Second Reading Speech
Mr Bowen (Minister for Financial Services, Superannuation and Corporate Law and Minister for Human Services)I move:
That this bill be now read a second time.
Today I introduce a bill which will amend the Corporations Act 2001 to strengthen the framework relating to termination benefits, otherwise known as 'golden handshake' payments.
There is significant community concern about the levels of termination benefits paid to company management. Such payments are given to outgoing company directors and executives at a time when they are no longer able to influence the company's future performance. The government's reforms will empower shareholders to more easily reject such payments where they are not in the best interests of the company, the shareholders or the community.
Currently, termination benefits, unlike other components of remuneration, are subject to a binding shareholder vote. The Corporations Act requires that shareholders' approval be obtained for termination benefits, subject to certain thresholds.
However, the existing thresholds allow termination benefits to reach up to seven times a person's total annual remuneration before shareholder approval is required.
This is a very high threshold, which leaves shareholders powerless to stop excessive termination benefits. The bill will address this, by lowering the threshold required for shareholder approval to one year's base salary.
The reduction in the threshold is twofold. Firstly, the quantum of the threshold will be reduced from seven years to one year's pay. Secondly, it will no longer be calculated by reference to the person's 'total remuneration', and instead will be calculated by reference to a person's 'base salary'. The definition of 'base salary' will be specified in regulations and finalised following further targeted consultation with industry.
This is a significant reduction in the threshold for shareholder approval, and will ensure that shareholders have the power to reject excessive termination payments where they are not in the best interests of the company or the shareholders.
In addition, the bill widens the scope of individuals subject to the regulatory framework, by extending the application of the provisions to 'key management personnel' for companies that are a disclosing entity. This will ensure that all key individuals, who have their remuneration disclosed in the remuneration report, will be captured by the regulatory regime.
The bill also broadens and clarifies the definition of a termination benefit, to capture all types of termination benefits. The bill provides a clear statement that a broad interpretation of the term 'benefit' should be taken, and requires that the substance of the payment should prevail over its legal form. This will address existing loopholes by ensuring that termination benefits that are disguised as other forms of payments will be captured by the regulatory regime.
In addition, the bill provides a new regulation-making power to prescribe certain types of payments which are, or are not, considered to be a termination benefit. This will clarify existing legal ambiguity on whether specific types of payments require shareholder approval. It also provides flexibility to quickly respond to any new methods of providing termination benefits which seek to circumvent the law.
The government will undertake further targeted consultation on the details of the regulations with industry.
The government has been responsive to submissions received as part of the public consultation process, and has decided not to change the shareholder voting arrangements.
A number of stakeholders identified practical difficulties with changing the timing of the shareholder vote until after the departure of the director or executive. Accordingly, the government has decided to retain the status quo which allows the shareholder vote to be held at any time prior to the termination benefit being paid to the director or executive.
Retaining the current timing requirements maintains the primary objective of these reforms, which is to provide shareholders with a greater ability to reject excessive termination benefits given to company directors and executives.
The bill also improves the integrity of the shareholder vote by ensuring that directors and executives who hold shares in the company cannot participate in the shareholder vote to approve their own termination benefit. This removes the conflict of interest which exists when a director or executive votes to approve their own remuneration, including their own termination benefits.
There is an exception to this requirement where the director or executive casts a proxy vote on behalf of another person who is entitled to vote, in accordance with the directions on the proxy form.
The bill also introduces an express requirement to immediately repay a termination benefit, where it has been given without seeking the necessary approval from shareholders. Directors and executives will continue to hold such unauthorised benefits on trust for the company. This will facilitate recovery of unauthorised benefits, particularly where they have not been repaid immediately.
The bill also substantially increases the penalties associated with paying a termination benefit without seeking the necessary approval by shareholders. Potential fines will now be set at $19,800 for individuals, and $99,000 for corporations.
This is intended to send a clear signal of the government's intention to crack down on termination benefits paid in contravention of the law. The new penalties will also provide a stronger deterrent and better reflect the seriousness of the offences.
The bill will not affect existing contracts, and will apply to all new contracts which are entered into, extended or substantially varied after the commencement date.
In summary, these reforms will strengthen the accountability of company management in providing termination benefits, and further empower shareholders to reject excessive termination benefits. These measures are designed to promote responsible remuneration practices, particularly with respect to termination benefits.
More generally, the government has tasked the Productivity Commission with undertaking a broader review of Australia's remuneration framework. This is a very wide-ranging review which will examine the existing regulatory arrangements that apply to director and executive remuneration for companies which are disclosing entities. The inquiry will also examine international trends and responses to the problems of excessive risk taking and corporate greed.
The inquiry will be led by the chairman, Gary Banks, and Professor Allan Fels AO has been appointed as an associate commissioner to assist with the inquiry. The other commissioner is Robert Fitzgerald. The commission will report by December this year. The Productivity Commission is a well-respected instrumentality which is well placed to consider all the issues and bring down a measured and balanced report which the government will then consider.
Finally, I can inform the chamber that the Ministerial Council for Corporations was consulted in relation to the amendments to the national corporate regulation scheme, and has approved them as required under the Corporations Agreement.
I commend the bill to the House.
Debate (on motion by Mr Billson) adjourned.