Leading company directors say boards are not being tough enough to prevent excessive remuneration packages being awarded to chief executives, and fear the complexity of pay packets has made it more difficult for directors to have sensible debates with management on the issue.
Speaking at the Australian Council of Superannuation Investors annual conference yesterday, Tabcorp and Healthscope chairman Paula Dwyer and Aurizon chairman Tim Poole also backed the findings of a recent survey that found 70 per cent of company directors claimed there was a risk-averse decision making culture on Australian boards.
“I think there is this worrying proliferation of governance experts in the performance debate, which has tempered the ability of public companies to take risks and generate wealth,’’ Ms Dwyer said, adding there was a sense that investors also did not want risk taking.
“It is in our culture to perhaps not have that capitalist view of the world.’’
She also questioned why an increasing number of CEOs being appointed to run Australian companies were foreigners.
Mr Poole said: “As a collective in my experience (directors) are too risk averse’’ before adding that while the pool of director talent in corporate Australia was strong, it was failing to attract the best talent in the country to boards.
“We are missing out on some very significant talent because of the structure. The risk/return equation is wrong. We can’t pay directors variable salaries. The media and investors have a very low tolerance level for failure … Collectively we need to find a way to change that paradigm because we won’t be able to get the best,’’ he said.
Earlier this year Prime Minister Malcolm Turnbull warned against a “cult of excessive CEO remuneration” in Australia following the controversy over Australia Post CEO Ahmed Fahour’s $5.6 million salary.
While boards have been showing more restraint on executive pay, especially in the mining and banking industries, many fear remuneration structures remain excessively complicated, especially for long-term incentives.
Some companies such as Commonwealth Bank have also introduced so-called “soft targets” to calculate bonuses, which has raised the ire of institutional investors.
Ms Dwyer said community expectations of executive remuneration were focused on “holding people to account.’’
“Boards and remuneration committees really need to be tough. They need to be much harder in the conversation, in the setting of targets, in holding people accountable,’’ she said.
She also questioned whether the short- and long-term incentive components of executive pay packets were being properly thought through.
“I don’t think boards have the wherewithal to hold management accountable … Some performance-based pay is hidden behind complexity and that makes it difficult to have a sensible discussion about performance.’’
While Mr Poole said the tools and structures of executive remuneration were adequate, he added: “I don’t think boards are using them well enough.’’
“Boards need to get tougher in performance criteria setting. And at the end of that boards need to be tougher about what has happened,’’ he said.
“We have the tools to say, ‘Hang on, we haven’t performed as well. The share price has gone down and the remuneration outcomes don’t reflect reality’.’’
New Oz Minerals chairman Rebecca McGrath said boards needed to be more creative in their remuneration structures.
“There is too much out of the box. It is not very creative,’’ she said.
“We should be very creative to design remuneration to suit where the company is at in its history.’’
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