Joe Hockeys boardroom challenge

Directors and boards have come under increased scrutiny and criticism on a number of issues and from a number of quarters not least from some government ministers.

However, as Federal Minister for Financial Services and Regulation Joe Hockey explains, now is not the time to hunker down in the trenches and batten down the hatches. He wants to engage directors in a debate on a number of fronts and, as he outlines to John Arbouw, he wants directors to take up his boardroom agenda

Joe Hockey is obviously a dog lover, because in his words he was only throwing a dead cat on the table when he made recent statements criticising institutional investors for not exercising their proxy votes and describing the skills and gender base of Australian boards as too narrow.

Unfortunately, for Hockey this cat raised the hackles of a business community which has been struggling to come to grips with GST implementation, a lower Australian dollar, rising interest rates and the global economic uncertainty inherent in volatile stock markets.

The view, expressed privately by a number of directors, is that he is an upstart who has already made a number of gaffes including the issue of the rounding out of GST prices. Politicians often forget that, while the business community might be a conservative government ally, it does not take kindly to political point-scoring at its expense.

He has even put noses out of joint within his own party - one former senior NSW figure in the Greiner government telling The Australian newspaper on May 21 that Hockey was "a bumptious little prick who always wanted to cut corners".

Whatever the merits or demerits of Joe Hockey, there is no denying that the ambitious 33-year-old lawyer and former Young Liberals president has already had a significant impact on the areas within his portfolio.

As the member for North Sydney and a NSW Liberal moderate, Hockey has impeccable political connections. He was a president of the Student Representative Council at Sydney University, went on to the Young Liberals and worked as a banking and finance lawyer for Corrs Chamber Westgarth.

As an adviser on privatisation he worked for both John Fahey and Nick Greiner during their terms as NSW Premiers. In 1994, Hockey was selected to run for the seat of North Sydney just after popular independent Ted Mack announced his retirement. He won the seat easily and he is now the youngest minister in Parliament.

Hockey's responsibilities in government include banking policy, corporate law reform, the Australian Competition and Consumer Commission and he is directly involved with competition policy.

It is a new portfolio specifically created by Prime Minister John Howard and one of the prime outcomes Hockey is expected to achieve is to make Australia (read Sydney) an international financial centre.

So why did he toss the dead cat?

"There are some issues which I think should be put on the table but unfortunately the media has chosen to look at this in terms of conflict," he says. "My view is, let's talk about corporate governance in new economy companies, let's talk about executive remuneration, let's talk about the demographics of boards, let's talk about companies that spend a lot of money on IT but do not have IT skills on the board.

"I had two directors come up to me recently asking questions about my speech on corporate governance (Sydney Institute, May 1) and I asked them if they had read it. When they said no I told them they could download it from joehockey.com.

"They said they wouldn't go anywhere near the Internet. They believed it was just a passing fad like the minerals boom. I know that one of these directors sits on a board that is spending a phenomenal amount of money on IT.

"Look, there might be a perception that I am sitting in the edifying castle of Canberra but I spend more time talking to business people than business people talk to each other. It is my day-to-day bread and butter."

It would be easy to dismiss Hockey as just another politician trying to grab the headlines in the next day's papers but up close and personal he exudes an air of enthusiasm and a determination that is infectious.

Hockey's boardroom agenda is a critical policy area not only for the Howard Government but for corporate Australia. The prize is convincing Asia and the rest of the world that, if Australia grows to be a financial centre on a par with Tokyo, New York and London, it will lead to increased international investment.

According to Hockey, Australia is in the third golden age of its development. If the 1860s gold rush was the first age and the post-war boom the second, then the transition from the old economy (agriculture and mining) to services and information technology and telecommunications represents the third age.

He maintains that the new economy is not simply about new services but also new ways of doing business and that is why his boardroom agenda includes the reform of the Corporations Law and the regulatory practices governing Australian business.

A more workable tax system was the first step and the proposed changes to the Corporations Law currently before Parliament and other regulatory frameworks is the other. Hockey believes in reform but not in over-regulation and that is the main reason why he has opened up debate on a number of fronts.

What he wants from the business community is the creation of a recognisable and accepted regime of self-regulation that will leave him and his Government free from Senate interference. It is the reason why he is very strong about the need for corporate governance.

Hockey claims not to have criticised the AMP board, but there is little doubt that when he called institutional investors "lazy" in March for shirking their responsibilities and implying they have a cosy relationship with the corporate establishment, he was aiming at the AMP.

At the time, the board of the AMP was under fire for the $1.2 billion loss on the GIO acquisition, with one shareholder at the May 18 AGM labelling the deal as possibly "one of the greatest colossal blunders and devastations in Australian financial history, apart from our old mates Christopher Skase, Bondy and Spalvins".

The debacle forced then chairman Ian Burgess and a number of AMP directors to resign. The process of accountability worked but in some quarters it was regarded as taking far too long, resulting in bad press and a lagging share price.

"Corporate governance at AMP has now worked," says Hockey. "I see what happened with AMP as reinvigorating good corporate governance.

"I don't see any fundamental problem with Australian boards and I think the quality of directors overall is very good. There is a lot of strength in the Australian boardrooms that could be well duplicated in other jurisdictions.

"I see corporate governance being a product of self-regulation. Good corporate governance is about Australia taking control of its own corporate destiny rather than having an over-zealous Senate impose prescriptive corporate governance procedures on the business community.

"I genuinely believe that there are moves being made by the Government and the business community to work towards a more robust self-governing regulation model. From an international perspective we still suffer a little from the excesses of the 1980s.

"My goal is to try and put in place a legislative formula that allows businesses to take responsibility for their own destiny while at the same time putting in place a regime that gives shareholders a sense that the company is adopting best practice.

"Global capital can move where it wants to and, if Australian companies do not follow global best practice, we simply won't attract international investment. I know that institutional investors ask questions about a company's financial performance but I am not convinced that they ask enough questions about good corporate governance.

"There are 200,000 trading companies in Australia, but while shareholder scrutiny of the top 50 publicly-listed companies is strong, it is those other companies whether listed or unlisted that give rise to questions of good corporate governance particularly the new dotcom companies.

"My message to those new companies who want to raise capital is that they should think about corporate governance before they try to raise equity. You don't necessarily want the person who invented the widgets running the company and that hasn't been debated in any great significance."

Hockey not only wants greater skills diversity on boards, he also wants to see more women. He says women represent only 8.3 percent of directors and this lags behind US and New Zealand.

The other director issue that has had significant airplay of late is the question of remuneration - with even the Prime Minister chiming in on the subject. There is little doubt that the payout by AMP to departing CEO George Trumbull was the trigger.

Acting AMP chairman Stan Wallis defended the payout at the recent AGM on the grounds that it was done "to avoid the costs, disruptions and uncertain outcomes of court action". However, more controversy occurred when the AMP board awarded its current CEO Paul Batchelor a 1.2 million option package despite the fact that he had been involved in the GIO takeover and the rejection of the $21 a share offer for the AMP by the National Australia Bank.

During the AGM, the head of Perpetual Investments Australian equities, Peter Morgan, questioned the remuneration of Batchelor and its $16 a share strike price and Wallis was forced to take a poll of shareholders before the package was approved.

Hockey however, claims to have never personally said that directors are overpaid. He also acknowledges that there is confusion particularly in the media between the salaries of management and executives and director's fees.

"I would rather see directors paid more and sit on fewer boards and pay more attention to the transition of their companies to the new economy," he says.

"However, directors need to be sensitive to the plight of the Government in dealing with the situation when there are some executives receiving very large remuneration packages on the one hand and on the other the coal face workers for one reason or another are not getting their full entitlements," he says. (The Trumbull payout came at the time the National Textiles company in the Hunter Valley went into receivership and the Government had to eventually step in to pay workers' entitlements)

Hockey certainly wants the institutions to take a more proactive role in determining a range of issues not least remuneration.

"The AGM is a forum for large shareholders and not just small shareholders. It is far too tempting for directors to look at AGMs as the equivalent of visiting the dentist and what I would say to them is make it work for small shareholders," he says.

"If you actually make an effort in communicating with shareholders throughout the year then you won't need to lose any teeth when you go to the AGM.

"It is a really dangerous path to go down if directors see shareholder activism as a pain. It is about directors learning about human interaction on a grand scale. As a politician I face that every day; and you have to strike a balance on what is in the best interest of the majority. The more communication you have with smaller shareholders the better off you will be.

"There have been a number of instances where boards have made decisions without informing small shareholders and this has caused problems. I tossed a bit of dead cat on the table by suggesting that companies should have a chat room for shareholders."

He says the Government has done its bit to help business by introducing the safe harbour concept in terms of board decisions and he has lifted the hurdle before minority shareholders have enough votes to call an extraordinary meeting or influence AGM agendas.

"Under the current Senate circumstances that's not too bad," he says. "As well, there is an amendment moved by the Senate on the Employee Entitlements Bill that I am going to reject. (this amendment would have involved changes to the insolvency provisions and made them more onerous for directors)

"The AICD decided it was going to lobby on Employee Entitlements in relation to company insolvency and that opened up a potential hornets' nest when we were trying to hold the line on the matter because of the level of credit that would be available to SMEs.

"What we have got in my view is a Labor Opposition and to a lesser degree the Democrats who do not understand doing business. I might add that Senator Andrew Murray (Democrat) has been very reasonable to deal with on this issue.

"I am dealing with a hostile Senate that wants to be prescriptive. What I am saying is that if we can get self-regulation working well in the form of good corporate governance then I have a very strong case to argue to the Senate that we don't need prescriptive legislation.

"I want the AICD and various stakeholders to work on a plan that will address these kind of issues. I am at pains to emphasise that. I raise them because as an observer I see the issues coming through the tunnel like a train and I am urging people to discuss and deal with them now before it becomes necessary for a more prescriptive action."

Whether that means the development of some independent scorecard is something he sees the industry and the Government working out.

Of more immediate political concern is the implementation of the GST. The Government has spent nearly $500,000 in advertising spending both before the last election and in the current campaign to sell the "feel good" GST message.

The last thing the Government wants is to dilute that message and create the impression that the GST is having or will have any negative impacts. The recent sensitivity over the possibility of further interest rate rises by the Reserve Bank underlines the point.

The controversy over the rounding out of GST prices and any perception that companies are fiddling with prices before the GST comes into force is another sensitive area.

There have been instances of companies trying to gain a marketing advantage with a "buy now before the GST comes in" campaign. Closing-down sales or Autumn, Winter, Spring or Summer clearances as marketing precedents mean little in the heated debate within the GST political prism.

"Some companies have tried to gain a marketing advantage through the introduction of the GST," Hockey says. "The bottom line is that business and government have a common interest in that we don't want to scare consumers (read voters).

"If we are spending money explaining the benefits of the taxation system to consumers and the business community is spending money scaring people about an Armageddon that comes after the 1st of July then we are not working to a common purpose.

"I would say to those businesses that are choosing to gain marketing advantage by scaring customers to buy before the 1st of July be careful. That's all we are saying.

"The business community quite rightly was supporting us in developing the tax package. It's been fantastic support. But don't go to water on us now to get a marketing advantage by trying to tell people that things are going to be worse after the 1st of July."

Of particular concern to business is the prospect of any action by Allan Fels and the ACCC. The consumer and competition watchdog has already made barking noises at a couple of companies. There are some who feel that Fels has overstepped the mark.

"I will stand by Allan Fels on this. He is quite rightly trying to send a message to business that if you engage in price exploitation or you mislead or deceive about the transition then you will pay a price.

"I know that Allan Fels does not lightly make public statements about companies without having some reason for making those statements. But this is as much as explaining to companies that you cannot engage in inappropriate conduct as it is about enforcing the law.

"The ACCC has the power to enforce breaches of price exploitation. And if there is any doubt out there about our support for the ACCC you will note that we have increased its funding in the Budget."

Of more encouragement to directors and boards is the intention of the Government to proceed with the financial services reform bill. At the moment, the Government is still taking submissions, but Hockey intends to introduce a Bill to Parliament sooner rather than later.

The most important issue for the Government and for Hockey at the moment is to find certainty in the status of the Corporations Law. A recent court in WA has the effect of reverting control of any Corporations Law from federal to state jurisdiction.

A potential effect would see both domestic and international companies having to comply with a myriad of Corporation Law rules based on state issues. It is a move back to a time when Australia had different rail gauges and different State accreditations for medical, teaching and legal qualifications.

"I am working very closely with Attorney-General Darryl Williams to get full referral from the States to the Commonwealth of the powers in relation to the Corporations Law.

"It is absurd to consider returning to a State-based Corporations Law regime. Most States are supportive but there are one or two that aren't. The sooner the business community can send a message to those jurisdictions the better.

"It is a deal breaker in terms of having Australia recognised as an international financial centre. I plead with directors and the business community in general to let Western Australia and South Australia know what the real impact of non-referral is."

Joe Hockey has tossed more than dead cats on the table.

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