We all pay when giants are silent

Australia's best-paid chief executive officers are doing it tough. According to The Australian Financial Review's survey of executive pay, for the first time in a decade none of our CEOs made more than $10 million. But a few came mighty close. ANZ's Mike Smith, Westpac's Gail Kelly, Marius Kloppers of BHP and James Hardie's Louis Gries bagged more than $9 million each.

Australia's best-paid chief executive officers are doing it tough. According to The Australian Financial Review's survey of executive pay, for the first time in a decade none of our CEOs made more than $10 million. But a few came mighty close. ANZ's Mike Smith, Westpac's Gail Kelly, Marius Kloppers of BHP and James Hardie's Louis Gries bagged more than $9 million each.

Seven more made more than $8 million, and every single CEO in the top 130 companies made more than $2 million.

In the past 10 years, the base pay of corporate executives has more than doubled, while average weekly earnings have risen by about half. Shareholder returns averaged 30 per cent in the same period.

In its 2010 report on executive remuneration, the Productivity Commission wasn't able to conclude whether higher pay led to better performance, suggesting the use of high termination payouts muddies the water and pay packaging might be "more art than science". That's a nice way of putting it. Either way, corporate executives get a hell of a lot of money.

Some shareholders think they're being ripped off, and many voters believe "something should be done". Enter the visible hand of big government. In July 2011, the controversial two-strikes rule was introduced. Now, if more than 25 per cent of the votes cast at two consecutive annual meetings fail to approve the remuneration report, all board members except the managing director must stand for re-election.

Last year, more than 100 companies had first strikes. This AGM season, first-time offenders such as Crown, Pacific Brands and BlueScope Steel seemed to take notice, releasing more information on pay packages and cutting remuneration. So, all good then?

Not really. Like politicians, chief executives can make popular decisions during their tenure, keeping share prices bubbling along, and leave a huge mess for their successors years later.

There probably isn't a regulation or rule that can address this. What's left? The free market may be imperfect, but it's the best thing we've got for assessing value, making investments and deciding things such executive pay.

The problem is, in this area the free market isn't so much free as captive - to the institutions. Private investors ask the hard questions on executive pay at annual meetings, but the institutions, where the real power lies, are frequently silent. Why is a mystery. Perhaps they don't want to bring bad publicity to their investments, or they don't want to draw attention to their own generous pay packages, or they have lost touch with what constitutes a reasonable amount of money. Yet this is where the real power lies.

The gatekeepers to Australia's vast pool of superannuation - the asset consultants and super fund trustees - could force them into action but rarely do so. It could easily be different. Each time a fund manager were called on to justify their performance, the trustees could ask how they voted on executive pay and a host of other issues. Those answers could be released publicly.

Let's see who's cosying up to management in an attempt to "stay on the drip". Let's hear from the people with the power to make boards accountable explain why they choose not to. Trouble is, those same institutions that keep quiet about outrageous pay packets, failed strategies and stupid acquisitions, are the same ones that have the deciding votes to re-elect "second-strike" board members.

The law offers the appearance of change without much substance. Institutions are failing to use their voting power, and trustees are failing to force them to use it.

If you think retail shareholders are disenfranchised, the situation is 10 times worse in super funds. There is no obligation to even hold an annual meeting, let alone vote on how they're run. As long as trustees act within the strictures of the Superannuation Industry (Supervision) Act, there's nothing members can do about it. If the government is serious about corporate reform, let's start here. Give members a real say in how their funds are run. Let them vote, see how much their executives earn, and how their fund managers vote.

As long as institutional investors don't have to account for the opinions of their members, the idea of a shareholder democracy will continue to be what it has been for a long time - a farce.

This article contains general investment advice only under AFSL 282288. Nathan Bell is the research director at Intelligent Investor, intelligentinvestor.com.au.