Press Room

Transcript of Productivity Commission appearance

November 14, 2015

Here is a transcript from the lively 70 minute appearance before the Productivity Commission inquiry into executive pay at the Melbourne hearings on June 24, 2009.

Mr Banks: Our next participant today is Stephen Mayne. Welcome to the hearings. Could I ask you just to indicate the capacity in which you are here today.

Mr Mayne: I'm a shareholder activist.

Mr Banks: That sounds quite relevant to our proceedings. So, as indicated, we will give you the opportunity to go through the main points you want to make.

Mr Mayne: As you know, you've got my little two-pager which I submitted. I've also got a two-page supplementary I would like to take you through for a couple of key points responding to some of the submissions.

The executives who keep on complaining that the estimates of their share-based pay is overstated in the current market, that may be correct but for most of the last three to five years it was understated to the tune of several hundred million dollars at any point in time and the one specific example I would like to draw you to, which was also the one occasion I raised at valuation of equity incentives at an AGM, was the 2006 Babcock and Brown AGM where the auditor and the board had valued 800,000 $5 options - and this is on page 3 of your supplementary, I have actually extracted the Babcock and Brown annual report - at $1.17 million when at the time the share price was north of $20 and the valuation should have been closer to $10 or $15 million.

So rather than the CEO, Phil Green, having his pay estimated in 2005 at $12.3 million, it should have been around $25 million if you had been doing an appraisal of the valuation based on the current market price.

Given that Babcock, I think, is the largest disaster in Australian corporate history with more than $10 billion lost, including all their listed funds, the executives hoofed out the door with a couple of hundred million dollars in cash, it's just an example - now these options are valueless, now, but at the time that particular annual report it was understated $10 to $15 million. I got up and asked the auditor (Mark O'Sullivan from Ernst & Young) and said, "Isn't this fundamentally inaccurate?" and he just said, "It applies with accounting standards," and blah blah blah.

So I agree with the argument we should go with received value from incentives and we should update it each year. So we should say, "Over the years we've said this, but now based on the current share price the actual incentives received over the years are this," and it just gives you a more accurate figure.

I was at dinner last night with a former chair of a top 150 company remuneration committee who said, "I still don't understand Black-Scholes." I don't understand it, I rarely take the valuations of the incentives to be meaningful. Poor old Sol Trujillo, his pay wasn't $13 million last year, it was $8 million. He didn't get five million because the long-term incentives were worthless and he got zero. So it does distort the public debate because the figures are a snapshot in time, the accounting process Black-Scholes is contentious and the market movements render the figures meaningless in short periods of time.

The power of proxy advisers

My second supplementary claims that proxy advisers have too much power, particularly Charles Macek's recommendation, the chairman of the Telstra remuneration committee, that proxy advisers be banned on voting on remuneration reports. I think that is, frankly, self-serving pap. Telstra having had their remuneration report voted down courtesy of proxy advisers recommending against it. As a whole I think proxy advisers have been a force for good in Australia but I also think that they do have extraordinary power. RiskMetrics in particular does seem to have quite a donkey vote where if they say, "Vote this way," the institutions tend to do that.

The best example of that is that I have run for 35 public company boards, my average vote is 15 per cent in favour, the one time RiskMetrics recommended in favour of me was Centro Retail last year and suddenly I got 70 per cent of the non-Centro vote in favour and I was the same candidate who was only worth 15 per cent everywhere else. The only difference was RiskMetrics' recommendation, and the institutions did tend to slavishly follow that recommendation.

My opinion is it's okay if overall I think they're getting it right, but it is an enormous amount of power given the donkey vote that follows that. I sometimes criticise them such as the recent Westfield remuneration report where RiskMetrics, in my view, had delivered the against votes at Boral, Transurban and Wesfarmers, which were three of the most noticeable defeats last year.

We get to Westfield this year, Frank Lowy's salary has gone from $15.8 million to $16.2 million - over the odds. Everyone else is cutting back. Macquarie's CEO down from $28 million to $300,000. RiskMetrics said, "We support voting in favour of the Westfield remuneration report," – 93 per cent in favour. So I just felt they lost their spine on that one but overall they tend to get it right and it is an incredible donkey vote that the institutions tend to follow their advice.

John Egan's AMP black mark

Remuneration consultants, I agree when they're hired directly by CEOs, it certainly is a conflict of interest and I still remember back to the press conference when AMP demutualised and the chairman, Ian Burgess, said, "I'll let George Trumbull explain his remuneration package," and then George got up, the CEO, and explained why a million free shares for him was fine. That was worth $15-$20 million at the time and the remuneration consultant concerned who said this was just fine was John Egan.

Ten years later he is still the most prominent, often-used remuneration consultant. I still sort of say, "Where is the accountability?" Most of the AMP directors have gone from that whole disaster and debacle with George Trumbull, the rem consultant who endorsed the most outrageous gift of shares I have ever seen, still is the number 1 rem consultant in Australia today.

Fix corporate voting to fix executive pay

My key message is that at the end of the day the most important thing for governance and for controlling and monitoring executive pay in Australia is the appointment of directors. The directors will set the policies and should be accountable.

We are seeing the system work well in terms of remuneration reporting and voting against remuneration reports but the system is not working well in terms of voting against directors. On page 2 of my update today, I have listed the 13 times since 2006 that a remuneration report of an ASX 200 company has achieved an against vote of more than 40 per cent and I've ranked them from the top. So it starts with Valad, 76 per cent against, and I've contrasted that with, at the same AGM, what was the least most popular director's vote. So if the shareholders have got a problem with the remuneration report, they should also in my view have a problem with the directors because they set the remuneration policies which they are so unhappy about.

If you go through it, there is not a correlation. If you look at Boral, 58 per cent against the remuneration report; least popular director, Paul Rayner, 99.5 per cent in favour. Wesfarmers, 50 per cent against remuneration report, least popular director, new chairman Bob Avery, 99.5 per cent in favour, and on it goes. So the directors average 96 per cent and the system is not dealing with voting against directors. I think if directors who let pay get out of hand knew that they would be voted off the board or something could happen to them; it would strengthen their arm in terms of negotiating with greedy CEOs to say, "Hang on, mate, I can't give you a $10 million bonus because I'll lose my seat next year if I do that," but at the moment; very, very rare for directors to be voted against.

How boards rort corporate elections

In terms of fixing up corporate voting, there's a couple of sort of key rorts in the director election system which I would like to draw your attention to.

The first one is called the "no-vacancy rort", which is where a board in their constitution can declare that any number they like is the maximum number of directors. So a good example is West Australian Newspapers. I ran for their board in 2007. They only had four directors. It was the smallest board in the ASX 100. But they came out and still said, "Sorry, Mr Mayne, there's no vacancy," because their constitution says they can pick any number they like. It says, "Minimum 3; maximum 11, or any number we like." So they always do that. The effect of that is that to get elected, a simple majority of 50 per cent is not good enough. You have to knock off one of the incumbent directors to get elected.

Now, when your average incumbent director gets 96 per cent of the vote, it makes it pretty difficult for a challenger to knock off an incumbent director. Then when you twin that with the other major rort of the corporate voting system known as the undirected proxies, which is where someone who just signs the form and sends it back automatically defaults their vote to the chairman. The equivalent of this in political terms would be someone walking in to the federal election and saying, "Yes, I'm on the roll," and putting an empty ballot in the ballot box. That's an automatic vote for John Howard because he's the incumbent. That would be the equivalent. In politics it would be an outrage; it is an outrage in corporate elections. It averages about 10 per cent of the vote.

So when you combined those two rorts, the first being the no-vacancy rate, the second being the 10 per cent average undirected proxies that finish up in the back pocket of the chairman, I've listed for you there on page 1 of the supplementary the 17 times in my board tilts - and I've run for 35 - 17 times where 100 per cent of the directed proxies in favour of me would not have been enough to succeed because the size of the undirected proxies that the chairman would then use against you in a poll was big enough to reduce your vote down to below what the least popular director got.

What I've listed there for you is the AGM, the year and what my vote would have been with 100 per cent of directed proxies in favour, offset by the chairman voting the undirected proxies against. The fact that on 17 occasions 100 per cent of directed proxies in favour would not be enough to succeed says you have a gerrymandered system which is tilted in favour of the incumbents and that directly takes away from shareholders being able to hold directors to account and remove directors who are not performing.

Professor Fels: So on your first example, NRMA, the 45.07 per cent refers to ‑ ‑ ‑

Mr Mayne: What happened there was Nick Whitlam said, "Don't vote in favour of all four candidates because your vote will be invalid. Only vote in favour of three candidates." So most of the shareholders voted in favour of three and left mine blank. Nick then grabbed them and said, "I'll take those as undirected proxies," so he managed to come up with 55 per cent of the total vote as undirected proxies in his hand and so even if I got a hundred per cent in favour, he would have used 55 per cent of all votes as undirecteds and he would have got me down to 45 per cent and I would have lost by the length of the straight because the least popular director was Nick Whitlam himself with about 93% in favour.

Mr Banks: Have you recommended a solution to that because you've also got a recommendation about CEOs facing elections as well.

Mr Mayne: Being up for election. I think a simple solution would be - it's either the listing rules or the Corporations Law which says that a public company must have a minimum of three directors. I think you could just extend that by saying it must have a minimum of three and a maximum of 15 or pick some figure and then you don't allow constitutions to say "or any figure the board wants".

Telstra does the right thing

Board size is a matter for the shareholders. If the shareholders want to add one, two or three new directors, they should be able to do that. To Telstra's credit, under the Howard government, every time there was a contested election at Telstra - and I've run three times, you've had Melbourne Cup fields there - they always allow the vacancies to go up to the cap in the constitution which is I think 15. So they say there's 12 candidates, three of them are incumbents, there's six vacancies - because that would take us up to the cap in the constitution - and after that there's no vacancy. Big companies likes Telstra actually do do the right thing here and so I think just something which - the basic problem is you can't allow a board to decide how many vacancies there are after they have seen who have nominated.

Make corporate elections like political elections

In any political election you declare this is how many positions there are and then however many nominate then that's it. So it's just removing that ability to retrospectively decide how many vacancies there are would be a very, very important reform. In terms of the undirected proxies, you just fix that with an electronic system of direct voting. Why do you need to have a cumbersome manual system that requires the chairman to formally lodge all proxies for, against and undirecteds? Just move to a straight direct voting system and if you really want to give a proxy to the chairman, you have to tick the box because at the moment it just defaults to the chairman if you send the form back in the reply-paid envelope. So removing the system that defaults the undirected proxies would be the other element of that reform.

Stop executives voting on remuneration reports

On the bottom of page 2 under that list of the biggest protest votes I have said a few other things just to fix up voting. A very important one in my view is that executives can't vote on their own remuneration reports. I think in terms of concrete things that you can actually come out with from this inquiry that would be in my top three or four that you can actually recommend that Frank Lowy can't vote his 10 per cent stake in favour of his $16 million salary package which is now the highest salary package in Australia and six weeks ago at the AGM he just did that. He did precisely that, he voted his 170 million shares in favour.

I think the argument goes that if you are listed in the top five or top 10 paid executives, then you should not be allowed to vote your shares in favour of the remuneration report. At Toll Holdings last year Paul Little owned 10 per cent, big controversy over ridiculous payouts and he voted his 10 per cent in favour and it would have been line ball if he hadn't voted.

So I just think there is a fundamental conflict in allowing major CEO shareholders to vote their stakes in favour of remuneration reports and because it's non-binding I don't think there is any harm, there is no real disenfranchisement because it's a non-binding vote. They should be able to vote on their own election and things like that. But just to get a true sign to strip out the conflicts of interest voting on your own remuneration report I think would be one very concrete thing that you can deliver.

Disclose how institutions vote

Another very important one is the disclosure of how institutions vote. We have no visibility in Australia about how specific institutions vote in their stock. We have a system of conscripted superannuation funds. No other system in the world where people's moneys are conscripted away from them and we have a trillion dollars of super. Voting is a key asset of that trillion dollars and there is no visibility. You see the best funds, such as AMP and AXA, releasing regular reports saying, "We voted against 25 per cent of remuneration reports, we voted against 15 per cent of directors," but you never know on which ones. So it really is a secret fund manager's business as to who voted against what. In the US by law the big mutuals have to release on their web sites how they have voted on specific resolutions and this does deliver a lot of accountability.

When Enron collapsed, people were able to go back and say, "Fidelity, in Boston, you voted in favour of every single dodgy pay resolution at Enron," and they were held to account. There were press discussions, the Teamster's Union even picketed Fidelity in Boston because of vast amounts of their super funds lost in Enron and they were able to go back and say, "Who backed all these dodgy schemes?" In Australia I think it would be terrific if you could say, "AMP supported Frank Lowy's pay this year," and I would go to the AGM and I'd say, "AMP you're doing a really good job overall on voting, but why are you backing Frank on $16 million a year?" It would be a terrific level of visibility.

Make institutions vote

I would love to see compulsory voting for institutions. If you compulsorily conscript people's superannuations away and then you give them to all these huge funds, I think they should disclose how they vote and they should be compelled to vote. We have a system of compulsory voting in political elections. The turnout in corporate elections is often 30-35 per cent. The major assets of Oz Minerals were sold off two weeks ago to the Chinese government and the turnout was 35 per cent. 65 per cent of the shareholders on a key vote, selling off $1.7 billion worth of major mines to the Chinese government, no visibility as to who voted, no visibility who didn't vote and a terribly low turnout of 35 per cent.

So compulsory voting for little boutique funds might be difficult, but if you are of a certain size and scale, you are a big fund, you should be able to manage a system where you vote on the top 300 stocks and, like the US funds do, on your web sites you reveal precisely how you voted.

Who backed the ABC Learning chair?

An example of a controversial vote, Transurban's AGM last year, Australia's biggest toll road company.

The chairman is David Ryan who was the chairman of ABC Learning and for the previous five years was the chairman of the ABC Learning audit committee. I got up and I said, "David, I think it's time you retired. You've blown $3 billion down there at ABC Learning, it's not a good look, on you go." No, the shareholders gave him another three years on $420,00 a year and I don't know who were the 66 per cent of shareholders who voted in favour. Don't know. Was it the Canadian pension plan fund with 15 per cent? Don't know. No visibility. No transparency.

To fix director election voting, a lot more transparency around who is voting and how. Take away the undirected proxies rort, take away the no vacancy rort, have an auditable trail. At the moment there is no electronic audit trail on corporate voting in Australia. So Computershare don't even give you a receipt to say, "We've received your vote." AMP have released lots of reports saying how votes have gone missing and I think there needs to be a fully transparent electronic auditable system of corporate voting.

Can't even scrutineer voting in corporate elections

I have run numerous times in political elections, I have run against Peter Costello, Jeff Kennett's old seat, I'm allowed to scrutineer. I'm allowed to appoint scrutineers who have exactly the same access to the voting results as Peter Costello's did in Higgins in 2007. In corporate elections I have run 35 times. I have never, ever seen the votes come in. But the CEO and the chairman have an electronic system where they can dial into the Computershare system and they can see precisely what the current voting is at any point in time. But the outside candidate who is challenging gets nothing, no visibility and often they will try and charge me five grand just to give you a copy of the share register. Political elections you automatically get the electoral roll for free.

So I think it would be terrific to have a look at the principles of how political elections are handled in Australia and we're very proud of our system of compulsory voting and very transparently scrutineered, independent watchdog. Who counts the votes?

There's no independent Australian Electoral Commission for corporate voting. It's all counted by the agent Computershare appointed by the company. I had a meeting with the Computershare CEO the other week and he said, "Yes, look, at the end of the day we work for the companies, the issuers. They ring up and say, 'We we want to know how this person voted, that voted,' and we can. We give them running totals. We tell them who is on the register. We help them solicit, we do all that stuff." The outside candidate; nothing. Very, very tilted, unlevel playing field.

We can talk all we like about valuations of options and these sort of things but I think for me the most important thing is cleaning up the director election voting system.

Unbundle the conflicted financial giants

The last two comments I make, bottom of page 2 of the supplementary, to fix up voting on directors I think we have a fundamental problem in Australia which is the evolution of financial supermarkets.

We are the only country in the world where the big domestic banks also dominate in funds management. So the Commonwealth Bank was simultaneously a lender of more than $1 billion to Centro and the larger shareholder with 7 per cent of Centro. So they smoked $600 million of their clients' superannuation monies whilst putting Centro basically under as a banker. From my experience the big banks don't vote against directors nearly as much as independent fund managers or an AMP or a 452 capital or offshore funds. The offshore funds particularly are the donkey voters with the likes of RiskMetrics.

So I am not aware of National Australia Bank, Australia's second biggest manager, Colonial (owned by CBA) ever taking a big stand on a director election and voting against. They don't release reports like AMP, they're not very transparent. I think part of the problem is that they are financial conglomerates that have multi-layered relationships with these companies.

So if you're a lender to BHP, you're running their super fund, you're their transaction bank, can your bank-controlled fund manager really come along and vote against the chairman of BHP at the AGM? I think you can't. I know this would be a massive structural reform but I would love to see almost a Glass Steagle-type thing where an unbundling of who is controlling equity in the Australian economy and who is controlling the votes and who is controlling debt because I think there is a fundamental conflict between debt and equity.

We have seen that with the collapse of Centro where the one player was simultaneously big lender and big equity player and I think it plays out in corporate voting through the directors club and all those relationships. If you go and track who is on the boards of the big four banks, you can basically track what other companies they're on, they're always on the big the companies as well. I don't know how the club works, but from my experience you don't see the big banks exercising their votes like you see other more independent boutiques or the AMPs of the world.

So I think the way to fix that would be first to put some visibility on it and say, "Let's see how Colonial is voting. Let's see how MLC is voting for NAB and we can prove this," but at the moment it's just speculation because there is no transparency about how they're voting. But I've never seen them in the press. I have never seen any evidence of big banks actively voting against directors and I think that would be a good reform.

Make it easier for shareholder resolutions

The reason I run for boards is because it's too difficult in Australia to put up a shareholder resolution. Boards effectively have a monopoly over what shareholders vote on at AGMs because under Australian law you need 100 wet signatures from shareholders to get up a resolution for the AGM or to call an EGM or you need to own 5 per cent of the stock. There has only been about 25 times that 100 shareholders' signatures have been successfully gathered by a retail interest and that has been only green groups, unions and the Australian Shareholders Association. 25 times in 20 years.

In America Exxon will get a dozen every year. They will have hundreds and hundreds a year because in America you can get up a shareholder resolution if you have owned US$2000 worth of stock for the previous 12 months. That completely lowers the barrier to shareholder resolutions. It's too easy to nominate for a board. I need one signature from a shareholder. I can nominate for a board in five minutes. It's too easy. If you want to run for a federal seat of parliament, you need 50 signatures from people who are in the seat. So there should be some sort of higher barrier to running for a board, but because it's such a low barrier that's why I do it because it's the easiest way to put pressure on. But I would far rather put up shareholder resolutions.

Director retirement schemes would have gone earlier

I could knock out all those dodgy constitutions which say the board can choose any figure they want to be the maximum because the investors don't like it, the proxy houses don't like it. So I could just routinely go, "Woolworths, remove this clause from your constitution," and it would get up. But how do I get 100 wet signatures? I haven't got two weeks to go around, drive around to people's houses, etcetera. It's too hard.

So if you lowered the barrier to shareholder resolutions I could have knocked off, for instance, all those director retirement schemes that were running particularly through the 1990s. They've mostly all gone now, there are a few of them that are grandfathered. But they basically work like good behaviour bonds, where the size of your balloon payment at the end of being an executive director rose over time the longer you served.

So you want your non-executive directors to be able to walk the plank on a matter of principle. But they won't do that if they're sitting there going, "Once I get to 15 years I get five times my final average salary as a balloon payment."

Now, they've mostly all gone but during the 90s I would have put that up. I would have said, "Cancellation of director retirement scheme, compensating increase in up-front cash payment." All would have been voted by the shareholders, would have been fixed far earlier and is far better governance. But the mechanism to do it, the mechanism for a small shareholder to put up a shareholder resolution is very high with the 100 signatures.

So if you were to recommend one thing to make life as a shareholder activist easier and end me needing to do frivolous board tilts when I really just want to put up a resolution, lower that and you get us a lot more accountability for boards very, very quickly with that very small reform.

Mr Banks: Just on that last one, if you would have got support for such a resolution why isn't the resolution coming from another quarter?

Mr Mayne: I'm not aware of an Australian institution with 5 per cent ever putting up a resolution.

Mr Banks: Why is that then?

Mr Mayne: They don't want to rock the boat. A primary interest of fund managers is not improving governance of companies. So if something comes up and they have to vote on it, they've outsourced the research on how they vote to the proxy houses and they will vote. But in terms of actually creating something to vote on, that is a major step, like putting up a resolution to remove a director, calling an EGM. Putting up a resolution for anything is a major step for an institution, and I'm not aware of it ever happening, which is an example of chronic passivity in Australia. My basic beef, getting into this space, is a lack of culture of shareholder pressure in Australia.

Professor Fels: Can I just ask you one very general question. Obviously this inquiry is about executive rem. You are saying many of the problems would be better addressed if there was a change in corporate governance arrangements generally, which would have all sorts of implications for other dimensions of corporations than just executive pay.

So I just wanted to say this is an obvious issue that arises: how far does this inquiry get into that, and if it does, does that call for a kind of general examination? I can see, just listening to you, what the implications are for votes on executive rem. I'm not quite sure what the other implications are for things that are a bit beyond the inquiry in some ways. Do you want to comment on that?

Mr Mayne: I think it's just all one and the same, and that one of the most important roles that a board does is to hire and fire the executive talent to run the company and to pay them appropriately. So I think the idea of having a separate vote on remuneration is almost not relevant. If the system was working better you would always be having that vote every time you voted on a director. So just see it as one and the same.

I simply say, in terms of getting outcomes, which I think would be more accountability and more appropriate pay, rather than coming up with something prescriptive, you can't earn more than your average worker works or something like that, I just think the system would work best if you step back, get to the basic principle-agent issue. Look at the voting records and identify the major problem in Australia as an inability of shareholders to vote against directors, 96 per cent average. If you accept that is the key problem then I think you fix that, you fix executive pay.

So I am asking you to take a slightly bigger picture, but I'm simply saying that I think it is all one and the same. Where will we get a debate started to improve the fairness and transparency of corporate voting?

I think some Productivity Commission commentary coming out of this would be a great place to start. Obviously it is not the key focus of it, but I have noticed some other submissions, the RiskMetrics submission talks about the problem of the no-vacancy rort. I think it also mentions about directors voting on their own pay.

So it does, in my view, come back to the shareholders own the company, the directors are their agents. In any system you need an ability to change your agents based on good, reliable information. At the moment we don't have good, reliable information on how the principals are voting in the appointment and reappointment of their agents. You fix that and I think you fix a lot of it.

I think, personally, that the biggest single problem in America in terms of why their executive pay is so out of control is the inability of American shareholders to vote against directors. All they can do is withhold votes. If Obama introduces that you can vote against directors and you can remove them, and he decouples chairs and CEOs, removes poison pills, I think that would have a profound effect on executive pay in America, because boards that approve ridiculous packages would be voted out.

Professor Fels: Could I ask you just to go on from that and talk about how you would see that then affecting Australia in turn, if the US got its house in order? There's an implication in your submission, I think, that you see that as being an important factor.

Mr Mayne: You always hear companies talk about the global war for talent, and the American market is where it's most out of control. So we in Australia have a propensity to hire expat CEOs in our top 10 companies more than any other developed market in the world. At the moment, seven of our top 10 companies are run by CEOs who are born overseas. We almost have a bit of a cultural cringe in Australia about appointing Australian-based CEOs. The last five BHP CEOs have been expats. In terms of what you have to pay them, particularly when you're recruiting from the American market, blows out because the American market is so out of control.

The Ahmed Fahour example was the one I gave you in my submission, where he was paid $13.3 million in compensation benefits for what he was leaving on the table at CitiGroup. CitiGroup is a nationalised bank, it's gone broke, and what he left on the table would be diddly squat if he was still at Citi.

But the National Australia Bank shareholders here in Melbourne have had to pay $13 million. That's why the former CEO of NAB, Nobby Clarke, got up at the AGM the next year and said, "Why have you paid this guy more in his first 35 days than I got in 35 years as the CEO of NAB?" It's all because the American pay system was completely out of control. So you bring the roof down there, it improves things globally.

Mr Banks: Getting back to the directors, you've got a couple of other suggestions, one of which is that CEOs who are managing directors or directors should in fact be required to stand for re-election. What are the perverse outcomes of that? If you were to do that, two things could happen.

First is CEOs could say, "The risk has just one up and therefore I want to be compensated even more than I am now," because one of the reasons for the golden parachutes that we see and that have been put to us is in fact that the risk of losing your contract is relatively high.

The second thing is you would suddenly have CEOs no longer being directors but they would simply just be CEOs. So I just want to understand what you think would be the perverse or unintended consequences of requiring CEOs to stand for election.

Mr Mayne: I don't think there would be any unintended consequences because they would simply join the 96 per cent club. I mean, no CEO would ever be voted out of office. The voting record for CEOs is even higher than the typical non‑executive director, so they would get the usual 98, 99 per cent. But it would just be an extra accountability mechanism. Why is one specific group of directors given a job for life on the board? There's no other situation I'm aware of in board voting where one director gets a job for life. The best example is Rupert Murdoch went for decades without being elected to the News Corp board even though he was the executive chairman.

So the loophole in the law doesn't just say the CEO. The loophole allowed Rupert Murdoch as the executive chairman to never face the shareholders to be voted on the board. The only other executive chairman who was doing that was John Gay at Gunns. Rupert Murdoch and John Gay at Gunns, two companies with shocking governance. You leave the gate open and they will walk through it and they will say, "I won't submit myself to the shareholders even though I'm the executive chairman."

I simply say, "Close the gate." Even if it's every three years, that's fine. Why should Sol Trujillo have never been elected to the board? If you don't want to be a director, you don't be a director and you don't face the vote. If you're a director, you're up every three years.

I just cannot understand why there is an exemption for CEOs. If you want accountability for CEOs let the shareholders vote on them every year, in my view, because at the moment the two most unregulated things in the executive pay debate are the fact that a company can pay an unlimited amount of cash to the CEO and the CEO can't even be voted off the board because the CEO is appointed for life until they leave. So I think, poor old non-executive directors, they face an electoral cycle every three years and they've got to go cap in hand to the shareholders to say, "What's the overall cash cap that you can give us each year?"

Professor Fels: What about the view that in the case of the CEO it's almost that kind of ex officio role on the board?

Mr Mayne: Well, that may be so but I'm not aware of any CEO in the top 100 who is not actually a formal voting director.

Professor Fels: Yes.

Mr Mayne: So you get a vote. I mean I think it would be fine to not have - I think it would probably be a better system to have them ex officio. But if you want to give them a vote then you want to have them as a formal director with all the fiduciary responsibilities that comes with that then you should be subjected to the vote.

Again, it's one of these little concrete things. I think it's in my top five of concrete things you could specifically change, not particularly earth shattering but just as important in governance and shareholder rights, because no-one in the community even realises that a CEO is there for life and it's a voluntary issue. So Ziggy Switkowski put himself up, Sol Trujillo said, "Why should I? The government might vote against me. I won't even have an election."

Mr Fitzgerald: You will have seen in some of the submissions that people have tried to deal with this issue in a different way. For example, some submissions have said that if the shareholder vote against a remuneration package rises to about 25 per cent then in the next year either all directors stand down or all those that are on the remuneration committee stand down. They're not part of your recommendations, you've got a broader set of strategies, but I wonder whether you have a view about those sorts of propositions that link up the directors having to stand with a significant or material vote against a remuneration package?

Mr Mayne: I think that anything that automatically caused the removal of the director would be wrong, because the thing I most like about the non-binding vote is it removes the fear factor and allows people to vote against it and send a message because it has got no consequences, there are no adverse consequences, it's just a signal. So I think maybe the system would be - I like the idea that automatically the chairman of the remuneration committee is up for election at the next AGM if the rem report vote is more than 10 per cent against.

How Macquarie yielded on pay policies

For instance, the reason I think that Macquarie Bank wilted in sticking with their pay packages - I mean I came up with the nickname, "millionaires factory", 10 years ago. I've been to their last seven AGMs, run for their board. I've heard all their debates. They are the most highly paid people in the country.

Now, at the 2006 AGM, Macquarie, the pay packets were getting up north of $20 million. The proxy advisers recommended in favour and they got 97 per cent. It was massive; despite huge pay packets, it was massive. I think it was in 2007 that RiskMetrics changed its tune and said, "We recommend a vote against." Massive campaign by Macquarie, they were strong-arming the institutions; big, big campaign. 21 and a half per cent against, and this was substantial.

After a big battle I saw that as a shot across the bows at Macquarie Bank. They then folded and they changed their policy when they changed their CEO and now a majority of the bonus is not short-term cash, it's in shares. I think one of the key reasons that that happened was because Helen Nugent, the chairman of the remuneration committee, was up for election at the next AGM. She knew that if Macquarie brazenly ploughed on with the massive short-term cash bonuses - yes, it was the same system for 30 years but times have changed. If they had ploughed on she would have got an against recommendation as the chairman of the remuneration committee from RiskMetrics and she would have been in danger of being voted off the board.

I cite Telstra and Macquarie, the changes they did to their remuneration, as the two best examples of the system working really well. Non-binding protest vote, sends a message, change policy. That's what you want.

Professor Fels: What about the extra step, making it binding?

Mr Mayne: No, I think then you would be breaking contracts and people would be less likely to vote against because it would cause uncertainty. I like the system. I just think it needs to be coupled with follow-through voting against directors rather than beefing up the consequences. I mean executive pay votes is one of the best things Costello did in government. The system is working well, much more transparency and market discussion, much more disclosure about pay practices, shareholders voting against, message has been taken, policy is changing. Don't change it. The system is working really well.

Mr Fitzgerald: Sorry, but I just need to clarify. Are you saying that the system works well insofar as the binding vote but are you supportive of, for example, the head of the remuneration committee, the director, being required to stand at the next election?

Mr Mayne: Yes.

Mr Fitzgerald: You're in favour of that consequence, not an automatic removal?

Mr Mayne: Yes, correct, that's right. So that would be terrific. Over 10 per cent, you're up for election at the next year even if you're not on the three‑yearly cycle. It's not removing them but it then just says, "Hey, you've got 12 months to heed the vote," or the Macquarie situation: you've got 12 months to heed the vote or you can test your support. That would really focus the chair of the remuneration committee. You might struggle to get directors volunteering to be the chair of the remuneration committee and you'd probably get a big explosion in pay for the extra amount to chair the rem committee because of the risk associated with being removed. So there might be some unintended consequences there but it would be a good accountability mechanism.

Mr Banks: Which would have to be voted anyway, to the extent that the pool for directors was inadequate to achieve that.

Mr Mayne: Correct, yes. It's amazing how highly regulated the cash payments to NEDs is and how it's being controlled. I think the NEDs are underpaid. It's primarily, in my view, because they have to go to the shareholders for approval to increase the cap, yet the CEO can be given $100 million cash with no reference to shareholders. I think it's fundamentally inconsistent. The directors should be saying, "Deregulate board pay. Why should we seek an approval for our overall pay when it's completely unregulated for the management and the CEO when it comes to their cash?

Mr Fitzgerald:
One of the other issues we're looking at in this inquiry is whether or not the current range of senior executives that are covered by the disclosure regime or the remuneration report is appropriate. There is some view that the only people that shareholders should be interested in is the CEO and the CFO.

In other words, to reduce the number that are captured by the current disclosure regimes. It would reduce complexity in the reports and so on and so forth. Others, of course, might hold the view that you need to capture more. I was wondering whether you have a view about who shouldn't be subject to the current disclosure regime or any other disclosure regime that's introduced?

Mr Mayne: I have a very firm view on that: all directors, so if the CFO is on the board then automatically that's disclosed; and then only the five or 10 or whatever the figure is most highly remunerated employees. So I've mentioned in number 8 on my formal submission, "Better disclose fund manager pay and close the Alan Jones loophole." Of course the Alan Jones loophole is that Macquarie Radio, public company, he is paid $5 million a year yet he is not included in the top five executives because he is not technically an executive, he is just an employee. Yet the shareholders are told that the 2CH programming director, Ian Holland, earns $123,000 a year. Now, talk about meaningless disclosures. How can one employee hoof out the door with $5 million a year and the shareholders are not told yet they are told someone is earning a fraction of that. It was the same with Eddie McGuire at Channel 9. He was on $5 million a year as an on-air talent. It was only when he became CEO this was disclosed.

Reveal the fund manager pay

The biggest rort f all is fund managers. Fund managers are not technically deemed executives. So you have all these multi-millionaire fund managers voting on everyone else's pay when their pay is not disclosed even though they are the most highly remunerated people at the company. John Sevior, head of Perpetual Equities, is earning three, four, five million dollars a year yet the company discloses in the annual report that the company secretary is on $400,000. This would be again in my top five of very simple, small reforms that would be very positive. Change the disclosure to all directors and the five most highly paid people. If that is some guy on commission in China who happens to make $7 million in commission selling zinc to the Chinese for OZ Minerals, so be it, shareholders should know.

Mr Fitzgerald:
But can I ask what is your rationale for that? Why do you want to know simply what non-executive employees earn? In a sense, there's a bit of a view that there's a right to know. But that may be insufficient. So why do you actually want to know what the head of a particular division is earning, even if they are the highest paid, if they don't have, technically, an executive role?

Mr Mayne: I have a view that sunlight is the best disinfectant, and that you wouldn't have had the amazing perks scandal that has bedevilled British politics if you'd had sunlight, if you'd had disclosure of the guy claiming the cleaning of his moat. So if you are disclosing that there is some guy in China getting $7 million a year it won't happen. So the most important thing for shareholders to be told is, "Who is taking the most of your cash each year?" That is far more meaningful, and particularly with fund managers.

I mean, Greg Perry, we all remember the Chris Cuffe pay issue when the Commonwealth Bank took over Colonial. He was the CEO of Colonial First State, he got $33 million. Greg Perry, who was the head of equities, got something similar. They were B1 and B2 at Colonial. The $30 million that he got has never been disclosed, because he wasn't technically an executive. He was just a humble, ordinary, garden-variety fund manager with no executive powers.

What the definition of an executive is is also an important issue. I would argue that someone who is the head of equities, managing a large team of fund managers, is an executive. But no fund manager appears in these top five. So I often go to the AGMs of the likes of Bell Financial Group and Perpetual and say, "This isn't your top five most highly paid, is it? It would be very different," and they go, "Yes, it would be very, very different if it was the five most highly paid people. But I'm not going to tell you what my bloke on commission in Perth is making, stockbroking firms." I think it would far more meaningful.

Professor Fels: I just want to pursue this a bit further. I think I can see your point that in some ways the present system doesn't capture quite what is intended. I'd like to test some of the arguments against. One of them is one of the reasons why we want executive pay disclosure is there is a concern that they in some way directly have an input into the setting of their own pay so you want maximum disclosure. On the other hand, a person in China who gets $7 million for doing something is probably not involved in determining their pay, so there's a slightly different approach to that one.

Just another obvious thing, there is also some kind of people who are a bit intermediate; that is, they're not executives, they're not way out there just getting a lot of money but having no real role in determining it. There are probably a number of intermediate cases which the present system picks up. So that was just a thought about the different categories. If you're going to have the five highest paid, would it be the five highest paid plus the five highest executives?

Mr Mayne: You've nailed it in one. I think you'd say, "Identify your five most senior executives and reveal what they're paid. Then, identify your five next most highly paid employees," and that way you cover the lot. Imagine the negotiating power a CEO would have if you say, "Mate, if I sign this contract you're in the top 10, you're in the annual report." Beautiful negotiating power to stop secret multi-million dollar packages going to non-executives. There would be hundreds of pay packets that are not being disclosed that are of a significantly larger quantum than what is being disclosed. It's all about quantum.

Mr Banks: Are you ruling out that some of these people may actually be delivering more value for the company than the management group?

Mr Mayne: If the bloke in China has landed a massive contract with the Chinese government I'd say you should have given him $10 million, but at least tell us you've given him seven because that's a huge amount of my money which you're giving him and previously you're not disclosing it.
Mr Banks: Might that disinfectant be so strong that really talented individuals who could be really valuable to the company and therefore to shareholders are not stepping forward into roles that would expose them to that kind of scrutiny?

Mr Mayne: I think that's an argument for not disclosing any pay to anyone. I accept that the executive pay has ratcheted up with disclosure, but that's a price that I'm very happy to pay for transparency and accountability. So be it; disclose it all. If you accept disclosing executive pay then I think you should accept that it be done comprehensively, and it bring in the top executives, the directors and the next five most highly remunerated employees.

Professor Fels: Just going back to something I kind of half mentioned anyway, I think the principle reason why you want executive pay disclosure is their own role in setting it or influencing it. The guy in China, who let's say it's a pure case where that person has no real role in determining their pay and having a vote or an influence on it, then your rationale is just when someone gets paid a huge amount of money it should be made known to everyone. It's a slightly different principle.

Mr Mayne: I agree it's a slightly different principle, but at the end of the day, the person who has negotiated the contract in China has influenced the contract because they have negotiated that contract for themselves. So anyone who can negotiate themselves a contract which extracts millions of dollars of shareholders' funds...

Professor Fels: They've got a bit of bargaining power.

Mr Mayne: Clearly they have some influence they're obviously delivering - often these commission-type things, like the real estate agent who flogs $100 million worth of property in Toorak, or the car dealer, the lawyer at Slater and Gordon who is down in Gippsland doing asbestos claims, you would see a lot of unusual people pop up, and then that would need to be explained.

So, "Mr Slater and Gordon, why is your bloke in Gippsland on $2 million?" "Well, he's extracted $100 million of asbestos settlements." "Great, well done. Good to see it disclosed." But sunlight is the best disinfectant.

I don't care what the station director of 2CH is getting, it's not meaningful. I would happily accept a system which says you don't have to disclose any figure under $500,000. So if you want to reduce disclosure you'd say, "Anyone over 500,000, the top five executives and the top five next highly paid." So get rid of the $100,000 packages, it's irrelevant. So if you're worried about too much disclosure, put a threshold which says anything under a certain amount we don't need to know. It's the seven figure balloon payments that are secret that I think need to be disclosed.

Mr Banks: Perhaps that station manager needs a pay rise.

Mr Mayne: I think he does, yeah.

Mr Banks: The only other thing I was going to ask you, you talked a bit about proxy advisers. You haven't said much about the remuneration consultants, and just any thoughts you had on that and how it's operating currently. We've had a number of participants talk about the lack of independence in relation to at least some remuneration consultants, given that they're also getting their own remuneration from management as well as reporting to the board, depending on the range of activities they are involved in.

Mr Mayne: I absolutely believe it shouldn't be the CEO appointing the remuneration consultant. It should be the boards seeking independent advice from someone who's remuneration is not in any way influenced by the people he or she is recommending on. My problem with remuneration consultants is the same issue with auditors who rarely qualify the accounts, or independent experts in takeover deals who always come up with a valuation that suits. Whoever pays the piper, whatever that saying is, gets the tune they want to hear. From my experience, I guess there is no visibility over a remuneration consultant who says, "This is outrageous, this is over the top."

The only one I'm aware of is when the NRMA was in the middle of their Keating versus Whitlam factional fights. Eric Dodd, the CEO back in 2000 was getting a big options package, and Nick Whitlam wanted to get a similar big options package as the non-executive chairman. Keating called in John Egan - the John Egan who said it's fine to give George Trumbull $20 million worth of free shares - who said, "No, we shouldn't give any options to the non-executive chairman." That's the only instance I'm aware of of a rem consultant rolling a chairman, and it was coming from a rival faction on the board, so it's a unique situation.

Pay non-executive directors more

I must admit I know a lot more about the proxy advisers than I do about the rem consultants. It's a very, very undisclosed world. My gut feeling, but not particularly informed, is that it's a lot of conflicts of interest and the pay has been getting out of control. The consultants, they always say, "We got an independent firm of consultants in to recommend it." But often when the boards are saying that defending the increase in board fees, they're right. The non-executive directors are not getting overpaid and the consultants are recommending modest increases in the pool cap.

So for me, there is nothing wrong - NEDs are underpaid and consultants should be recommending higher pay for NEDs. CEOs is where it's out of control. Those figures I give you, Frank Lowy, $16 million in 2008 at Westfield, the entire board, $2.28 million; ridiculous. Macquarie Group: $24.8 million for CEO Allan Moss; entire board, $2.65 million. Why aren't the consultants saying, "Less for the CEO, more for the board"? That is the biggest change that should happen, is the relative pay between NEDs and CEOs. I think, frankly, the rule of thumb should be no CEO should get more than his entire board. So whatever the fee cap is for the board is the fee cap for the CEO. That would be an amazing reform.

Mr Fitzgerald: It would be a significant reform. I'm aware that we're out of time but I just want to understand one thing. One of the consistent themes in all of the submissions is that disclosure might be good but the disclosure regime we have at the moment is not working effectively. We constantly hear about annual reports that have more than a third devoted to remuneration reports and so on. If you extend the number of people that are captured, that would increase that. Have you got a particular view as to how you in fact make the disclosure regime work more effectively than it currently appears to be?

Mr Mayne: I have the biggest stash of annual reports at home than anyone, because I'm a shareholder in 690 companies and I get deluged with annual reports. I have never read a full remuneration report. I find them to be 50 pages of excess information. The only thing I'm interested in in the annual report is - and all the separate tables valuing options and short-term incentives, all I'm interested in is the actual total pay packet of the directors and the top executives broken down into cash, STI, LTI, super, other benefits and the comparator with the previous year. So that's the one table I'm interested in.

From my point of view you could get rid of all of the rest and that would be fine. The one thing you would add is the historical assessment of all pay deals for ‑ particularly the CEO.

So it would say, "Frank Cicutto joined National Australia Bank in 1960. He was paid a regular teller's wage," whatever. "He became executive director in 1990 when he was on $300,000 a year and received his first options issue of this many options. He sold this many shares in 1995. We then issued him these options in 1996, these options in 1998. He then sold these shares here. His pay went up to here," so an accurate historical assessment of the CEO's overall remuneration relationship with the company; because every time we go to have a vote on new options or something, we never know how many other options he has been issued earlier, whether he has dumped some shares when they were $35. It's a snapshot in time on a one specific isolated component, an incremental component to their pay, presented in a way which is completely out of context with all that has happened before.

So for me you can get rid of it all except for the actual data and then I would just love a really succinct summary of the pay relationship with those key people since they joined. You would get five-page rem reports which for me I would read ever word of it. It would be really, really valuable and it would save a lot of trees.

Professor Fels: What about the argument that you kind of need both? In other words to get to the bottom of some things you need the details, there needs to be - even if you can't read them all there will be a few people who will go through it.

Mr Mayne: Look, I know the proxy advisers go through them in detail and value them. The Westfield and the Macquarie rem reports are very good. The disclosure is very detailed. I guess I personally just find it too much. I accept the argument that there are some people who look at the detail. I think when RiskMetrics and the others present that's really a good question for them: at the end of the day you are delivering the votes for and against rem reports. What information do you use of the detail and what information do you not need and what additional information do you need? It is a very detailed area. The experts are looking at it in detail.

I sort of rely on the proxy advisers. I'll get to an AGM and I'll say, "Can you show us the proxies please on the remuneration report?" They will say, "Right, 30 per cent against." I will say, "Right, there's an issue, what is it?" because I can't read all the - and I get the chairman to explain what the issue is and I say, "Well, are you going to change it?" He says, "Well, you know, maybe," or whatever and this and stuff.

But often it will be, "Put the proxies up." "98 per cent in favour." "Okay, chair, I'm in favour as well. The instos are obviously happy, the proxy advisers are happy, I'm happy, no issue. Let's move on to something else." That's the way I work. I've outsourced that research, if you like, to the proxy advisers and how the proxies come in. Then I leap on it. Whenever there's a protest from the instos I leap at it and say, "Right, what is it and what are you changing?"

Then for me I just look at the pay figures and say, "Mr CEO, you're up $3 million from last year. You're getting a bit greedy here. Do you really need these options? You've already got 10 million options." A little debate around that without, "your KPI says," "your hurdles," and, "you're in the first quartile". All that stuff is just too much.

Professor Fels: Only for the CEO?

Mr Mayne: Primarily for the CEO, yes. The history, yes, that would be great, CEO history.

Professor Fels: On another issue there are various codes of kind of good practice now that we see from AICD, from the ASX and so on. Have you looked and have you any views on those codes about value or ‑ ‑ ‑

Mr Mayne: The corporate governance principles?

Professor Fels: Yes, in regard to exec ‑ ‑ ‑

Mr Mayne: On exec pay? I must admit I haven't spent a lot of time on the detail.

Professor Fels: Yes. Do you have - you've talked a lot about process. Now, just on actual substantive outcomes, do you have a general view on executive rem and do you want to say it or you're not going down that track? Has it been excessive in general? Has it risen excessively? Is that how you'd see it? Others say, "Oh, not too bad but some exceptions." We've had the full range of views, as you can imagine.

Mr Mayne: I think it is very much company specific. I have no problems with Frank O'Halloran, who I probably regard as probably the best CEO, pound for pound in Australia, getting $5 million a year at QBE. He has been the finance director since 1978. He has created one of the 10 biggest insurance companies in the world. The stock has done fantastically well. Five million dollars sounds a lot. No problems at all for me with that.

I think your typical big four bank CEO in the last 10 years, or particularly if you stopped at two years ago, retired worth between $30 and $50 million. That was basically because the cartel was out there. They were all getting paid piles of cash and then they all got their options and it went through the roof.

For mine - that was just - it was greedy. The CEO of ANZ who was paid only in shares. He was getting $15 a year in cash, $15 or something. It was tiny. The rest was in shares. He was gaming the tax concessions on the shares. Share price is going up. He is worth $30 to $50 million.

For me that was - at the end of the day banks are like a licensed utility ‑ licensed by the government, should be a utility. I think that the fact that Australia has the world's most expensive banking system was because the CEOs got all their huge options plays on and then just milked the system as far as the regulators would allow. Howard government did nothing, sat back.

Australian consumers suffered the world's most expensive banking system. Brutal banks driven by equity incentive schemes which delivered the big four CEOs $30 to $50 million. I think they were the perverse incentives in our financial system. It wasn't taking risk in subprime, it was abusing our cartel and gouging the consumer and delivering Australians the world's most expensive banking system.

The last one I would say is any CEO who gets lucky on the commodities boom, Greg Gailey, current chairman of the Business Council left Zinifex with a $12 million payout which was just basically, "You can have all your incentive shares." He didn't triple the zinc price, China did that. I would love to see incentives that focused on what you can deliver, what you can actually deliver and curtails it if it's just the zinc price triples; you don't just get some massive windfall.

So I think some of those mining CEOs did get out of whack with variables they had absolutely no influence over. You could pick another company where someone has done a huge amount of heavy lifting in a difficult situation and got nothing because they've saved the company, salvaged huge value, but the company share price has still gone down; tough industry. I should try to think of someone. You need to focus it on deliverables that you can influence, and sometimes that does include bonuses for stopping your company going broke, risk management, and not just a one‑dimensional upside based on share price. Particularly in a commodities focused nation like ours, you get windfall CEOs who happen to be in the right place at the right time.

Professor Fels: From that perspective, those people who say the pay rise, I think we had a 96 per cent increase over six years against 30 per cent for wages or something like that, is justified because the stock market went up by almost that much. What do you think of that as a class of argument?

Mr Mayne: I think it was out of whack, not hugely, and I accept pay all around the world was going up. But I think that quantum was out of whack. You could wind it back 20 to 30 per cent on where it got to and I think it would be about right. I've got no problems with a CEO earning $3-to-$5 million a year.

I love saying to James Packer at the AGM every year, "Well done for working for free," because he doesn't draw a salary. I always go to Frank Lowy and Rupert Murdoch and say, "Why can't you do a Packer and work for free? Frank Lowy, you're getting $190 million a year in dividends from your stake in Westfield. You don't need $15 million a year in cash. You are double-dipping."

I still can't believe RiskMetrics recommended in favour. So that's an example where I think it is out of whack. Frank should be working for free, like Kerry Stokes, a lot of the owner shareholders. Gerry Harvey, what's he on, half a million? Kerry Stokes just takes a regular director fee, $100,000 a year, even though he's executive chairman. So it's all uneven. Rupert Murdoch, $32 million a year when the share price has gone nowhere since 1998; that's just an outrageous example of American benchmarking. Shares have gone down from $28 to $12 or something, he's still hoofing it with $32 million a year and lecturing everyone else through his newspapers about some public servant getting a 10 per cent pay rise.

Mr Banks: I think we were ambitious allowing 30 minutes, but it's been very useful, that discussion, so thank you for that. I was trying to keep count of your top five reforms, and I think we might have blown out to 10. But they are all concrete suggestions and we'll clearly look at those as we're thinking our way through this process to the draft report. So thanks a lot.

Mr Mayne: Thank you.

Mr Banks: We'll break now for lunch and resume at 2 o'clock.