If the submissions were not being made by some of the bluest chip organisations in Australia, one could not help but laugh. That a professional body or company would, with a straight face, mount an argument against the Federal Government’s proposed changes to executive termination laws is remarkable.

As background, in June, the Government formally introduced legislation which seeks to prevent public companies from making executive termination payments which exceed one year’s fixed remuneration. Critically though, those corporations are still able to pay executives an unlimited “golden handshake”, so long as the payment is approved by a majority of voting shareholders. This is understandable given it is the shareholders who foot the bill for any executive termination payments, rather than the directors, who merely authorise the payment.

Under existing laws, companies are able to pay departing executives up to seven times average total remuneration over the past three years (including short and long term bonuses) without shareholder approval. This perverse situation would have allowed Telstra to make a termination payment to former CEO, Sol Trujillo of more than $70 million, or Macquarie Bank to pay former boss, Alan Moss, a golden goodbye of more than $180 million.

However, despite the compelling logic of the new laws, large corporations and lobby groups (who appear to be more concerned about ensuring their executive are well paid, than their shareholders are receive adequate returns on equity) have gone on the attack.

The Australian reported that “Rio Tinto Australia’s managing director Stephen Creese said there was a risk that long-serving employees who were not executives, would get unfairly caught up in the new crackdown and would not receive accrued benefits.” Creese’s concerns may be slightly unwarranted given the vast majority of Australian employees receive termination payments equivalent to one week for each year of service. In fact, most executives actively seek to reduce termination or redundancy payments for ordinary workers, at times, taking such matters to industrial courts. (It is only when it comes to executive termination payments where corporations seem to suddenly adopt a very generous stance).

Similarly, the Financial Review reported that Origin Energy submitted that it was “particularly concerned with the setting of the limit at the proposed one-times level as this would have the effect of imposing additional time and cost barriers in Australian companies seeking to recruit externally.” The mysterious “time and cost barriers” referred to by Origin remain mysterious. Many termination payments are undertaken on an ex-gratia basis, for example, the payment to former Oxiana CEO, Owen Hegarty (of $8.35 million) was made by the board after Hegarty’s resignation. Further, if discussing termination payments with potential executives is such a timely and difficult exercise shareholders would be well vindicated in questioning whether such a candidate is appropriate to head their company. What kind of CEO demands a payment for failure before they have even started on the job?

The AFR also noted that the Hay Group claimed that a one-year threshold is not required due to a “downward trend” in executive payouts over five years. It should come as no surprise that a firm of remuneration consultants supports higher remuneration for executives (Hay obviously knows where their fees are coming from). The only problem is that Hay’s claims are completely incorrect. In the past five years, executive pay has continued to skyrocket. Even in 2008, with equity prices and corporate profitability slumping, Australian executives managed to increase their remuneration. Over the past two decades, CEO salaries have increased by 564 percent, from 18 times average full-time earnings to 63 times. That is before termination payments are considered.

In the last three years, former PBL executive, John Alexander (the man accused of “killing Channel Nine”) received a termination payment of $15 million. Former ASX boss Tony D’Aloisio (who is now head of Australia’s corporate watchdog, ASIC), received $7.8 million, Mike Tilley collected $6 million at Challenger while Andrew Scott took away $3 million, despite overseeing billions of dollars of wealth destruction at Centro.

Under existing laws, all those termination payments were made without recourse to shareholders. Any company which opposes the long-awaited changes is simply proving what has long been suspected — that directors are placing the interests of executives before their fiduciary obligations to shareholders.

Peter Fray

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