bill be amended such that executives are prevented from using taxation and
other loopholes to maximise termination payments, such as non-taxable bonuses
or share schemes.
Recommendation
7
That
the Bill includes a sunset clause of two years from the date of release of the
Productivity Commission's final report into executive remuneration in order to
trigger a review of this legislation, taking into account the report findings.
Nick
Xenophon
Independent
Senator for South Australia
07
September 2009
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