Sunday, March 08, 2009


The debate about this is worldwide and Australian fat-cats get peanuts compared to top businessmen in the UK and USA. But the issue has nonetheless arisen from time to time in Australia -- most recently in the case of Pacific Brands. I present below two well-argued cases for and against attacking extraordinary pay packets. I myself cannot see that there is any discipline -- market or otherwise -- on huge executive remuneration. I certainly feel that any firm which undergoes a substantial collapse during the year should not be allowed to pay its top executive any more than the average wage in that year. I am myself a shareholder in many leading companies (including Pac Brands) and feel that shareholders are constantly being robbed by company executives without any recourse at all being available to them. The idea that company boards exercise any effective supervision seems to me to be very seldom true. Company boards are mostly made up of "good ol' boys" who avoid like the plague any "rocking the boat"

The case against legal control

TIME to give credit where it's due. In spades. The Rudd Government appears to be keeping its head on executive remuneration when all about them are losing theirs. Malcolm Turnbull proposes to give shareholders a binding veto over executive remuneration and on ABC's Lateline on Friday night, Opposition families spokesman Tony Abbott went over the top in prosecuting the Turnbull proposal. Abbott dared the Rudd Government to act urgently to change the rules. "There is no reason why the Government couldn't, next week when parliament next sits, change the rules and say that shareholders should be able to vote down excessive directors' and excessive CEO's salaries."

Well, yes, Tony, there is a good reason. It is a really dumb idea, and a disappointing one to come from Liberal ranks, the party that is meant to be committed to sensible regulation of business. The Government knows giving shareholders the right to vote down executive pay is a dumb idea. Indeed, one hopes the Opposition does too, but they have the luxury of irresponsibility. The Coalition is revelling in the age-old power of oppositions to propose cheap, populist vote-winners safe in the knowledge no responsible government could ever enact them.

Mind you, all the politicians have been equally and disgracefully cheap in jumping on the bash-Pacific-Brands bandwagon. Between their fulminations, none has been honest enough to point out that the allegedly greedy bonuses were paid to Pacific Brands executives some time ago for their performance in the 2007-2008 financial year, a record year for the company. The payments were decided before the Lehman Brothers collapse triggered the full horrors of the global financial crisis. The directors of Pac Brands were as ignorant of what was to come as Wayne Swan, the boffins in Treasury and all our politicians. And the confected uproar about chief executive Sue Morphet's pay increase from $685,775 to $1.8 million failed to mention that her pay rose when she stepped into the top job.

At least Swan appears to be steering clear of what could become a race to the bottom on the question of executive remuneration. Though the Treasurer blusters about being "sickened" by the pay rises for Pacific Brands executives, he keeps his cool about doing much about it. The ACTU's chief class warrior, Sharan Burrow, is paid to foment envy so it's no surprise she wants executives financially disembowelled, but Swan has steadfastly played a straight bat about regulation in this area, whispering assurances that "ultimately, shareholders will hold their executives accountable".

The discrepancy between the Government and the Opposition was on striking display during the Lateline debate between Abbott and Agriculture Minister Tony Burke. In response to Abbott's challenge to legislate on executive remuneration urgently, Burke said while some work was being done on remuneration of Australian Prudential Regulation Authority-regulated institutions, there were limits on government interference between shareholders and a private company. Burke rightly taunted Abbott by asking him if it was so easy and desirable to change the law on executive pay, why didn't the Liberals do it when they were in government.

Enough of the politics. What of the policy? Why is it a bad idea for shareholders rather than boards to have the last say on executive remuneration? For starters, a prime reason for the success of a public company as an investment vehicle is that it recognises the difference between ownership and management.

Owners do not have the time, skills or energy to manage companies. They elect boards of directors to hire and fire managers, set their pay and oversee their work. In concept, it reflects representative democracy. We elect politicians to run the country for fixed, or relatively fixed, terms. At the end of that period, we can give them the boot if they have done a lousy job or re-elect them if they have done a good job. But between elections, we don't get to second guess or micromanage their decisions. Athenian-style democracy just doesn't work.

Representative democracy doesn't guarantee perfection. Governments often make mistakes. Sometimes terrible blunders. So do boards of directors, including on remuneration. But the right remedy is for voters to sack their elected representatives when given the opportunity to do so. For them to try to micro-manage the decisions of the board on specific matters about which the shareholders have no skills, information, resources or time to do a full analysis is a recipe for a vastly increased number of mistakes.

It is true that there has been agitation in recent years towards greater shareholder activism. Increased disclosure requirements enable shareholders to better exercise their traditional rights: to vote at board elections and vote with their feet. Shareholders get to vote on share issues and on major mergers and acquisitions because those matters go directly to the fundamental nature and structure of their investment.

Determining remuneration is entirely different. It is a quintessentially operational matter. To give shareholders a binding vote on remuneration crosses the Rubicon. It would mark the first time shareholders have been given an executive power traditionally vested in directors. It beggars belief that the Liberal Party is willing to overturn such proven principles.

There are plenty of other good reasons why shareholders should not have the last say on remuneration of public company executives. Such significant shareholder power would cause a stampede of talent out of public companies to private entities. Indeed, why work in Australia at all? Why not join the already significant Aussie diaspora in Hong Kong, the Middle East, New York or London?

We need to learn from the New Zealand brain-drain that their new Prime Minister is trying manfully to reverse. In a globalised world, talent flows from the area of highest regulation to the least. While some loss of local talent is inevitable because we can never, and should never, match the jurisdiction of least regulation, why make it dramatically worse in return for no real benefit?

Finally, there is the need to not strangle incentive. Regrettably the Coalition-which should have this buried in its DNA-seems to be pandering to the opposite instinct. They are now beset with the jealousy and class war gene. We accept easily the vast amounts paid to golfers, tennis players, rock stars and actors. No one ever whines about the pay discrepancy between a key grip and lead actor. Why do we constantly invoke such meaningless comparisons in the corporate sphere? We should be encouraging our best and brightest to run our most productive enterprises. While it may presently be fashionable to complain about the undoubted mistakes in executive compensation, let's not substitute a system that drives talent out of our key businesses.


The case for legal control

I guess it was inevitable that, at a time when companies are laying off workers by the thousands, we'd see a revival of public outrage over the huge salary packages and exit payouts of chief executives. The suspicion arises that senior executives actually award themselves bonuses for their fortitude in undertaking the distasteful duty of depriving fellow employees of their livelihoods. But the public has been utterly disapproving of exorbitant executive salaries for at least 20 years. Liberal and Labor leaders have often echoed that condemnation without there being any noticeable slackening in the rapid rate at which remuneration has continued increasing.

So the question is whether the present outrage will lead to any genuine attempt by the Government to curb executive remuneration, or whether we'll get more angry words and not much else. It will be a big test of Kevin Rudd's professed desire to reform "extreme capitalism" and have social democrats such as himself correct the depredations of the evil "neo-liberals". Don't hold your breath.

I'd be happy to defend high executive remuneration if I believed it was, as many executives claim, a product of market forces. In truth, it's more easily explained as an instance of market failure. It's just not possible to believe the ever-growing sums these executives are paid bear any relationship to the value of their contribution to their company's success. There doesn't seem to be any correlation between executives' pay and their company's profits or share price. When the sharemarket soars and the economy booms their remuneration rockets. But when, as now, the market plummets, the economy turns down and company profits take a dive, we might see, at best, senior executives forgo an annual increase.

Executives will tell you all they're doing is keeping up with the going rate. Each year company boards employ independent remuneration consultants to advise them on the adequacy of their executives' pay. This is a racket. The truth is that paying for independent advice is a contradiction in terms. Inevitably, anyone who's selling his advice will sell the product the customer wants. It's called capitalism. In practice, a handful of remuneration consultants endlessly work their way round the circle of listed companies telling each that their pay levels are below the norm. In the process, of course, they keep bidding up the norm.

The reason executive pay seems to be in a stratosphere all its own, unrelated to market realities, is that it's not set at arm's length. Directly or indirectly, chief executives have too much say in the setting of their own remuneration. Within big companies, the yawning gap between senior executives' salaries and those of everyone else - the double standards in the setting of salaries - is a cause of sullen resentment and passive resistance. If senior executives are aware of this non-co-operation, it doesn't worry them enough to prompt them to change their behaviour. Which raises a question that's long fascinated me: how can they keep it up? How can they keep living by double standards their fellow company employees and the community find so repugnant?

You could explain it simply in terms of their greed (and our envy), but that's too simple. Most of these people are motivated far less by money and far more by power and status. They're working far too hard to gain much enjoyment from their possessions. Their yachts are usually moored all weekend. They regard their salaries as points in the game - the more points they amass, the more they see themselves as winners. No, I think they've convinced themselves they're members of a different race to the rest of us. They're Arians and we're not. They maintain this fiction by careful choice of what sociologists call "reference groups" - the circles of society with which they compare themselves and which they seek to impress.

So if you're a senior executive you compare your salary only with those of other senior executives - in your own company and in other companies in your industry. And you always compare up, never down. It wouldn't surprise me if most of these people secretly believed they weren't doing all that well in the pay stakes and that it was all quite unfair. "I'm just as good as Joe Blow at XYZ Limited - better, actually - so how come he's getting 30 per cent more than me?"

It's a mistake to think politicians have done nothing to curb executive pay. One thing they tried was requiring more detailed information in company annual reports about who was getting what. It backfired. Rather than prompting moderation, it armed senior executives with greater knowledge of what their rivals were getting and motivated them to try harder to catch up with and overtake those rivals.

Next a government imposed the requirement that senior executives' salary increases be put to the vote at shareholders' annual meetings. Trouble is, the vote is indicative of shareholder feeling, but not binding on the company. It turns out to be hard to muster a no vote among all the big institutional investors that hold most of the shares in our public companies and, even then, some no votes have been ignored. Even so, I like Malcolm Turnbull's suggestion for such votes to be made binding - as far as it goes. Where proposed salary increases were rejected, directors would have to come back to an extraordinary shareholders' meeting with an amended proposal. That would be expensive and cumbersome, of course, but that's the deterrent. It would motivate boards to ensure their first proposal was sufficiently moderate as to ensure its approval. New chief executives could be hired on no more than their predecessor's package pending shareholder approval.

But the community deserves a say, not just shareholders. If it had the courage, the Rudd Government could register the community's disapproval by removing the company's tax deduction for salaries in excess of, say, $1 million. Or salaries in excess of $1 million could be taxed in the executive's hands at the penalty rate of, say, 60 per cent. The point is that enough should be done to firmly register on senior executives' minds the community's censure. "Your behaviour is anti-social and we desire you desist."


Victoria's new top cop sounds a lot tougher than his squishy predecessor

His fat Lesbian-loving predecessor was simply out of her depth, which she eventually realized and resigned -- not before corruption ran riot in the force, however. So much for the "affirmative action" mentality that put a woman into the top police job despite her slender qualifications for it

Underworld solicitor Zarah Garde-Wilson should not be able to practise as a lawyer, according to Victoria's new top cop, Simon Overland. And in a candid interview with the Sunday Herald Sun, the Chief Commissioner has argued for the worst sex criminals to be locked away for life. Days into his new role at the helm of Victoria's 11,000-strong police force, Mr Overland has also:

REVEALED his secret real-life role in the events now dramatised in the controversial second series of Underbelly;

STATED footballers are role models whether they like it or not and need to be careful of the company they keep; and

TOLD how, at the height of the gangland war, organised crime figures were agitating for a Royal Commission to slow down police investigations.

Ms Garde-Wilson, former girlfriend of slain gangster Lewis Caine, has in recent years beaten gun and perjury charges and efforts by professional watchdogs to ban her from acting as a lawyer. She was accused in court by an AFP agent of tipping off a criminal that charges against him were imminent.

Asked if he believed Ms Garde-Wilson should be able to continue practising, the Chief Commissioner said she should not. "My personal view - no," Mr Overland said. He said he was not criticising the decision that allowed her to remain a lawyer, but was adamant in his view she should not be permitted to practise.

But the Commissioner's most powerful words were reserved for the issue of punishing sex predators in the community. "I have a view that there are some people who represent such a danger to our community that they should just be locked away and they should just be locked away forever and never be released," he said. "And I don't know if we do enough of that. "If someone is a genuine sexual predator, if someone is a genuine pedophile - I'm careful here because a lot of people get branded with those labels and there's a question whether they are - but if they are, they will be a threat to the community for their entire lives. "And I'm very much behind just saying, 'Well, that's it, it's a community safety issue, lock them away. Life means life'."


Bankrupt public hospital partly closed down

Bed numbers have been slashed this week at Sydney's biggest hospital, in a round of ward closures aimed at reining in a $70 million blow-out in the region's health spending. Ten of 16 operating suites have been closed and elective surgery has been cancelled, with staff forced to take leave, sources said. Forty-three cardiology and heart surgery beds have shut since late last year, said medical and nursing staff, culminating last week in the closure without notice of the heart surgery ward - which staff found empty and locked when they arrived for work.

The unprecedented axing of about 70 beds comes after the Herald revealed in late January that Sydney West Area Health Service, which oversees Westmead, owed $26 million to creditors - more than any other region and almost a quarter of NSW Health's outstanding debt to suppliers at that time.

Neurosurgery and general surgery beds have also closed, said the sources, while casual nursing shifts have been curtailed across the entire hospital, as displaced permanent staff are redeployed into vacancies on the roster. The closures represent about 9 per cent of Westmead's total capacity, and are the biggest round of cuts at a single hospital to strike the beleaguered state health system. The chairman of the hospital's Medical Staff Council, Andrew Pesce, said the closures were by far the most severe the flagship teaching hospital had seen. "It's a quantum leap [compared with] the modest bed closures usually built around [public] holidays," Dr Pesce said.

Coming a month before Easter and without any promise that beds would reopen or surgery resume, the closures were the equivalent of an extra Christmas closedown, said Dr Pesce - referring to the practice of selectively suspending services during the holiday period to save money. "If things continue the way they are going, the morale of the place will become so low that doctors and nurses will start leaving," he said. Hospital managers were not solely to blame because NSW Health gave them "unrealistic budgets".

Public hospitals had traditionally been insulated from state spending cuts, Dr Pesce said, but NSW's wider financial crisis meant they were no longer receiving favourable treatment. Health accounts for about one-third of the state's spending, and had blown out by about $300 million at the time of November's mini-budget. Area health services were ordered to save $943 million over four years.

A spokesman for the Health Minister, John Della Bosca, declined to address the Herald's specific questions about closures, offering instead in a written statement: "There have been adjustments to bed platforms and relocations of some services within Westmead's overall funding base . Westmead has further capacity to improve bed utilisation and this is a priority for management attention in the relevant services as part of the operational strategy." He also did not answer a question about the number of patients whose elective operations were cancelled, instead insisting elective surgery was still available but saying the hospital was "under resource pressure and needs to ensure that its priorities are met but not exceeded and that all opportunities to ensure it operates efficiently are explored".

The president of the NSW branch of the Australian Medical Association, Brian Morton, said he understood patients would be moved to general wards under the care of "staff who don't have the same skills". Patients would be at risk if already overcrowded hospitals were further stressed. .. That's when mistakes happen."

The Opposition's health spokeswoman, Jillian Skinner, said the closures would endanger patients. "The evidence is quite clear that delayed treatment makes conditions worse and makes the hospital stay longer - and therefore more expensive."


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