Comments on: Executive remuneration: PC pays out on directors

By: Harvey Tarvydas

Harvey Tarvydas — Fri, 02 Oct 2009 08:57:53 +0000

Dr Harvey M Tarvydas
Thanks BK for the clarity you bring and so many of your readers (commenter’s) have cleverly and clearly (and mostly genuinely) made good discussion points. I think the PC has out performed the expectation on them, good on them, it’s so good to see smarts with courage.
A degree of impossibility at solving the envisaged problems using simple available techniques strikes me and in the name of the disenfranchised shareholders I think some seriously radical but smart moves are needed. say, as radical as one might measure the radical nature of the taxpayers bailout of our corporate ‘overpaid lazy crooks’ run companies. Is there a ‘radical’ meter? Only the human educated brain?
Firstly, in the name of those good points, transparency, honesty, openness and real talent of the directors and executive, give every shareholder the same vote then the board has to be armed with real ‘convincing’ arguments (transparent, honest, open and display real talent). This arrangement can let the enemy in with influence but board powers (and talents) can overcome these dangers. They’ll have to work - harder.
Secondly, to suppport this, one needs an indepemdant judicial body (arbitrator) to take complaints from shareholders about directors and/or from directors about shareholders. It has to have the talent to be a productive pain in the bum of boards who would then quickly learn how to do their job properly and avoid the pain in the bum. (the ‘back to kindergarten’ phenomenom)

The recent almighty, massive expense to the taxpayers of the multiple global bailouts makes the expense of these ideas trivial in preventative expenditure terms while they will result in major quality added to business and life in the sophisticated western world.

NOTE: There is a move by global experts to have international financial rules (like the Aussie APRA) with international law accountability.

By: Heathdon McGregor

Heathdon McGregor — Fri, 02 Oct 2009 01:00:13 +0000

Robert:

“Basically the PC’s answer is as it always is: Leave it to the market. We knew this would be the answer they would give before they ever published their report. I can’t believe that it took them four hundred pages to say it!”

The market will sort it out and if it doesn’t then they will get a bailout.

I wonder if I am mistaken or confused but isn’t the way the renumeration set up just a tax dodge? If the bonuses are not based upon performance but written into the contract then why are they termed incentives or bonuses? Does this alter the tax status of these payments and can the tax laws be altered that in order to get taxed as a bonus then your performance must reflect this. I wonder how many companies would guarentee these “bonuses” if imeant passing money to the government?

By: AR

AR — Thu, 01 Oct 2009 08:22:33 +0000

I’m fascinated by the way so many phrases & concepts from a 31yr old radio show have permeated our culture. The more mordant don’t even feature in the brain dead visualisations proffered on TV and the execreable movie. Given that the different versions (at least three that i’ve noted) broadcast on ABC radio in the Summer hiatus over the decades are heavily cut, that means that many of our commentariat spent too long in the Sceptic Isles, presumably in a damp bedsit without UHF acess. Hmm, I fink dat’s signficant, with apologies to God Rundle.

By: bakerboy

bakerboy — Thu, 01 Oct 2009 07:52:15 +0000

The ‘club approach’ identified by the PC is the core of the problem. We are a small population and there is a small pool of people who fill board positions on Australain companies. Have a look at the lists of board members across 50 companies - you will see the same names over and over. It has been a ‘who you know’ club for many years. Alex

By: Keith Bedford

Keith Bedford — Thu, 01 Oct 2009 07:50:40 +0000

As a Director of a private company and a shareholder in public comapnies I believe that the idea of firstly making shareholders advices binding on the Directors and using a sensible reqirenment that if 20-25% of shareholders wont agree with the directors proposals that they should not cary out their proposals is the way to go. The current non binding posible 50% majority vote is a nonsense and totally discourages small shareholders from holding shares as they have no say. Give us a say in what Public Companies do this and we should all see a vast improvement and certainly allow more candidates for us to vote onto Boards thus widening the available pool.

By: Tom McLoughlin

Tom McLoughlin — Thu, 01 Oct 2009 04:41:32 +0000

I didn’t see Roger’s piece before mine but notice the echo. Also I ought to have added at end of first paragraph the big short term profit allows significant dividends to be paid out appeasing big institutional shareholders run by people on their own short termism culture, and at the cost of firm sustainability and long term growth. Inother words cannabilising the firm rather than harvesting the bounty.

By: Tom McLoughlin

Tom McLoughlin — Thu, 01 Oct 2009 04:36:41 +0000

Criteria for success of a corporation is not directly correlated to share value over the short or medium term. So this is no measure of a CEO or similar success. This is demonstrated by the simple thought experiment of slashing costs (critical plant and HR) to massively increase profit short term by simply failing to do maintenance, R&D etc etc. That is short cut the real costs of doing good business.

Secondly virtually all corporations succeed or not within the political economic context of the social fabric and civil society guaranteed by govt and taxpayer. Not the other way round. So company profits and shareholder money is underwritten by that framework. They ought to be grateful and tolerate a reasonable level of govt regulation/intervention including on executive payrates. Because their viability depends on govt and civil society. That’s the lesson in spades of the GFC. That’s also why Joe Hockey is wrong wrong wrong with his superficial argument that it’s up to shareholders alone to decide what to do with ‘their’ money.

Thirdly, and this is the flaw in BK’s piece above and the PC no doubt: If there is a director’s club lacking merit, guess what the price of protection of that board will be - a big fat green light to excessive exec pay so these latter also don’t blow the whistle on lazy incompetence. In other words the exec joins the club and maintains the barriers. And gets paid danger money to be the public face and protect the board in a mutual buttressing exercise. It seems apart from pay rates the distinction between board and exec is one without a difference, and why the PC have their head up their *rse (again) like so many other policy areas, being so market faith based.

When are they going to acknowledge the market is a political economic invention?

By: Robert Garnett

Robert Garnett — Thu, 01 Oct 2009 04:15:23 +0000

The notion that remuneration caps are a direct interference in property rights would be fine, but for four issues.

Firstly, public companies are not islands entire unto themselves. Their very existence is dependent on a fair and open society, with infrastructure, services and a market provided by the community, which also generally has a considereable stake in their success across many dimensions. The community therfore has a stake beyond the “property” rights of shareholders.

Secondly most shareholders have no direct control over the companies they own shares in. It’s their property, but they own so little of it that they are powerless to have any influence. Usually it is only a few large institutions or barons who can actually control the companies. The small sharehoders are invariably disenfranchised by the large.

Thirdly in the case of some of the companies such as banks, the automotive industry, big carbon and big mining they are underwritten by the tax payer as has been well demonstrated by the GFF and the corruption of the CPRS. I would say this gives the taxpayer some rights in regard to what their leaders get paid.

Finally the shareholders of Public companies have their ownership of the public companies with very limited liability. They have no limits on the upside, but the worst that can happen on the down side is they lose their capital. No one takes the shareholder’s house or car if the company becomes liable for damages that exceed the companies capacity to pay. This is ownership with all care and no responsibility.

I personally “own” a lot of shares in various companies. I don’t feel I “own” any part of the companies themselves. What I do believe I have a right to is a dividend and the right to sell the shares if someone wants to buy them.

We have “salary caps” for footballers, pensioners and the low paid. I would feel quite comfortable if we had salary caps for those men of genius who run our companies.

Of course, company directors should be responsible for the performance of CEO’s performance and pay, but where are the new breed going to come from? How will they get elected? Whose going to propose them? When I here some plausible answers to these questions I might have some faith in the PC’s report.

Basically the PC’s answer is as it always is: Leave it to the market. We knew this would be the answer they would give before they ever published their report. I can’t believe that it took them four hundred pages to say it!

By: Jenny Haines

Jenny Haines — Thu, 01 Oct 2009 04:12:53 +0000

The emphasis in executive pay needs to shift from incentive to performance. What is most appalling about executive pay in recent times is that they receive their pay, bonuses and shares etc even where the company is heading towards bankruptcy. If there were higher and tighter perfomance benchmarks on receiving anything other than pay in such a company, that would be a start. If the company is performing poorly, shareholders need to be empowered to place restraints on executive pay by holding it at its current level, or reducing it by the same percentages being asked of employees.

There is no doubt an old boys club among CEOs and board directors and lots of mutual back scratching. But there is also supposed to be something called business ethics, corporate governance and corporate responsibility. Diversifying the membership of boards may help. Federal Government legislation empowering share holders may help. In the end what is required are business executives with a conscience. Is that possible?

By: Croesus

Croesus — Thu, 01 Oct 2009 03:42:57 +0000

I knew you were one of us really Bernard. I’ve quite happy with Paul when he gave us imputation credits and even Peter managed to remove tax from some of the right people (though a bit generous to billionaire’s who wanted to set up the odd love child with a million dollars compounding for 60 years….) but those company directors who enjoy the freebies because of the gifts they make of shareholder’s money and even get gongs for it can’t even arrange remuneration rationally. It’s not as though it hasn’t been pointed out for the last few decades. If you want the best bureaucrat or software engineer in the world by all means pay him a few million a year if you genuinely think that’s what your company needs but if you want the great all-purpose CEO or CEO in waiting at least make it possible for him to lose out if the shareholders do badly over the medium to long term. If he gets $$150 million for his five year tenure in which the company grows from market cap $1 billion to $10 billion without disproportionate increase in risk and he doesn’t take it all unless the gain proves durable, that’s fine by me. But….

And BTW, that 25 per cent vote against remuneration two years running is not a good call because it runs too obviously into the answer that 75 per cent have voted in favour. So, what about 25 per cent the first year to put the directors on notice and then 50 per cent the following year. Or, better perhaps, require the directors to get a 60 per cent majority in the second year to get the package up….