Bill Shorten's Testimony to the Parliamentary Joint Committee on Corporations

AWU National Secretary Bill Shorten and Corporate Research Officer Trent Gillam addressed the Federal Parliament's Joint Committee on Corporations and Financial Services inquiry into the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Bill 2003 in Melbourne.

ACTING CHAIR (Senator Conroy) Welcome. The committee prefers all evidence to be given in public, but
should you at any stage wish to give any part of your evidence in private you may ask to do so and the committee will consider your request. The committee has before it a written submission from the AWU--submission No. 47. Are there any alterations or additions you would like to make to that submission at this stage?

Mr Shorten There are some additional issues on three points which I would like to speak to.

ACTING CHAIR I invite you to make a brief opening statement.

Mr Shorten The Australian Workers Union welcomes the opportunity to talk about the bill which we call CLERP 9, looking into positive reforms to corporate law in Australia. We have put in a written submission. We think in essence the bill is a good step forward, but perhaps in some areas it could afford to go further. The Australian Workers Union represents tens of thousands of workers across a range of industries. Many of our members work in the private sector and for publicly listed companies. Our members are the ones who suffer when there are corporate
collapses. Unfortunately, we have had members involved at Ansett, Pasminco, Tasmanian salmon and a range of other companies that have been in difficult circumstances and faced insolvency, so we believe that the efficient administration of corporate law is fundamental to
employment security for our members.

Specifically, we think that CLERP 9 will have some positive impacts on corporate law in Australia. There are certainly measures designed to improve the reliability and credibility of financial statements through enhanced auditor independence. We believe that there are improved
enforcement arrangements, which we also support. There are also some measures to better allocate and manage risk. Our specific submission to this inquiry is around audit reform,
executive remuneration and penalties for breaches of the Corporations Act 2001. At the outset I indicated that the Australian Workers Union believes that, whilst CLERP 9 is a positive first step, the audit reforms contained within it are insufficient to protect auditor independence. In
particular, we hold the view that there are difficulties maintaining auditor independence when auditors also undertake lucrative non-audit work for audit clients. We believe that auditors should be prevented from undertaking certain non-audit work for audit clients, such as accounting, bookkeeping services, valuation services, actuarial services, the resolution of legal disputes and internal audit services.

The second part of our submission focuses on executive remuneration. The Australian Workers Union favours increased disclosure of executive remuneration. We certainly believe companies should be required to disclose the remuneration of the 10 highest paid company officers. We certainly believe that companies should additionally be required to disclose comprehensive details of employment contracts with senior employment executives, including

'golden hellos' and 'golden goodbyes'. Furthermore, we believe that shareholders should be allowed to make non-binding resolutions on the levels of executive remuneration in order to provide guidance to the board on the levels of remuneration they consider to be acceptable.

We do not accept the argument that increasing transparency in executive remuneration will increase average executive remuneration. We support the prohibition on the granting of options and the payment of bonuses and retirement benefits, other than statutory superannuation to non-executive directors, and we certainly support the requirement to fully disclose equity value protection schemes. We do not agree with the Business Council of Australia where they oppose the reporting or disclosure of
the remuneration of the 10 highest paid executives. The third area that we want to make a submission about is penalties under the Corporations Act. We believe that the penalties under the Corporations Act should be at least double their present levels. On all three propositions, we
broadly support the ALP's current position on CLERP 9.
There are three or four additional matters that I wish to briefly draw the committee's attention to.

The first matter is the issue of infringement notices by ASIC. The CLERP bill proposes allowing ASIC to issue infringement notices to companies for breaches of the continuous disclosure regime. The bill proposes a number of limitations, however, of ASIC's power to issue
infringement notices. Specifically, the bill proposes that, before issuing an infringement notice,
ASIC will be required to hold a private hearing at which the entity would be given the opportunity to give evidence and make submissions.

The bill also proposes that compliance with an infringement notice is not to be taken as an admission by the entity of liability, or as a contravention of the Corporations Act. Furthermore, if the entity does not comply with an infringement notice, the bill certainly requires that ASIC should go to court and prove its case. With the protections proposed within CLERP, it is difficult
to see how the infringement notices could be abused. We believe there are clear benefits of the infringement notices, in terms of making them simpler to use. They certainly have the potential to reduce costs associated with enforcing the continuous disclosure rules.

One aspect of the infringement notices which has attracted criticism from business is that, if the entity decided to comply with an infringement notice, ASIC could be allowed to publish in the Gazette a copy of the notice or an accurate summary of the notice for the purposes of media
reporting. We believe that the positive reporting of companies accepting infringement notices will in many ways--even more than monetary penalties--be a way of promoting better corporate behaviour. It is our experience in a range of other legislative regimes that alternative
penalties, such as notices, have a way of focusing companies as much as monetary fines. We have certainly seen it with the Esso corporation, which was fined $2¼ million for a number of breaches of the occupational health and safety legislation. For a company of that size it was a speeding ticket, whereas we have found that the publicity that it has attracted from trying to blame its workers has had far greater impact. We believe that the corollary certainly applies in corporate governance and regulation.

If infringement notices are introduced, the BCA is arguing that a third-party panel should be involved in the decision to issue these infringement notices. We think that is a ludicrous watering down of ASIC's role, unless the BCA is proposing that the third party be someone other than a business, which might well be a panel of trade unions--which is unlikely to be BCA's position.

The second issue we want to briefly touch upon is auditors reporting alternative financial treatments discussed with companies. The AWU supports another proposition that has been raised by the ALP which requires auditors to specifically report to shareholders on alternative
treatments of financial information that have been discussed with management, the ramifications of the use of these alternative treatments and the treatment preferred by the auditor. We believe that this would make it more difficult for companies to choose more favourable methods of packaging financial information without shareholders being made aware of the alternatives.

The third additional point we wish to make on the CLERP 9 bill is regarding the maximum number of directorships. We believe that directors in public listed companies should not assume too much responsibility by accepting a number of multiple directorships. The Australian Workers
Union believes that the maximum number of directorships a person is allowed to hold in public companies should be three. We note that the Australian Shareholders Association said that the chairmanship of a listed company is the equivalent of three directorships and that the maximum number should not exceed five. We think that the stewardship of three publicly listed companies is a very important responsibility and we are seriously sceptical of the ability of the professional director class to focus upon a number of different directorships. We have looked at the directorships of a number of prominent people who have been involved with Ansett, NAB or Pasminco.

Margaret Jackson is currently the Chairperson of Qantas and a director of the ANZ Banking Group, Billabong International and John Fairfax Holdings--she is very busy. We regard that as an excessive number of positions.

Graham Kraehe is Chairman of BlueScope Steel, is currently involved with the National Australia Bank, and is a director of Brambles, News Corporation and other organisations. We think it is impossible to be able to pay the necessary attention to all those tasks, especially in the case of these individuals as chairpersons. We know Catherine Walter is a director of the Australian Stock Exchange Ltd, Orica and a range of other non-publicly listed companies. We seriously question whether or not this director is able to focus on all of the directorial
responsibilities required across a wide range of companies. Charles Goode is the Chairman of the ANZ Banking Group, Woodside Petroleum, Singapore Airlines and other companies just a very busy portfolio.

To look at some of the companies that have been at least controversial and, in the opinion of the Australian Workers Union, have underperformed on their shareholders' expectations: Charles Allen, before he resigned, was a director of Amcor, AGL and Air Liquide. Brian Clark was
Chairman of Vodafone Holdings in Japan, a non-executive director of China Mobile Ltd, and chairman and board member of a number of Vodafone Group companies. Peter Duncan is a director of Orica, GasNet and CSIRO and chairman of Scania Australia. Kenneth Moss is a director of Adsteam Ltd and GPT Management Ltd and Chairman of Boral Ltd and Centennial Gold. Geoffrey Tomlinson is a director of Reckon Ltd, Funtastic Ltd and Program Maintenance Services, Deputy Chairman of Hansen Technologies Ltd and a director of Amcor. Edward
Tweddell is Chairman of Ansell and a director of the Australian Postal Corporation and CSIRO.

These are very busy NAB directors before we even get to their NAB responsibilities. AMP Ltd were of course involved with the not so successful GIO venture. Peter Willcox is the Chairman of AMP and of Mayne Group at the same time. Richard Grellman of Atlas Group Holdings is Chairman of Cryosite Ltd and the New South Wales Motor Accidents Authority. Meredith Hellicar is a director of James Hardie Industries in the Netherlands, the New South Wales Treasury Corporation--that will be interesting--the Southern Cross Airports group, Amalgamated Holdings and other companies. Peter Mason is Chairman of JP Morgan Chase and a director of the Mayne Group and Pasminco, who employed many of our members, and Chairman of NAB. Mark Rayner was the Chairman of NAB and Mayne Nickless and a director of Boral. The list goes on, and I will table the list of some of the companies that we have noted, but these people clearly are struggling with the number of directorships they have if you judge the performance of some of the companies they have been in.

The gene pool from which the directors is drawn is too small and too limited, and with the cynical gender appointment of an even smaller group of women directors who are the names to have on these company boards it is
very difficult to argue wage restraint or to argue the benefits of restructuring to the people on the shop floor when there is such a small group of people whose names constantly reappear time and time again in corporations. Certainly when you look at the performance of some of these
corporations it is a wonder how they keep getting reappointed.

There is one final issue that we wanted to raise in terms of CLERP 9. We have had a look at some of the examples of company underperformance and we would go to changes to due
diligence in hostile takeovers. It is a difficult area. We are concerned about the manner in which companies, when they make hostile takeovers, mergers and acquisitions, conduct appropriate due diligence in regard to these potential acquisitions. We have in mind HIH's acquisition of FAI, AMP's acquisition of GIO, Air New Zealand's acquisition of the remaining 50 per cent of Ansett from Murdoch, Pasminco's acquisition of Savage Resources, and the Commonwealth Bank's acquisition of Colonial.

We do not know how people could miss the $32 million payment to Chris Cuffe of Colonial; how Air New Zealand could miss some of the problems within Ansett that my members who are engineers there could have told them about; and how Pasminco, in the Savage Resources merger,
could have missed some of the issues around the hedging which sank Pasminco. The list goes on. We recognise that it is difficult to conduct due diligence in the climate of a hostile takeover. We are severely sceptical as to whether any of the due diligence undertaken took more than a visit to Dunn and Bradstreet or the use of publicly available information that a first year economics student could have discovered. In our opinion, the due diligence of some of these organisations and these failed mergers or failed acquisitions was based on a combination of
insufficient attention to that due diligence combined with an attitude of: 'We have a very large balance sheet, therefore we cannot make a mistake--size will triumph over everything.'

We acknowledge that the Corporations Act does require directors to carry out their duties to the standard of a reasonable director and that it is difficult for the target of a merger to willingly hand over all of its financial details and business strategies to the potential predator business. We do believe, however, that there needs to be some standard which requires more than just
arrogance about the size of the balance sheet of the purchasing company or the target company.

One option could be an independent auditor who is required to report the results of the due diligence without revealing the necessary commercial and business strategies of the target company. Another alternative would be to provide some legislative direction to the reasonable
director tests that have been laid down in the court system. They are the points we wanted to address.

Senator MURRAY Dealing with chairs of publicly listed companies first, how do you react to the proposition that, firstly, they cannot be executives and, secondly, they should not have more than one chair? It would not prevent them from being directors elsewhere, and I would exclude related entities from that prescription.

Mr Shorten Certainly, if the chair is involved with a related entity, that may be consistent with the overall holding company's business case and proposition. Dealing with the second part of your question first, we believe that seriously chairing a major Australian listed company
which employs our members and also may have the superannuation investments of our members in it is a serious responsibility.

Just as we believe that politicians should not have second jobs while they are politicians and just as there is a prohibition on full-time union officials carrying out another full-time job, we think that being a chairperson of a major company, such as Qantas, Blue Scope Steel, Pasminco or a bank requires all of your attention. We are seriously sceptical that they could do much more than one other directorship with that function. We certainly do not support people being chair of two publicly listed companies at the same time. We think that the attention to detail and the leadership required from that position precludes the effective execution of those tasks,
acknowledging your caveat about related entities.
In terms of the role of a chair being non-executive, I think that leads to two issues. The first issue is that I think it is difficult for a chairperson not to take some fairly time-consuming role in the organisation. I think it is appropriate to have a CEO and senior management team who are tasked with the operational conduct of the business. In my experience, a wise CEO would involve the chairperson to a large extent. So where one draws the line between being an executive chairperson and an independent chairperson can become blurred, depending on the amount of time that someone spends. We do not have a final and fixed position on that distinction.

What we would say, however, is that one benefit may be director rotation. After a certain number of years, an independent director becomes sufficiently involved with the organisation, so we do support director rotation after a 10-year period. We think it would be difficult ultimately
not to have seen all the challenges that a company will raise over a 10-year period. Obviously, you cannot change a whole board in one hit, as one director at NAB is proposing at NAB; that would certainly damage the share value. We think the constant bringing in of new blood to
organisations at the board level, at the senior level, makes sense. One way we get around some of the issues of the chair is that you put a 10-year rotation rule onto these positions.

Senator MURRAY I am going to have to go soon to catch an aeroplane so I want to switch to another topic--the remuneration issue. I think there are two distinct issues, although they sometimes coalesce. One is remuneration of executives and the other is remuneration of
directors. The evidence from this committee from what I will loosely term the director class is that directors properly should have their remuneration assessed by shareholders, but the remuneration of executives is the responsibility of the board.

Dealing with directors first: at present, a binding vote is required on any part of the remuneration package which relates to equity, but the cash component does not require a binding vote and the proposal is that there should be a non-binding vote with respect to this area. Personally, I think that is nonsense, because I think the entire package for directors--both the cash component and the non-cash component--should be a binding vote. How do you react to
that?

Mr Shorten Let me just make sure I have understood your question: is it about distinguishing executive remuneration from independent directorial remuneration?

Senator MURRAY No. Do not concern yourself with whether someone is an executive at the moment; just deal with someone who is a director. The question is whether the shareholders should approve the remuneration, both cash and non-cash, which would require a binding vote.
The important thing to recognise is that a binding vote is already required for the equity side of things.

Mr Gillam Our view would certainly be that the most important thing about directors' remuneration is the total remuneration they receive. In that respect, having an additional nonbinding shareholder vote specifically on cash remuneration seems to be an unnecessary extra step.

Senator MURRAY The second aspect relating to directors' remuneration is whether there should be a compulsory vote. There is no compulsory vote at present; a binding vote is required. One of the issues being considered is whether compulsory votes should apply generally for resolutions. The view of the Labor Party is that it should apply for super funds. I do not disagree
with that; I just believe it should also encompass other funds and I believe it should encompass subject matter as well. The subject matter I am particularly interested in is directors. Do you agree with the concept of a compulsory vote where you can apply it? We all recognise that you cannot apply it to mums and dads; we are talking institutions here. Do you think it should cover subject matters as well as institutions?

Mr Shorten Whilst I do not appear in this capacity, I am a director of the Superannuation Trust of Australia, which is quite a large industry fund. It has about $4.6 billion. We have discussed that matter, and we have certainly been very active in people exercising their vote on a range of issues, not just remuneration issues. We think that is important. Speaking for the Australian Workers Union, whilst we have not canvassed that matter at our national executive, I believe that the default position of our union would be that we do support compulsory voting.

The range of the subject matter to which we extend that beyond remuneration is something we have not turned our minds to. Having said that, I believe once again that the attitude of our senior officials would be that it is appropriate to try to exercise compulsory voting. We think that a corporation will function more efficiently if there is a forced, active interest from all of the shareholders, rather than simply leaving it to a few institutions and the board of the company to make all the decisions without the scrutiny of voting.

Senator MURRAY We have discussed the process by which shareholders should approve directors' remuneration, and I think that therefore covers executive directors. But we need to pay attention to executives who are not directors. I am of the view that shareholders should have the opportunity to approve what I would regard as unusually high, excessive, extravagant--use whatever adjective you like to cover it--remuneration. I have been thinking of something like 20 times MTAWE, or average weekly earnings, which would be about $1 million.

Mr Shorten Twenty times what base?

ACTING CHAIR MTAWE.

Senator MURRAY Or average weekly earnings; we could use that measure if you like. It would be about $1 million a year. I think the executive class have been taking shareholders for a ride and we need some mechanism whereby shareholders are given back power. How would you view a situation which broke the current convention, which is that the directors determine all executive salaries, and which said that in certain instances the shareholders should have a say, particularly where the packages are particularly large? I should indicate that that already is the case for equity related plans.

Mr Shorten The Australian Workers Union, through our experience of having members in a range of large companies and also through the investments of superannuation funds in the Australian equities market, have the very clear view, consistent with a volume of research that has been produced, that there is no correlation between superior performance and superior
executive salaries. We are very supportive of shareholders being involved in the processes for the very top percentiles of the company so that they have a say in what the executive packages are. We think that will not lead to a race to inflated executive returns. All of the enterprise
agreements that our members are party to are on the public register, and that has not led to a giant wages outbreak.

Senator MURRAY Good point.

Mr Shorten In addition, we agree with much of the question that you put. The performance of executives has been a sort of vaguely masonic ritual. I mean no disrespect to the masons, but it has been a vaguely secretive ritual, which is not at all clear to the employees of companies or shareholders.

ACTING CHAIR I want to talk briefly about the 'ratcheting up' argument of the Business Council. I am sure you have seen their comments and their submissions. They believe that further disclosure of salaries of the top 10 executives--up from the top five currently--would
ratchet up executive salaries. I think you have been a bit harsh. This argument of comparative wage justice is something that it is unusual for the Business Council of Australia to advance. It is going back to the good old days. I thought we were more interested in productivity, enterprise bargaining and that sort of stuff, but if they want to advocate a return to comparative wage justice why would we object?

Mr Shorten A bit like the previous question, the most suitable answer would be yes. The argument of the Business Council--that they will not get superior directors because if you reveal the wages and conditions of senior executives and directors in some fashion this will lead to an inflationary wages spiral in the Australian senior executive market--does not work, because we are already told that it is difficult to find good directors and good senior executives. That is where there is no transparency in wages and conditions. We think that companies having more information about what is happening will not lead to a ratcheting up; what it will lead to is a linking of performance to executive remuneration, which is appropriate. The Australian Workers Union are not against successful companies paying senior executives lots of money, but we do believe that, unlike the workers, who tend to get paid much less and have to bear the risk of job
losses when companies underperform, there is very little upwards accountability of directors. We think transparency will in fact add to accountability.

ACTING CHAIR The previous Parliamentary Secretary to the Treasurer, Senator Ian Campbell, said that the government would require up-front and real-time disclosure of executive contracts. The CLERP 9 bill fails to implement this requirement. I know you have been involved--unfortunately for you and for the members of your union--when some companies have collapsed. Have you experienced a situation where executives received large payouts, then
ultimately the company folded and your members lost their jobs and entitlements?

Mr Shorten The Australian Workers Union represented several hundred maintenance engineers at Ansett, and the waste of money which went on in the senior reaches of the company was staggering. We understand that, when the administrators went through the company and the
levels of people, they found that something like 50 senior executives were earning more than $200,000 a year--or it might have been 20 executives earning more than $500,000 a year. Either way, you had $10 million being paid to a class of managers who presided over a collapse.

At Pasminco we were the largest union representing people at the smelters and at some of the mines in Tasmania and Queensland. The board of Pasminco, in our opinion, has been remarkable unaccountable. The company collapsed because it got into hedging, which it did not understand;
it overcapitalised Century Zinc mine at a time when zinc prices were decreasing globally. Yet these directors pop up in new companies as if nothing has ever happened. Unfortunately, now we have seen the Newcastle smelter closed, we have seen job cuts at Rosebery in Northern
Tasmania, Risdon and Hobart, Broken Hill and the Elura mines in western New South Wales--yet these Pasminco directors operate in a state of a blithe, naive nature, where they move on to the next directorship.

So we absolutely reject the notion that transparency will allow some sort of ratcheting up of wages. We absolutely reject the notion that transparency will lead to some failure of management. There is no doubt that the Australian stock market--not so much this year, thank
goodness, but over the last two years--has significantly underperformed, and it has underperformed with the superannuation money of our members who have accounts of $30,000 and $40,000. But you have got a very small number of directors who are of professional director class running around. Any director can make money in a bull market; it takes genius to make it in a bear market. Unfortunately, most of the directors and supporters of the Business Council proposition have proved they only have the Midas touch when they are working in a goldmine--
and they have even managed to trash that in a number of very significant Australian companies.

ACTING CHAIR I wanted to talk about the members of your superannuation fund and shareholder activism. You had a brief discussion with Senator Murray on the issue of voting, mandatory or otherwise. A number of unions have already moved to voting 100 per cent of the time and there are some proposals to mandate super funds to vote. I think you mentioned that you have not had a chance to consider this yet; is it something that is on your agenda?

Mr Shorten The submission into corporate governance has not been a traditional area for our union, but we will ignore the performance of companies at our peril in the future. I have no doubt, using my crystal ball, that our union will support, when it is discussed at our national
executive, the issue of compulsory voting on a range of issues within company performance.

Unions face elections every four years and politicians face elections every four years. We are supporters of compulsory voting. What is interesting, however, is that in corporations, if votes have to be exercised, people do look at some of the issues more carefully than if there is no requirement to look at the issues.

ACTING CHAIR You mentioned the ASIC infringement powers. I think you said you support the infringement powers for continuous disclosure. Have you had any experience with companies that have not disclosed to the market and therefore, ultimately, they have failed or
had significant troubles which have led to your members losing their jobs and/or their retirement benefits?

Mr Shorten There is no question that, in our experience, the mere requirement to have an annual balance sheet and look at what is on it is in no way a guarantee of what is actually happening. We certainly believe that if ASIC had a wider range of administrative powers it could
focus on the performance of companies, including continuous disclosure issues. Most external auditors ultimately rely on the honesty of the information they are being given. It is very difficult to legislate against dishonest behaviour or prevent dishonest behaviour. However, you can only wonder what the auditor of Harris Scarfe was doing when there was no inventory to back up
what was said to be in the books. You can only wonder.
There is an apocryphal story which could apply to audit, where fund managers come to the board of a superannuation company and say: 'Invest with us because we're real tyre kickers. We go out and investigate companies. We really know what's going on.' You find out they have lent $100 million to a Chinese-Malaysian businesswoman who had hired actors the day before the fund managers came out. The actors worked in the factory during the day. The fund managers--19-year-olds in pinstripe shirts--came out, had a nice lunch, saw the workers on the floor and left, and then the actors were laid off and the $100 million that was lent was gone.

We believe that most of the audit firms work very hard, but it is very hard for them. They rely on the quality of the information they are given. It is the same with independent directors. The first question we ask when we meet the directors of companies that we organise into the union is, 'How do you know what the balance sheet says is correct?' They will generally say to us, 'Someone's told us.' Then we ask the senior accountant, 'How do you know?' and they say, 'Because we have it on an SAP computer accounting program.' Then we ask, 'Who inputs the data?' and it will generally be a 19-year-old putting in the data. That is not a failsafe mechanism, so we are keen to see ASIC enjoy greater powers to seek administrative solutions to improve continuous disclosure.

ACTING CHAIRThat concludes all the questions I have. Thank you very much.

Committee adjourned at 5.03 p.m.