Labor’s Approach To CLERP 9 – Cracking Down on Corporate Greed Stephen Conroy - Deputy Leader of the Opposition in the Senate, Shadow Minister for Trade, Shadow Minister for Corporate Governance, Financial Services and Small Business

Speech

Transcript - Australian Shareholders Association (ASX) - 7 October 2003

Introduction

Good morning.

In light of the imminent release of the draft CLERP 9 bill, I appreciate the opportunity to discuss Labor's approach to CLERP 9 with you.

At the outset, I'd like to commend John Curry and the ASA for the role that you play in holding Australian companies to account.

The draft CLERP bill will address a number of corporate governance issues. The most talked about will be executive remuneration. Many in the business community will say that the current debate about corporate governance has resulted from the collapses of Enron and WorldCom in the US and One-Tel, HIH and Ansett in Australia. They'll say corporate governance is a fad and it will fade as people forget about the latest scandal as share prices rise and as time moves on.

Whilst I think these scandals highlight the problems, in my view the issue runs deeper than the latest corporate scandal.

History

Let me see if you can guess the year in which following topics were major issues in the corporate world:

• Mismanagement at the biggest companies;
• Insider trading;
• Misstated profit & loss accountants;
• Excessive remuneration of executives;
• The need for accounting standards;
• The role of hedge funds;
• The need for independent directors;
• Shredding of internal documents;
• Directors and officers liability insurance; and
• Socially responsible investing.

Some of you might guess that these issues came to fore in the late 1980's or even in the last few years.

In fact these issues were raised by shareholders in 1620.[1] Many of these issues were raised in relation to the Dutch East India Company which was established in Holland in 1602.

From 1620 to 1622 shareholders attacked directors' conduct in a series of pamphlets.[2] Shareholders in the Dutch East India Company had the same grievances as many shareholders today. They wanted:[3]

• The provision of clear information;
• The right to appoint managers; and
• Changes to directors' remuneration.

Centuries later, shareholders in Australia are hoping that CLERP 9 will address the very same issues.

Yesterday, the BCA, said that Labor's proposals "are a response to short-term concerns".[4] Clearly, the BCA have some history to catch up on!

Labor's Approach

In contrast to the Howard Government's self-regulatory approach. Labor believes in taking an activist approach.

Labor has a proud history in relation to ensuring that shareholders are aware of the salaries of corporate executives.

In 1998, Labor and the Democrats inserted section 300A into the Corporations Act. This provision required, for the first time in Australia's history, that companies disclose the remuneration paid to their directors and top executives.

Prior to that amendment, Australian companies did not have to disclose to shareholders what they paid their officers. It seems hard to believe now.

In August last year, I released a paper called the "Directions Statement on Improving Corporate Governance" . This paper was the first stage in implementing Labor's corporate governance agenda through legislative change. The paper outlined Labor's policy position on a range of corporate governance issues including executive remuneration.

On Sunday, I released a paper which sets out the second stage of Labor's corporate governance agenda. The paper is called "Labor's Approach to CLERP 9 – Cracking Down on Corporate Greed". The paper sets out the reforms which Labor believes should form part of the CLERP 9 Bill.

The paper proposes a range corporate governance reforms in the following areas:

• Executive remuneration;
• Composition of boards;
• Empowering shareholders;
• Analyst independence;
• Audit;
• Penalties for corporate misconduct;
• Accounting standards; and
• Whistleblowers.

Today, I'll outline Labor's position in relation to executive remuneration and empowering shareholders and discuss why Labor believes in taking an activist approach in relation to corporate governance.

Before discussing Labor's approach and our reform proposals, I want to mention that we campaigned for, and support, many of the proposals in the original CLERP 9 policy paper including granting ASIC the power to impose financial penalties for breaches of the continuous disclosure regime.

Although we have not seen the detail of the CLERP 9 bill we support the ASA's proposal for the ASA to act as a corporate proxy.

Empowering shareholders

I am concerned that the draft CLERP 9 bill will continue the Howard Government's self-regulatory approach and:

• will fail to hold boards accountable; and
• will fail to empower shareholders.

For this reason Labor has produced a paper which outlines our approach to CLERP 9. The paper sets out the corporate governance reforms which Labor believes should form part of CLERP 9. It will be available later today on our website: www.alp.org.au

One of the key areas of reform discussed in our paper, is empowering shareholders.

When you consider that the retirement incomes of Australians are dependent on the vagaries of the share market, the importance of shareholder activism becomes clear.

The way to increase shareholder activism in Australia is simple – empower the shareholders.

Australian boards have acted in their own self-interest, not in the interests of their shareholders.

A recent article in the Harvard Business Review, accurately diagnosed the cause of the problem, saying that:[5]

"When shareholders fail to engage, either in setting direction or holding board members accountable for their behaviour, an important link in the governance system is missing. In this context, a director's allegiance shifts from its proper base – the shareholders – to the nearby boardroom, where fellow directors and management fill the void."

Labor wants to empower you – the shareholder – to take on the boards.

How are can we empower you to do that?

With the following reforms:

1. Require increased disclosure in relation to executive remuneration policy.
2. Require companies to give shareholders a say on executive pay by putting a non-binding resolution on the company's executive remuneration policy to the AGM;
3. Require companies to put a non-binding resolution to shareholders in relation to the appointment of a director as Chair where the director is already the Chair of another company;
4. Require trustees of super funds to vote their proxies; and
5. Require funds managers to disclose their voting records and voting policy.

Yesterday, the BCA President John Schubert said that Labor's proposals to empower shareholders:

"…would simply lead to shareholders being overwhelmed by the volume of information."[6]

Let me put that issue to you the shareholders:

• Are you getting the information that you want in relation to "golden hellos" and "golden goodbyes"?
• Are you getting the information that you want on directors' relationships with the company?
• Are you getting the information that you want on directors who use equity value protection schemes to eliminate the risk element in their salary packages?
• Do you feel overwhelmed at the volume of information provided to you? If there is anyone here today, anyone at all who fells that they're receiving too much information on executive salaries? If so, can you please raise your hand?

Attacks on Shareholder Rights

Corporations Amendment Bill 2002

In addition to Labor's proposals to empower shareholders, Labor will oppose proposals which emasculate shareholder rights.

The Howard Government have released a draft bill called the Corporations Amendment Bill 2002.

This bill launches a direct attack on your rights as a shareholder.

The draft bill attacks shareholders rights in at least three ways:

• By shortening the notice period required for the calling of company meetings from 28 days to 21 days;
• By abolishing the right of a single director of a listed company to call a company meeting; and
• By abolishing the "100 member rule" – which gives minority shareholders the right to call a company meeting.

Labor will oppose each of these proposals.[7]

I am astounded at the hypocrisy of the Howard Government. On the one hand they agree with Labor that shareholders should vote on fat cat salaries in the CLERP 9 bill and then on the other hand they introduce a separate bill which actually reduces shareholders rights.

Boral

It's not only the Howard Government that is attacking shareholders rights.

Boral has proposed a resolution at their forthcoming AGM which also attacks shareholder rights.

In the Notice of Meeting which has been circulated for the AGM, Boral proposes changing the obligations required to modify its constitution.

Boral is proposing that shareholders wanting to put up a resolution modifying the constitution will have to obtain 5% of the votes that may be cast on the resolution.

This is an attempt to reduce shareholders rights to put up resolutions at AGM's. It's an outrage that Boral is so blatantly trying to nobble its shareholders.

However, the practical effect of the resolution is unclear.

Section 249N of the Corporations Act says that only 100 shareholders (who are entitled to vote at the meeting) are needed in order to give a company notice that they propose to move a resolution at the AGM.[8]

I call on Boral to reconsider their resolution as it directly attacks shareholders rights.

All Talk, No Action

Many of you here will be aware that the draft CLERP 9 bill has been over 12 months in the making. The original CLERP 9 policy paper was released in September 2002.

In light of the fact that fat cat salaries which have continued to sky-rocket, it's amazing to think that the original CLERP 9 policy paper didn't even mention executive remuneration![9]

But when you consider the Howard Government's approach to the top of end of town it's not surprising that executive salaries didn't rate a mention.

The Howard Government takes a self-regulatory approach in relation to big business. They believe that the top end of town should be left alone.

The only thing John Howard has done in relation to obscene salaries - is talk about it.

John Howard has been talking about outrageous executive salaries for seven and half years.

In 1996, Mr Howard said in relation to wage restraint:[10]

"..the obligation to display wage restraint, the obligation to ensure that wage increase are linked to productivity gains is not an obligation that is confined to people on low and middle incomes. It is an obligation that is also to be accepted and to be met in full by people on high incomes…"

He went on to say in relation to the working men and women of Australia that:

"we would understand if you felt that there were one law for you and one law for the rest of the community. That would be quite unacceptable, and I would simply say to all people who have wage setting responsibilities in the Australian community that it is essential that there be equality of sacrifice in the Australian community."

In 2003, Howard said:

""I think people have got a right to be angry….Can I say .. to my fellow believers in private enterprise in the corporate community, the public will lose faith in the system if they think it is unfair. And you can't ask wage and salary earners on modest incomes to exercise restraint in the national interest if they keep reading of these excesses."[11]

In May this year, in response to the furore over the payout to former BHP Billiton CEO, Brian Gilbertson, Mr Howard said: "I've got to say I think it's too much as well". He went on to say in relation to directors:

"It's your responsibility [as] apostles of the capitalist system, you want to keep the capitalist system free of too much government regulation, well you've got to deliver."[12]

Well Mr Howard, after seven and half years of talking about excessive salaries, it's clear that they have not got the message.

Directors have got their snouts firmly in the trough.

The one reform to obscene salaries in the last seven and half years is the release by the ASX of its voluntary guidelines. Nothing compulsory of course.

Just a gentleman's agreement that companies should start behaving or else the Government may have to do something drastic and actually introduce – horror of horrors – legislation to require companies to disclose their excessive salaries.

ASX boss, Dick Humphrey said in relation to the ASX Guidelines:

"It is imperative that we did this. The secondary objective was that this was achieved by way of guidelines rather than legislation. We knew that following the passage of the Sarbanes-Oxley Act in the US that unless the ASX acted there was a real danger that legislative action would be brought in."[13]

The business community are desperate to avoid any legislation that empowers shareholders. This is because empowering the shareholder, takes power away from the board.

Current State of Play

The self-regulatory approach of the Howard Government has failed to produce outcomes that benefit the shareholder, the employee or the retiree.

In Labor's view, self-regulation has been a green light to corporate greed.

The best example of the failure of the self-regulatory approach is executive remuneration.

A recent BRW survey of the 20 highest paid CEO's showed that only five have increased shareholder wealth in the last 12 months.[14]

Even since the release of the CLERP 9 policy paper, CEO salaries have continued to defy community expectations.

• The ex CEO of Southcorp, Mr Keith Lambert, took home a $4.4 million package after only 18 months at the helm - in spite of the fact that the group's profits plunged by $204 million.[15]
• David Higgins, the ex CEO of Lend Lease took home $8 million on his departure including a $1.61 million payment for promising not to work for a rival – in spite of the company recording a loss of $715 million.[16]
• David Murray from the CBA, took home $2.5 million which was a 7.4% increase in salary in 2002-2003, despite the bank's net profit slumping 24% in the same period.[17]

In relation to similar payouts in the United States, Warren Buffet recently said:[18]

"Directors should stop such piracy. Compensation committees should go back to the drawing board."

In Australia, very few directors are willing to speak out against the establishment. Wesfarmers Chairman, Trevor Eastwood, is one director who has. He says that the pay of some of Australia's chief executives is "outrageous".[19]

Another director who's broken the boardroom cone of silence is Charles Macek. He says that:[20]

"Business needs to recognise that it is part of the community. It needs to engage with the community, and reflect community attitudes. It's a cop-out to justify the process by which we have got here….It is delivering outcomes that clearly are unacceptable to the community."

In light of the recent spate of excessive executive payments, we have to ask why is that remuneration packages often do not coincide with shareholder value?

The power of the board to set remuneration and the powerlessness of the shareholders to have input into that process results in this disconnect.

To overcome this disconnect, Labor wants to:

• put checks and balances on the setting of executive remuneration; and
• empower shareholders.

Labor's Executive Remuneration Reforms

In relation to executive remuneration, Labor has proposed about a dozen reforms. I won't discuss all of them with you today, but I will touch on the key reforms.

The first reform is to expand the number of executives who are required to disclose their remuneration. Currently, companies only have to disclose the remuneration of the directors and five most highly paid executives. We support this provision – as we inserted it into the Corporations Act but we think the time has come to expand its application. Labor believes that companies should be required to disclose the remuneration of at least the 10 most highly paid executives.

(This is in addition to the disclosure of the directors' remuneration.)

Some people in the business community believe that salaries should only be disclosed for the CEO and CFO. Recently, the outgoing CEO of Perpetual Trustees, Graham Bradley said that:

"Disclosure of executive compensation has served to increase, not decrease, the costs of hiring executives by providing valuable information to executives and competitors."[21]

Directors of Australian companies need to step out of the boardroom and into the current century.

The real dinosaurs are the BCA. Yesterday the BCA President, Dr John Schubert said and I quote:

"..a proposal to increase the disclosure of remuneration from 5 to 10 of a company's most senior managers will only mean more information in executive remuneration being made available to the market."[22]

The BCA seems to have forgotten that shareholder's money is at stake.

The BCA seems to have forgotten that the retirement incomes of many Australians are contingent upon management acting in shareholders best interests.

How can withholding the value of the salary packages of key executives and directors be in the shareholders interest?

The second reform that Labor is proposing is enhanced disclosure of the board's remuneration policy in the director's report.

My understanding is that the Government plans to require the disclosure of executive contracts in "real time" and "upfront". Labor supports this approach. However, it does not go far enough.

Labor wants companies to disclose:

• the board's policy on duration of contracts, notice periods and termination payments;
• the board's policy on performance conditions;
• the value of options granted, exercised and lapsed unexercised;
• their policy on equity value protection schemes; and
• graphs plotting shareholder return for the previous 5 financial years.

The disclosure of this level of information empowers shareholders to make informed investment decisions. Labor believes that armed with this knowledge, shareholders should then have the right to vote on the company's remuneration policy.

The third reform which we are proposing and which the Government has already adopted is Labor's policy to give shareholders a say on executive remuneration.

In March this year the Howard Government voted down Labor's proposal to require companies to put a non-binding resolution to shareholders on executive remuneration. However, recently the Government has had a change a change of heart. We welcome their change of heart.

• In May, 51% of shareholders in pharmaceutical giant, GlaxoSmithKline, voted against the company's remuneration report.[23] Shareholders were particularly concerned about the CEO's golden parachute – he would have received $55 million if he were sacked.
• Institutional shareholders in the UK sent a clear message to the board of Glaxo that such outrageous payments were not acceptable.
• Although the AGM vote was only advisory, the Glaxo chairman said that the board would take it "very seriously".[24]

The fourth reform that Labor wants to see in CLERP 9 is the prohibition of loans to directors and management by the company. Directors should go to the bank like everyone else who wants a loan!

The fifth reform that Labor is proposing relates to non-executive directors. In our view, CLERP 9 should prohibit the payment of options, bonus payments and retirement benefits (other than statutory superannuation) to non-executive directors;

We believe that remuneration for non-executives should be distinguished from remuneration for executives. According to Corporate Governance International (CGI) the role of the non-executive director is to monitor the strategy and performance of the executive arm of the company and to safeguard the interests of shareholders generally.

Remuneration for non-executive directors should not provide any disincentive to independent action.

The ASX Corporate Governance Guidelines also say that companies should not provide options, bonus payments or retirement benefits to non-executives.

In Labor's view, this should be a requirement in the law.

Exploding the Myths

Change daunts many people.

The business community is no different. Their reaction to proposed changes to the law relating to executive remuneration has been fascinating. They've taken a "head in the sand" approach.

They don't realise the depth of feeling in the community about fat cat salaries and they're refusing to acknowledge that some corporate governance reforms need to be legislated.

Labor is not following the approach taken in the US. Instead, we are proposing strategic reforms that will strengthen the existing regulatory framework.

When Labor and the Democrats inserted section 300A into the Corporations Act in 1998, the business community had a similar reaction.

Their modus operandi is to put up a straw man argument and then knock it down.

Well today I thought I'd take the opportunity to explode some of the myths that the BCA and others have been peddling.

The first myth doing the rounds is that there is a link between CEO pay and performance. A study by three academics has exploded this myth. The report found that there is no link between CEO pay and company performance. The report found that very high CEO pay is in fact more often associated with below par company performance.[25]

The second myth is that pay rates in Australia are set internationally. Don Argus, the chairman of BHP/Billiton and Brambles says that:

"it is an international market that is setting the rate."[26]

Australian companies relative size in the world market does not justify having the world's third highest paid executives behind the US and the UK. What about the European executives? This "keeping up with the Jones" argument would do the BLF proud.

The third myth is that there is not a big enough talent pool in Australia to require a majority of independent directors. This is a total furphy. If boards look beyond the old school tie network, they would find an ocean of talent. One example of a group that's been overlooked for board positions is women. According to a recent census conducted by the Equal Opportunity for Women in the Workplace Agency (EOWA), women currently hold only 8.4% of board positions in Australia's top 200 companies.[27]

The fourth myth is that the problems faced in America as highlighted by the collapses of WorldCom and Enron and obscene executive salaries like the US$139 million payout to NYSE boss Dick Grasso. According to the myth, Australia has avoided the scandal and corporate greed that went on across the Pacific.

Australia is not immune from corporate scandal - ask any shareholder in One-Tel, HIH, Ansett and other recently failed companies!

Australia is also not immune from obscene executive salaries. The study by three academics which I've previously mentioned, found that executive remuneration levels in Australia grew from 22 times average weekly earnings (AWE) in 1992 to 74 times average AWE in 2002.[28]

Have our CEO's improved that much in 10 years?

The fifth myth is that giving shareholders a non-binding vote will have legal ramifications in terms of directors' duties.[29] This particular myth is peddled by the BCA who are horrified at the thought of shareholders actually having a say on how their own money is actually spent. What they've failed to realise is that the shareholders in the UK already have the right to vote on fat cat pay. In fact they've had the right since April this year.

No legal cases have been raised there.

Conclusion

I look forward to discussing Labor's CLERP 9 proposals with you.

[1] Dr Paul Frentrop, Corporate Governance – Lessons from the Past, ICGN Conference, July 2003.

[2] Dr Paul Frentrop, Corporate Governance – Lessons from the Past, ICGN Conference, July 2003.

[3] Dr Paul Frentrop, Corporate Governance – Lessons from the Past, ICGN Conference, July 2003

[4] BCA Media Release, Labor's CLERP Package a Backward Step, 6 October 2003.

[5] C. Montgomery and R. Kaufman, The Board's Missing Link, Harvard Business Review, March 2003, p. 90.

[6] BCA Media Release, Labor's CLERP Package a Backward Step, 6 October 2003.

[7] In relation to calling company meetings, Labor supports the proposal put forward by the ASA, CSA, the SIA, the AICD, and IFSA that would increase the number of shareholders required to call a company meeting to between 100 and 500 shareholders (depending on the size of the company), with each shareholder holding a minimum shareholding of $500.

[8] Section 249N says that the following members have a right to give a company notice of a resolution that they propose to move at a general meeting:

- members with at least 5% of the votes that may be cast on the resolution;

- at least 100 members who are entitled to vote at a general meeting; or

- such number prescribed by regulations.

[9] Note: The only related proposal in CLERP 9 refers to the IASB standard on expensing of share options.

[10] House Hansard, p. 5976, 29 October 1996.

[11] AAP, 10:29am, 27 February 2003.

[12] Jason Koutsoukis, Howard says $50m payout is too much, Australian Financial Review, 24 May 2003.

[13] John Arbouw, Corporate Governance Time Bomb, Company Director, Volume 19, 3 April 2003.

[14] Nicholas Way and Andrew Heathcote, 20 Highest Paid CEO's, BRW, 20-26 February 2003.

[15] Anne Lampe, Sydney Morning Herald, Dutch want to fix executive payouts at one year's salary, 10 July 2003.

[16] Robin Bromby, $5m makes it a pretty good year for BHP Billiton's new chief, The Australian, 1 October 2003.

[17] Tim Boreham and Geoff Elliott, Fat cats get the cream at CBA, Telstra, The Australian, 24 September 2003.

[18] Michael Bachelard, Corporate ‘Mae Wests' cop a buffeting, The Australian, 10 March 2003.

[19] Cathy Bolt, Wesfarmers takes a stand on CEO pay, The Australian Financial Review, 27 September 2003.

[20] Malcolm Maiden, Debunking the myth of the superhero CEO, The Age, 4 October 2003.

[21] Fiona Buffini, Senator plays tough guy on executive pay, The Australian Financial Review, 6 October 2003.

[22] BCA Media Release, Labor's CLERP Package a Backward Step, 6 October 2003.

[23] Lenore Taylor, Shareholder revolt over Glaxo pay deals, The Australian Financial Review, 21 May 2003.

[24] Lenore Taylor, Shareholder revolt over Glaxo pay deals, The Australian Financial Review, 21 May 2003.

[25] John Shields, Michael O'Donnell & John O'Brien, The Buck Stops Here: Private Sector Executive Remuneration in Australia, Report Prepared for the Labor Council of New South Wales, 2003.

[26] Malcolm Maiden, Debunking the myth of the superhero CEO, The Age, 4 October 2003.

[27] Christine Jackman and Michael Sainsbury, Women still not managing, The Australian, 2 October 2003.

[28] John Shields, Michael O'Donnell & John O'Brien, The Buck Stops Here: Private Sector Executive Remuneration in Australia, Report Prepared for the Labor Council of New South Wales, 2003.

[29] Media Release, BCA, Chairmen Concerned Over Voting Plan for Executive Pay, 30 September 2003.