Mounting community outrage at huge payments to departing executives has led the Federal Government to announce an inquiry into the issue — but first it will pass law to give shareholders more power over payments.
At present, shareholders don’t have to be consulted unless these termination payments exceed a figure seven times a director’s annual base pay. Under the new arrangements, announced by Treasurer Wayne Swan yesterday, executives would need their shareholders’ approval for any termination payment exceeding one year’s base pay.
"The Government’s reforms will empower shareholders to more easily reject such payments, when they are not in the interests of the company, the shareholders or the community," Swan said.
The Treasurer said that presently a director with an average salary package of $2 million a year over three years could receive a termination payment of up to $14 million without shareholder approval.
Swan said these payments had become "more common and in some cases more obscene", and that "[s]ome termination payments have borne no relationship whatever to the performance of the company or the pay of its executives." The Government has also ordered a wide-ranging inquiry into excessive executive pay.
Swan has also tried to allay concerns that boards and executives would merely find other ways to get around any changes to the rules. He announced that the Government is also broadening its definition of termination payments, to close up some of the current loopholes. He said the new legislation would catch all kinds of payments given at termination. But the new laws will not be retrospective, meaning that existing termination contracts would be allowed to proceed.
The Opposition has responded to the announcement by claiming that the Government has belatedly followed Opposition advice in reforming executive pay rules. But in truth it’s an issue that both major parties have dodged for a long time.
The moves follow widespread criticism of payouts to executives here and overseas, including outrage at reports that the retiring CEO of Pacific Brands, Paul Moore, is to receive a $3.4 million termination payment. The announcement of Moore’s departure, from December this year, came after the company’s decision in February to close its factories throughout Australia and move its manufacturing operations overseas, leaving more than 1800 Australian workers, including many in regional areas, without jobs.
In announcing the Productivity Commission inquiry into executive payments, Corporate Law Minister Nick Sherry was blunt in his condemnation of executive greed. "Unrestrained greed in the financial sector has led to the biggest global recession since World War II", Sherry said, and had so far led to the collapse of more than 50 banks and put millions out of work.
Sherry also announced that former chairman of the Australian Competition and Consumer Commission Professor Allan Fels would join the inquiry as an associate commissioner. He said Professor Fels had worked in the area of competition and consumer regulation for 16 years, and would bring "a wealth of experience" to the role.
Sherry promised that the inquiry would look into a broad range of issues, including "international trends and responses to the problems of excessive risk-taking and corporate greed". "There is significant community concern about excessive pay practices, particularly at a time when many Australian families are being hit by the global recession," he declared.
Sherry also said that the Productivity Commission would look in particular at the interests of Australians who now have big stakes in the nation’s major companies, through the shareholdings of their superannuation funds.
"The Rudd Government has made it clear that it will examine all workable options with regards to executive remuneration," Sherry said, promising that the public would be given plenty of opportunity to make its views known to the commission, which will be required to report by the end of the year.
It was also announced that the inquiry would look into the practice of companies offering their executives loans which they’re not obliged to repay.
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