Australia Reins in Exec Pay
The annual survey by the influential Australian Council of Superannuation Investors (ACSI) details some impressive figures in the worldwide battle to rein in excessive ‘golden parachutes’ and overall executive remuneration.
The 13th Annual ACSI Survey of Chief Executive Remuneration reveals that termination payments have shrunk by nearly 70% in the past five years with the median payment to chief executives falling to $A1.3m in 2013, from $A35 m in 2008.
Average statutory pay for CEOs at $A4.84m is still high at sixty times average weekly earnings (AWE) but is at its lowest level in a decade and 33% below the 2007 peak of ninety times AWE.
ACSI chief executive, Gordon Hagart said the study findings showed the benefit of investor scrutiny: ‘When investors behave like owners, and make it clear to boards their expectations around executive pay, Australian boards generally respond.’
Australia’s groundbreaking ‘Two Strikes’ legislation of 2009, now in its third year of operation at public company AGMs is the platform being used to more closely align shareholder interests with remuneration.
The story behind how such an active corporate governance measure was adopted starts way back at the tail end of the 1990s.
Executive salaries took off in Australia following the 1998 appointment of American Paul Anderson as first foreign head of the iconic BHP, the nation’s premier blue chip company, dominant in minerals, oil & gas, iron & steel with a host of associated subsidiaries.
The new trend in remuneration became evident when BHP made a record $A11.1million redundancy payment to Andersons predecessor, John Prescott, sparking criticism from local unions who highlighted the company’s $A1.47billion operating loss for the 1997-98 year.
Undaunted, the BHP Board set Anderson’s starting salary package at around two hundred times Average Weekly Earnings (AWE), a jump from BHP's long held historical standard of less than 50 times earnings, all helpfully plotted in a seminal study of 110 years of BHP executive remuneration by former academic and now Labour MP Andrew Leigh.
Anderson’s initial salary stirred a measure of public comment and he was greeted as the $8 Million Dollar Man by BHP’s largest union pre-arrival in 1998. More derisively he was dubbed on departure as the $17 Million Dollar Man a reflection on the overall value of his termination payment as BHP merged with Billiton in 2002 to create a global resources behemoth.
By then the floodgates had opened. The example BHP set in 1998 was replicated and restraint was abandoned. CEO salaries sat around fifty five times Average Weekly Earnings in 2001 and jumped to sixty nine times by 2004.
To deflect rising community concern and nascent pressure from some institutional shareholders the then government introduced a shareholder advisory vote on remuneration in 2004 and additional disclosure as part of the ‘CLERP 9’ overhaul to corporate law.
Business leaders responded in kind with CEO base pay increasing to eighty one times AWE by 2006, peaking at ninety four times AWE in 2007. The Global Financial Crisis engendered some moderation with base pay slipping back to a relatively meagre 84 times by 2008 but the now well established practice of generous golden handshakes helped sooth the pain.
The 2007 change of Government heralded a critical stage in the struggle for accountability. New Legislation in 2009 significantly expanding the scope and criteria for shareholder approval of termination pay was passed in the face of vociferous opposition from the business sector and lobby groups.
Following an extensive enquiry by the independent Productivity Commission 2011 then saw the passage of the unique ‘Two Strikes’ rule. In simple terms if a remuneration report received a no vote of 25% or more at two consecutive AGMs companies were required to put a motion to ‘spill’ (enforced re-election) of the entire board at the 2nd meeting.
Again, business condemned the changes with one senior corporate leader making the risible suggestion that investors should simply exit equity market holdings if they didn’t agree with board determinations on remuneration.
The 2011 legislation should have come as no surprise. Executive pay had been a contested and controversial issue in Australia for over a decade, with the Australian Institute of Superannuation Trustees (AIST) and then ACSI, backed by the nation’s mutual based industry superannuation (pension) funds had long taken an active interest on governance and remuneration issues.
The new style industry funds provided an initial base of AGM votes where remuneration did not match performance. From the early 2000s in concert with AIST and ACSI, they started to engage with asset managers and companies on a range of governance issues including shareholder value and remuneration, the increased activity a reflection of their growing size & sophistication as institutional owners.
The change of government in 2007 is recognised as the pivotal moment in achieving substantive shareholder friendly reform. While the 2004 legislation generated additional scrutiny and increased public opprobrium, corporate moderation was not forthcoming. Advisory votes were not enough. The new administration was elected with an explicit policy to give shareholders a greater say on executive remuneration, now a high profile issue that had long escaped the back pages of the business sections to mainstream reporting in the nations newspapers.
Corporate Australia, in opposing the 2004, 2009 and 2011 laws consistently occupied a fundamentally conflicted position. Domestic captains of industry and commerce had since the mid 1990s repeatedly trumpeted the wholesale deregulation of industrial relations laws and wage standards as a national priority under the guise of improving ‘productivity’ and ‘competitiveness.’
Simultaneously they vigorously resisted regulation, transparency and greater shareholder influence, regularly defending huge increases in executive pay and director fees while rejecting closer alignment between remuneration structures, company performance and long term value. The dichotomy was not unnoticed.
Public opinion was firmly behind the Government on the 2009 and subsequent 2011 legislation. The longer term results of enabling shareholder engagement is both measurable and generally seen as positive.
Business warnings of an exodus of executives and directors to off-shore roles have not been realised. Nor have the wilder predictions that giving shareholders a low threshold and a direct say on remuneration would render boards unstable, AGMs unmanageable and senior roles unfilled.
Australian law now contrasts with the US Dodd-Frank Act that gives an advisory vote to shareholders with ‘say on pay’ at publicly listed companies including additional reporting and the UK legislation, applying from October 2013, requiring more disclosure and a watered down binding vote process.
Australian Council of Superannuation Investors CEO Gordon Hagart characterised the gradual shift in these terms:
‘ACSI observes that increased investor engagement, combined with the work of more active boards, has resulted in better remuneration packages that improve alignment between executives and the providers of capital. We have seen fewer votes against remuneration reports over the past year as remuneration packages have improved in the market.’
‘Specific improvements include the major reduction in termination payments, more demanding bonus hurdles, longer performance measurement periods and an end to the culture where bonuses were seen as entitlement rather than reward for outperformance.’
Notwithstanding executive pay in Australia is still excessive, from a governance perspective the increased say on termination provisions and three years of direct shareholder votes have seen the beginning of a much deeper process to gradually re-align remuneration with institutional and asset owner interests of sustainable long term value creation.
The cumulative effect of the reforms is evident in driving greater engagement between boards, asset owners, asset managers and proxy advisers.
Ian Woods Head of Governance at AMP Capital bluntly puts it this way ‘Five years ago, the chairs wouldn’t return my calls about the remuneration report, today they are calling me.’