While it promised the world and delivered virtually nothing in relation to carbon emissions, the Federal Government released an exposure draft with respect to “golden handshakes” which appears to be a solid first step towards reducing executive largesse. The Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009, which was announced yesterday, seeks to restrict the ability for companies from paying “golden handshakes” (specifically, termination payments which exceed one year’s salary) to departing executives without shareholder approval.

The draft Bill appears to tick the relevant boxes — instead of requiring approval for termination payments which exceed seven times total remuneration, the threshold has been suitably reduced to one year’s base salary. (This is a significant drop — for example, in the case of departing Telstra CEO, Sol Trujillo, the proposed laws would reduce the ability to make a termination payment (without the need for shareholder approval) from more than $70 million to only $3 million.

The Bill will also widen the definition of “benefit” and broaden the scope of the provision to include any person holding a “managerial or executive office”. The current termination payment rules only apply to directors (so in reality, the only person who is actually affected by the laws is the managing director). The new Bill will:

…extend the scope of the regulations to apply to the key management personnel and the five mostly highly remunerated officers (if different) of the entity (that is, the officers named in the remuneration report), namely a person holding “managerial or executive office”.

Another important change is that the new laws, if enacted, require an executive who receives a payment which is subsequently rejected by shareholders to immediately repay any monies received (if not, the debt may be recovered by the giver in a court). The penalty for a breach to executives who fail to comply with the new laws has been increased from $2,750 to $19,800.

While the CEOs’ trade union (otherwise known as the Business Council of Australia) and the Australian Institute of Company Directors may oppose the Bill, what the new proposed laws effectively do is transfer the power to make large executive payments from a clubby board of directors to the actual owners of the company. And as RiskMetrics governance expert, Dean Paatsch, noted “if there is an unintended consequence that means legitimate termination payments are required to seek shareholder approval, shareholders will have no problem at all in approving them.”

The major fallback of the Bill is that it fails to differentiate between payments for a genuine termination and monies paid upon an executive’s retirement, which are dressed up to look like a termination payment. For example, former Pacific Brands CEO, Paul Moore, received a “termination” payment of more than $3 million, despite the fact he actually retired after a lengthy period of service with the company.

Similarly, Sol Trujillo is set to receive a “termination payment” of $3 million from Telstra despite announcing that he was resigning in order to “reprioritise and personalise” his life and is returning to the United States to spend more time with his family and aging parents. The new laws should require companies to outline the full details and rationale behind any termination, and specifically prohibit companies from making any kind of ex-gratia payment to retiring executives without majority shareholder approval.

The Explanatory Memorandum to the Bill claims that “there is significant community concern about excessive pay practices, particularly at a time when many Australian families are being hit by the global recession. The Government is determined to ensure regulation of executive pay keeps pace with community expectations.”

With the exception of failing to restrict companies from wantonly paying shareholder monies to retiring executives, the draft Bill appears to be a vast improvement on the current rules pertaining to golden handshakes.

Peter Fray

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