Bold as brass, Wall Street firms are again talking big bonuses. However, a proposal that Australian super funds are being urged to sign would give shareholders of US public companies more of a say in the matter, FIONA REYNOLDS writes.
You’ve got to hand it to the good folk on Wall Street. They certainly know how to fire up the international debate on executive pay. At the same time as some of the world’s leading governance experts were meeting in Sydney last month to discuss the role played by poor remuneration practices in the current economic malaise, news was filtering in from New York that Goldman Sachs executives were poised to receive yet another round of lucrative pay bonuses.
It was day three of the International Corporate Governance Network (ICGN) conference – an annual event that draws speakers and delegates from more than 45 countries, including senior representatives from some of the world’s biggest pension/superannuation funds including major funds in Australia. The ICGN was launched in 1995 by pension funds with the objective of lifting governance standards in listed companies across the globe and has developed into the premier governance body in the world.
Delegates attending the conference – held for the first time in Sydney – reacted to the Goldmans announcement with a mixture of frustration, dismay and alarm. While speaker after speaker attending the three-day conference stressed the need for a radical re-think on corporate pay structures that promoted excessive risk-taking, the good times were rolling once again on Wall Street. But richly-rewarded executives weren’t the only ones to come under fire at the conference. The world’s financial gatekeepers – the regulators, accountants, auditors and other oversight bodies – also came in for harsh criticism.
In particular, regulators in the United States were roundly criticised for having failed to respond decisively when they realised that markets had mispriced risk, and for allowing banks to operate with too little capital and excessive leverage. Complacency among institutional investors was also seen as contributing to the crisis. There was broad agreement that investors should be more engaged with the companies they owned; that they should have cared more. Keynote speaker and former US vice president, Al Gore, said companies and investors needed to “break the spell of the short-termism” if real progress was to be achieved.
Gore described the current obsession among both corporates and institutional investors on quarterly performance data as “functionally insane”, while noting that the average investor holding period for stocks had shrunk to 10 months, compared to seven years in the 1970s. Former World Bank vice-president Jules Muis said one of the most important lessons to be learnt from the recent crisis was for investors and regulators to prohibit the marketing of financial products that no one really understands.
The world would be a much safer place, he said, if each of us had the courage to say at the right moment in the right company: “I don’t understand, and I don’t think anybody here does either”. While warning that the problems exposed by the financial crisis were far from over, former chairman of the United States SEC, Richard Breeden, urged investors to be more aggressive in voting out directors and boards to ensure that their interests were better protected. Meanwhile our own Minister of Finance, Lindsay Tanner, spoke of the need for a new regulatory framework that sustained trust and facilitated long-term growth.
Tanner said new regulations would need to be more adaptive and flexible than in the past, with a greater emphasis on education and information technology. Notably for Australian super funds, the conference reinforced the proactive role that long-term asset owners can play in improving corporate governance. Indeed, many commentators warned that governance reform simply would not happen without active shareholder commitment. That is why it is important that Australian super funds join ICGN delegates in supporting one of the key shareholder reform proposals currently under consideration by the SEC.
This proposal to enable shareholders to appoint directors to the boards of US public companies is seen as an important step forward in US governance practices, which lag behind those in AustraliaUS sharemarket – will help persuade the SEC to adopt this initiative in the face of what is expected to be strong opposition from many US where shareholder rights are generally considered to be adequate (even if they are all too rarely enacted).
The ICGN believes that pressure from offshore institutional investors – who account for about 20 per cent of the business groups. AIST has already written to the SEC and I urge other super funds to follow suit and put pen to paper ahead of the SEC’s cut-off date for feedback on this initiative later this month. The executives on Wall Street may not be listening to the global governance debate but the SEC and others are. Like those who attended the ICGN conference, they understand that reform of governance and regulation are the essential ingredients for a sustainable recovery the world so desperately needs.