Big business has hit out at the Federal Government over its latest push to rein in huge executive pay packets.

The Government has not only endorsed the Productivity Commission’s inquiry into the way executives are paid, it has gone a step further by proposing a rule that would claw back bonuses from corporate cowboys who fail to deliver on their promises.

The Shareholders Association thinks it is a good idea, but company directors question whether the idea is workable.

Finance Minister Chris Bowen says he plans to introduce the legislation later this year which will force boards to be more accountable and give shareholders more power.

“I think this package does improve shareholder engagement and shareholder say over pay, and it introduces more transparency and minimises conflicts of interest,” he said.

The new laws are based on a recent report from the Productivity Commission. Included in its recommendations is a controversial two-strikes policy.

This means company boards would have to step aside and stand for re-election if 25 per cent of shareholders voted against a remuneration package twice.

Mr Bowen says shareholders often vote against directors’ pay packets but they are effectively ignored because their votes are not always binding.

“And I think that will concentrate the minds of directors to ensure that they are taking into account the views of their shareholders when setting pay,” he said.

‘Heavy-handed’

But John Colvin from the Institute of Company Directors says the idea is not workable or needed because there are already board spill laws in place.

“We’re a bit perplexed and quite frankly bemused at why we would have such a heavy-handed, red-taped, legislative approach to this area,” he said.

“Whilst there are examples of, and we acknowledge those, of pay outcomes which haven’t been in line with either company expectations… on the whole Australian remuneration of corporate governance has been very good.”

The Government also wants to make corporate cowboys hand back their bonuses if they do not live up to their promises.

Mr Bowen says there is an anomaly in the law that does not penalise chief executives for making misleading statements.

“Where there’s a material misstatement in a company’s financial statements then that leads to a bonus, there’s no capacity for shareholders to get that bonus back if that is proven to be the case later on,” he said.

“That hasn’t been a big issue in Australia, I have to say in fairness. But it has been an issue some places elsewhere around the world and I think it’s prudent that we make sure the law is robust as possible.

“So I’m consulting about that. That wasn’t part of the Productivity Commission’s recommendations.

“I’m consulting about that and about the best method, but I do think there’s an anomaly there which needs to be fixed.”

Graham Bradley from the Business Council of Australia is curious about the claw-back concept and whether it is needed in Australia.

“There is no reason in principle why executives should be awarded if they’re responsible for material misstatements in company’s affairs, and many large companies already have rules to that effect,” he said.

“We’re not quite sure how the Government intends to legislate this particularly complex proposal that they’ve made and we’re looking forward to consulting with them on the details.”

‘Positive’ step

The Australian Shareholders Association (ASA) says it is surprised by the Government’s whole-hearted endorsement of the Productivity Commission’s report.

Association spokeswoman Claire Doherty says the response is much stronger than they had anticipated.

“We think that it’s a very well-measured, very well-considered report,” she said.

“I think that there are some who think that it hasn’t gone far enough and there are others on the other side who think that it’s gone way too far, which is probably a good indication that it’s quite measured.”

“So from the ASA’s point of view, it certainly went a little bit further than we had asked, but we’re very positive about the recommendations and we’re very hopeful that they’ll have the effect of making boards much more accountable on this issue which is very important to shareholders.”

But with an election looming, Mr Colvin has questioned the timing of the Government’s response.

“I think there might be something in that. I think it might backfire though, if you think that there are over two million directors in Australia and this type of legislation doesn’t apply just to listed companies,” he said.

“These types of legislation, like the termination payments, apply to not-for-profits, to charities, to school boards, to hospitals.

“And if you’re going to have all this type of regulation governing them as well, you’ve got to ask yourself why, what’s the mischief and why are we adding this sort of regulatory burden?”