As Jeff Sparrow pointed out yesterday in Crikey, The Australian’s Janet Albrechtsen entered the executive pay debate with a stinging criticism of Malcolm Turnbull’s proposal for binding shareholder votes on remuneration and a strident defence of the current system of paying our executives.

While Albrechtsen may be praised for bravely taking a view opposed by virtually everyone bar executives, directors and remuneration consultants, in the interests of completeness, Albrechtsen should have mentioned that her husband, former Commonwealth Bank executive, John O’Sullivan, is a beneficiary of executive largesse.

John O’Sullivan resigned as chief solicitor and general counsel of CBA on 31 January 2008. In 2007, O’Sullivan collected $2.4 million. In 2006 O’Sullivan received $1.85 million, on top of $1.7 million in 2005.

In her article, entitled “The Right’s Crazy Class War on CEOs” Albrechtsen even launched a defence of Pacific Brands, claiming that:

Between their fulminations, [no politician] has been honest enough to point out that the allegedly greedy bonuses were paid to Pacific Brands executives some time ago for their performance in the 2007-2008 financial year, a record year for the company. The payments were decided before the Lehman Brothers collapse triggered the full horrors of the global financial crisis.

For a former commercial lawyer, Albrechtsen shows a surprising lack of business awareness. Much of Pacific Brands’ problems originated from decisions taken by executives (like former CEO Paul Moore) in previous years, such as 2007-2008. PacBrands’ problems largely stem from an onerous debt burden, which exceeds its tangible assets and market capitalisation (PBG’s debt of $900 million dwarfs its current market value of $85 million). As a result, Pacific Brands’ fate rests largely in the hands of its bankers.

The so-called “record year” referred to by Albrechtsen is an example of why short-term myopic remuneration structures (which favour “current year” profit over long-term, sustainable growth) are disastrous for shareholders. Pacific Brands paid its executives a bonus for the year ending 30 June 2008 after the company achieved an EBITA growth exceeding 17.6% — that EBITA growth turned out to be an illusion (unlike the cash bonuses paid to executives), with the company announcing a half year loss of $149.8 million a mere six months later.

Albrechtsen later claimed that:

Shareholders get to vote on share issues and on major mergers and acquisitions because those matters go directly to the fundamental nature and structure of their investment.

Determining remuneration is entirely different. It is a quintessentially operational matter. To give shareholders a binding vote on remuneration crosses the Rubicon. It would mark the first time shareholders have been given an executive power traditionally vested in directors. It beggars belief that the Liberal Party is willing to overturn such proven principles.

Albrechtsen is presumably unaware that shareholders already have the ability to vote on various aspects of executive (specifically, director) pay. For example, ASX Listing Rule 10.14 states that “an entity must not permit any of the following persons (which is defined to include directors) to acquire securities under an employee incentive scheme without the approval of ordinary securities of the acquisition”.

Similarly, the Corporations Act requires shareholders to approve terminations payments which exceed seven times an executive’s total remuneration (over three years). Requiring a binding shareholder vote on a Remuneration Report would be unwieldy, but it certainly is not the “first time shareholders have been given an executive power traditionally vested in directors” — they already vote on issuing options to directors and some termination payments.

Albrechtsen later argued:

There are plenty of other good reasons why shareholders should not have the last say on remuneration of public company executives. Such significant shareholder power would cause a stampede of talent out of public companies to private entities. Indeed, why work in Australia at all? Why not join the already significant Aussie diaspora in Hong Kong, the Middle East, New York or London?

The “talent shortage” argument is regularly proffered by company directors, and their highly paid remuneration consultants to vindicate burgeoning executive salaries. The only problem is, in reality, local CEOs or executives very rarely depart Australian companies for Hong Kong or London (the scenario is even less likely now given the state of overseas economies). The few Australia executives who have reached senior ranks overseas (such as Doug Daft, Charlie Bell or Andrew Liveris) virtually all worked their way up through the ranks of overseas companies. They were not headhunted from Australian operations as suggested by Albrechtsen.

CEO pay is not a class issue to be argued over by the ‘left’ or ‘right’ of politics. Excessive executive remuneration is little more than corporate theft, presided over by recalcitrant company directors who all too regularly neglect their fiduciary duties to act in the best interests of their company. Given that shareholders cannot rely on their representatives to ensure that agency costs are minimised, regrettably, it is up to government to provide regulation to ensure that the excesses of the past two decades are not repeated.

Peter Fray

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