The Rudd Government has today tasked the Productivity Commission (PC) with examining Australia's framework in relation to the remuneration of directors and executives.
Professor Allan Fels AO has been appointed as an Associate Commissioner to the PC to be a key member of the examination. The Productivity Commission Chairman Gary Banks will preside over the examination along with Commissioner Robert Fitzgerald.
Unrestrained greed in the financial sector has led to the biggest global recession since World War II. It has now spread across the world and instigated significant slowdowns in the US, Europe, China and caused more than 50 banks to collapse and millions of jobs to be lost.
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 Rudd Government is determined to ensure regulation of executive pay keeps pace with community expectations, particularly as job losses increase as a result of the global recession.
This will be a broad-ranging examination that will consider the existing regulatory arrangements that apply to director and executive remuneration for companies that are disclosing entities under the Corporations Act 2001, including shareholder voting, disclosure and reporting practices.
The inquiry will also examine international trends and responses to the problems of excessive risk taking and corporate greed.
Professor Fels brings a wealth of experience to the role; he has worked in the area of competition and consumer regulation for 16 years, including serving as Chairman of the ACCC from 1995-2003, and he is currently the Dean of the Australia New Zealand School of Government.
The Rudd Government has made it clear that it will examine all workable options with regards to executive remuneration.
The Government has today also announced reforms to the regulation of termination payments – or "golden handshakes".
The Productivity Commission is required to provide a final report within nine months of the date of the receipt of this reference. This review will complement the work already being undertaken by the Australian Prudential Regulation Authority in relation to executive pay in financial institutions.
As part of the review process, the Commission will provide an opportunity for public participation. All interested parties are invited to make a submission.
To register an interest in the inquiry or to find out more, details are available from the Commission at www.pc.gov.au or phone 02 6240 3239.
The terms of reference for the review are attached.
18 March 2009
The Productivity Commission (the Commission) is asked to undertake an inquiry into the current Australian regulatory framework around remuneration of directors and executives, as it applies to companies which are disclosing entities regulated under the Corporations Act 2001 and report within nine months of the date of receipt of this reference.
This review is intended to complement the work already underway in relation to executive remuneration practices by regulated financial institutions. Last year, the Prime Minister announced that the Australian Prudential Regulation Authority would develop a template that links capital adequacy requirements to executive remuneration practices in order to limit excessive risk taking in financial institutions.
The remuneration of company directors and executives is an issue which has attracted considerable interest from shareholders, business groups and the wider community. Concerns have been raised over excessive remuneration practices, particularly as we face almost unprecedented turmoil in global financial and equity markets.
The current global financial crisis has highlighted the importance of ensuring that remuneration packages are appropriately structured and do not reward excessive risk taking or promote corporate greed. The crisis has also highlighted the need to maintain a robust regulatory framework that promotes transparency and accountability on remuneration practices, and better aligns the interests of shareholders and the community with the performance and reward structures of Australia’s corporate directors and executives.
It is also important to recognise that internationally competitive reward structures for company directors and executives continue to provide incentives for directors and executives to assume leadership responsibilities within corporations.
Internationally, remuneration practices have been raised by various forums as a contributing factor to the global financial crisis. The Group of Twenty (G-20) and the Financial Stability Forum (FSF) are both examining remuneration issues to ensure effective governance and oversight of executive remuneration is part of their responses to the crisis. In addition, the United Kingdom and the United States have imposed conditions on remuneration for entities that have received the benefit of recent corporate bailouts and government assistance packages.
In undertaking the review the Commission should:
The Commission is to undertake an appropriate public consultation process including the invitation of public submissions.