Clean Environment, Dirty Politics

I'm speaking this afternoon at an ANU conference on climate change.
Clean Environment, Dirty Politics
Speech delivered to the ‘Australia’s Climate Policy Options’ Conference
Australian National University
31 March 2011
Andrew Leigh MP
Federal Member for Fraser

I acknowledge the traditional owners of the lands on which we meet today, the Ngunnawal peoples, and pay my respects to their elders past and present.

As the federal member representing the northern half of the ACT, I’m pretty proud of this city. In fact, last year, I gave a speech at the Sydney Opera House arguing that ‘Canberra is the Best City in Australia’.

But one of the things that makes this city so extraordinary – the close connection between city and natural environment – is also what makes the Bush Capital particularly vulnerable to climate change. Over the next five decades, climate models suggest that dangerous climate change could subject Canberra to:

  • a 50% increase in high or extreme fire danger days;

  • more frequent droughts;

  • more hot days; and

  • less water in our dams.


Each prediction is necessarily imprecise, but together they add up to a degraded natural environment, and greater costs to households. Canberra’s devastating bushfires in 2003 delivered a damage bill of a third of a billion dollars to what was then just a $16 billion dollar economy. Increase the probability of extreme fire danger days and you increase the expected cost of bushfires.

One way of regarding climate change mitigation is as a form of insurance. As Rupert Murdoch has noted:

‘Climate change poses clear, catastrophic threats. We may not agree on the extent, but we certainly can’t afford the risk of inaction.’

Just as we know that asbestos is very likely to cause malignant mesothelioma and bad cholesterol is very likely to increase the risk of a heart attack, we know that society’s greenhouse gas emissions are very likely causing global warming.

Will Steffen has pointed out that we know with 100% certainty that climate change is occurring and 95% certainty that it is human induced.

The science is slightly less confident is the extent of risk for individual regions. Yet if carbon emissions continue unabated and we reach ‘tipping points’, the risks are high.

When speaking with sceptical electors, I often use the medical analogy. If your child was sick, and 95 out of 100 doctors told you that the child needed a life-saving drug. Would you follow the advice of the other five doctors?

The best way of achieving action on climate change would be through a broad consensus across the political spectrum. Yet as one premier noted on World Earth Day 1990:

‘Regrettably, too many people on the conservative side of politics still view environmental consciousness as some sort of left wing conspiracy. Amongst both the Liberal and National Parties there is still a cringe when the environment is mentioned from a subconsciousness aversion that arises, I believe from a misconception that there is some fundamental philosophical inconsistency between environmental consciousness and democratic capitalism.’

That was Liberal Premier Nick Greiner. I hope that Premier O’Farrell can follow this advice and lead the Liberals down the path of action – accepting the advice of both mainstream scientists and mainstream economists.

In teaching environmental economics, the case study we often use to support market-based mechanisms is acid rain. When US President George HW Bush proposed the use of market-based mechanisms to deal with acid rain, electricity generators warned that costs would skyrocket. Today, the program is regarded as a success, having achieved its emissions targets at around one-third of the projected costs.

One reason the costs were lower than expected is that firms used a variety of approaches to reduce emissions. Some retrofitted emissions control equipment. A number switched to cleaner fuels. Others retired their dirtiest generators. Because each firm took the lowest-cost approach, the social cost was minimised.

For environmental economists, this result merely reaffirmed theoretical work going back to Arthur Pigou in the 1930s and Ronald Coase in the 1960s. By the time Coalition climate change spokesman Greg Hunt penned his 1990 university thesis (‘A tax to make the polluter pay’), the economic theory was widely recognised.

Hunt pointed out that ‘An attraction of a pollution tax regime is that it produces a strong incentive for firms to engage in research and development’. For consumers, ‘goods which do not generate [pollution] in their production will become relatively cheaper and therefore more attractive’.

Discussing the politics surrounding pollution taxes, Hunt argued out that ‘a pollution tax is both desirable, and, in some form, is inevitable’. He also suggested ‘even if some of the Liberals’ constituents do respond negatively, a pollution tax does need to be introduced to properly serve the public interest’.

Hunt’s thesis represents the view that most small-l liberals held for decades. The UK Conservatives are proud champions of their nation’s emissions trading scheme. As recently as 2007, the Liberal Party of Australia’s election platform promised: ‘To reduce domestic emissions at least economic cost, we will establish a world-class domestic emissions trading scheme in Australia (planned to commence in 2011).’

Scientists like to point out that climate change is dominated by tipping points. Tony Abbott’s one-vote ousting of Malcolm Turnbull as Liberal Party leader in 2009 is perhaps the best example of such a tipping point. Some of us still hope that the climate in the Coalition party room might experience another change in the future.

The benefits of market-based mechanisms over command-and-control is that by pricing carbon, we can unleash the creativity of the market.

This is already happening in Europe. For example:

  • Tesco (the world’s third-largest retailer) has opened its first zero-carbon store, and is aiming to be carbon-neutral by 2050.

  • Sorption Energy has developed an absorption heat pump for use in houses and in cars.

  • Ecobutton has developed a software program that allows computers to hibernate more efficiently (and tells the user the amount of CO₂ emissions saved).

  • Ecogen technology will generate electricity while generating heat and hot water, thus significantly reducing the carbon emissions of the household.

  • Cement manufacture is an emissions intensive industry. So Novacem has developed a cement that it claims is actually carbon-negative. That means it absorbs more carbon than it emits, because it is based on non-carbonate raw material.

  • Airline travel is something that people demand more of as their incomes rise – yet it is highly emissions-intensive. Airbus recently developed ‘Sharklets’ - specialised wing-tips which are designed to reduce fuel consumption, emissions and engine maintenance, while improving the range, take-off performance and rate of climb of the plane and assist in achieving a higher altitude.


Under a market based mechanisms it is entrepreneurs and households who decide the best path to reducing emissions. Because even the best-intentioned governments are unlikely to anticipate all the possible channels for abatement.

For all the scepticism of science and economics in the Coalition, it’s easy to miss the fact that they have actually signed up to the same emissions reductions targets as the Government. But they have committed to achieving those targets using an extremely inefficient policy. On our calculations, the Coalition would need to spend an additional $20 billion buying permits on the international markets in order to meet the 5% emissions reductions goal.

The only way of raising that $20 billion is through taxation. If the Coalition didn’t raise consumption or company taxes, they would probably need to get the revenue from personal income taxation. That means that under the Opposition’s plan, income taxes would need to go up to pay for the Opposition’s various subsidies. Put simply, while the Government is proposing to price carbon pollution, the Opposition’s scheme will most likely raise the price of work. While we want to tax polluters, they want higher taxes on workers.

If we are successful in legislating a carbon pricing scheme this year, this difference will come into stark relief. The Opposition has pledged to scrap a market-based mechanism, and replace it with their much less efficient way of reaching the 5% emissions target. In addition, they will also need to reverse the government’s assistance package. If our assistance package includes an increase in the pension, the Opposition will cut the pension. If our assistance package includes income tax cuts, the Opposition will raise income taxes.  If our assistance package improves incentives to move from welfare to work, the Opposition will reverse those improvements.

The Government’s scheme is based on an essential lesson from first year economics: the best way of addressing a negative externality is to put a price on it. But as many speakers today have discussed – the design details are critical. For households, we need to craft an appropriate assistance package. For businesses, it will be vital to ensure that emissions-intensive trade exposed industries remain competitive. And for energy generators, it will be important to provide certainty as they go about transforming themselves into cleaner producers.

The politics of climate change is never easy. But as an economist-turned-politician, I have to say that arguing for good economic policy in the face of a ferocious scare campaign is exactly why I ran for parliament. If we can make this reform, Australia’s economy will be better off. Our environment will be better off. And, as a result of engaging with citizens in an honest debate about our nation’s future, our politics will be better off.

Because of that, conversations like this one are a vital investment in a better polity. Thank you all for being part of it.
Add your reaction Share

Weathervanes

Consistency isn't everything, but it's astonishing to see how far some members of the Liberal Party have shifted from their commitment to market-based approaches to deal with climate change. So I gave a speech last week that drew together some (very recent) statements by Liberal Party members on the topic.
Carbon Pricing
22 March 2011


Tonight I rise to speak about the Liberal Party’s backflip on using market mechanisms to deal with dangerous climate change. We have heard in parliament today quotes from the honours thesis of the member for Flinders, Greg Hunt—a work titled ‘A Tax to Make the Polluter Pay’. We have heard in the media from the member for Wentworth, Malcolm Turnbull, who articulately argued that the most cost-effective way of reducing Australia’s greenhouse gas emissions is through a market based mechanism. The Liberal Party in their 2007 election policy document informed us:

Climate change means we must undergo a fundamental transformation to a low-carbon economic future.

A re-elected coalition government will establish an emissions trading system, the most comprehensive in the world, to enable the market to determine the most efficient means of lowering greenhouse gas emissions.

These views were held by Liberal Party representatives as recently as 16 months ago. Senator Alan Eggleston on 30 November 2009 said:

One way of avoiding the volatility of an emissions trading scheme would be to have a carbon tax. A carbon tax provides a very steady and known price for carbon, if you like, which is only varied by varying the tax. That tax can be set at a level that allows renewable energy systems to be competitive.

Senator Sue Boyce said on 30 November 2009:

My own background is as a manufacturer. In that sphere, I know the benefits of early adoption. I would just like to point out to the Senate that it was the Shergold task force, commissioned by the Howard government, who said, long before we got to this place, that Australia should not wait until a genuinely global agreement has been negotiated, because there are benefits which outweigh the costs in early adoption by Australia of an appropriate emissions constraint.

Senator Judith Troeth said on 30 November 2009:

By having a price on carbon, people can decide whether they really want to use these carbon-intensive products. It is an effort to move people away from carbon towards other alternatives, and the most effective and efficient way to do this is through a price signal.

The member for Dunkley, Mr Bruce Billson, claimed credit for the last market based mechanism, saying on 29 October 2009:

It was actually the coalition that instigated work on the emissions trading scheme. In fact, I have in my hand a report that I helped author back in 1998 which talks about regulatory arrangements for trading in greenhouse gas emissions—1998!

The member for Mayo, Mr Jamie Briggs, said on 3 June 2009:

I believe an emissions trading scheme is one of the policy levers that can be used to change the energy mix in Australia. An ETS will be, by definition, a price on carbon.

The member for Cook, Mr Scott Morrison, said on 3 June 2009:

There are a suite of tools we need to embrace to reduce emissions. I believe an emissions trading scheme is one of those tools in one form or another. Placing a price on carbon, as the Leader of the Opposition has said, is inevitable.

The member for Paterson, Mr Bob Baldwin, said on 3 June 2009:

I would like to make it clear: the coalition will support an emissions trading scheme …

We know the Liberal Party used to stand up for the market. Former Prime Minister John Howard told Tony Jones on 5 February 2007:

That doesn’t sound very much to me like a market mechanism, when you compel somebody to apply a particular technology. It is far better, if you want to keep faith with the market approach, to develop a carbon pricing or carbon trading system …

The member for North Sydney, Joe Hockey, was quoted in the Sydney Morning Herald on 17 April 2010 as saying:

There has been a distortion … There’s an argument that over time we haven’t paid a proper price for water. We haven’t paid a proper price for fossil fuels. We haven’t paid a proper price for land, etc. You would hope you can remove the distortions.

Climate change is real and it is not only happening in the environment but also happening in the Liberal Party room. A party that once had a proud tradition of supporting markets has now fallen victim of the populism of direct action. As the temperature goes up on the Leader of the Opposition, let us see whether the Liberal Party can again find its faith in markets.
Add your reaction Share

Community Roundtable

I spoke in parliament last week about a roundtable that I organised with some of the community leaders in my electorate.
Statements by Members
Fraser Electorate: Social Justice Summit
21 Mar 2011


The community sector is vital to helping disadvantaged Australians. It is often overlooked in politics. In my time in office I intend to make it a priority to connect with and support community organisations in the ACT.

On 1 March I held a breakfast round table discussion in Parliament House with 13 community leaders in my electorate. The purpose of the discussion was to learn more about the unmet needs in Canberra, the public policies that are working to help the disadvantaged, and changes that should be made to help them more.

Those who attended were Lynne Harwood from Galilee, Annie Madden from the Australian Injection and Illicit Drug Users League, Clare Doube from Companion House, Roslyn Dundas from ACTCOSS, Frances Crimmins from the YWCA, Dira Horne from Belconnen Community Service, Gordon Ramsay from Canberra Region Uniting Church, Sue-Anne Muggleton from UnitingCare, Shannon Pickles from St Vincent de Paul Society, Jenny Kitchin from Anglicare, Amy Kilpatrick from the ACT Human Rights Commission, Simon Rosenberg from Northside Community Service and Jackson Dunkley from Catholic Care. I was also joined by Alicia Payne, convenor of the ACT ALP’s Community Services and Social Justice Policy Committee.

Many attendees argued that Canberra’s most pressing social policy problem is housing affordability. We discussed homelessness, which is becoming a growing problem, especially for large families and youth. We discussed the importance of reducing the stigma and discrimination that is often directed towards disadvantaged Australians. Through preventive measures some of the participants expressed their belief that we can address poverty and disadvantage at its source rather than simply trying to react to homelessness, drug overdoses and mental health problems after the damage has been done. Some participants expressed concern about the balance of spending between proactive and reactive measures.

We also discussed the infrastructure of the community sector. Some participants believe that amalgamations or mergers are efficient and practical, whereas others argued that maintaining small, values-based organisations is the best way to run the community sector.

From my perspective, and hopefully that of other attendees, the summit was a tremendous success. The discussion was constructive and enjoyable and I hope it will be the start of an ongoing conversation. I want to publicly thank all of those who attended for their willingness to speak on these important issues so early in the morning and for their constructive and respectful attitude to their colleagues during the discussion.

Finally, I would like to thank Matt Hunter from Carleton College in Minnesota. Organising this event was the major project of Matt’s internship in my office and he did it with diligence and modesty.
Add your reaction Share

A Super System

I spoke in parliament last week about the government's Stronger, Fairer, Simpler superannuation reforms, and the importance of making sure our superannuation policies are equitable as well as efficient.
Abolition of Age Limit on Payment of the Superannuation Guarantee Charge Bill 2011
Second Reading (21 Mar 2011)


Thoughts of superannuation naturally lead us to thinking about the future. When I think about the superannuation system of the future I think about my one-year-old son, who will probably enter the labour market somewhere around 2030 and work until maybe 2070 or 2080, a year when most of us in this chamber will have shuffled off this mortal coil. Superannuation involves thinking about the retirement savings that my son will accumulate. It involves thinking about the retirement savings that I will accumulate and how that will impact on him and his brother.

Why do we have superannuation? We have it for two simple reasons. The first is that, as a spate of studies from behavioural economics has shown us, human beings have a tendency to undersave. We have a tendency to focus too much on the present and not enough on the future. Therefore, we can make people better off through a system of compulsory retirement savings. The other reason is to reduce the impact on the age pension. We want to encourage Australians to save for their retirement, if they can, so that the public purse does not have to pay for those who can afford to support themselves in retirement.

The history of superannuation reform, therefore, has been in two parts. There have been great reforms brought about by the Labor government, first through the introduction of the superannuation guarantee in 1992 and now through the important package of My Super and the increased compulsory contributions. Then there have been tinkerings—and I will go to some of those tinkerings in a moment. The tinkerings are the approach that those opposite take to superannuation.

But it is important also to recognise what those opposite do when big reforms are put up. Those opposite will place themselves in this debate as the friends of older Australians, as supporters of a strong retirement saving system. But that is not the history. Allow me to quote from Senator Bishop, as she then was, addressing the other place on 18 August 1992:

On this side Opposition members argued very logically and meaningfully that the imposition of this compulsory superannuation tax is a de facto federal payroll tax.

They were running their ‘great big new tax’ argument against compulsory superannuation. And then Senator Bishop, as she then was, told the Senate of a conversation with a small business person, who had said:

But now that this compulsory superannuation payment has gone through, yesterday I had to sack a part time employee and turn a full time employee into a part time employee.

The late Senator Peter Cook was moved to interject by this statement that, because the law had not yet come into effect, it was difficult to see how small business people would be affected by it. But Senator Bishop, as she then was, was unmoved. Senator Bishop finished up the 1992 debate as follows:

I heard Senator McMullan say, ‘The difference between our systems on superannuation is that ours is compulsory and theirs is voluntary’. That is very true. That is an essential difference. Our policy is designed to make it attractive for people to provide for themselves in later life whereas this Government’s is designed to penalise business, to regulate it out of existence.

Of course, if you carry on with that logic then the member for Mackellar should today be saying to this chamber that superannuation is penalising business—and, if it is penalising business, why would we want to extend it?

But of course such an argument is nonsense. As we know, superannuation does not penalise business, and that is why the government announced in May last year that we intend to raise the superannuation guarantee contribution age to 75 from 2013. We intend to do that to provide certainty for business in transition and to recognise that there are costs associated with this. An initial upper age limit of 65 was increased to 70 in 1997. There has been an argument by the member for Mackellar that the abolition of the age limit on the superannuation guarantee will encourage older workers to remain in the workforce. However, done in this manner, there is a high chance the opposite will occur. It is possible workers may be enticed to work longer but it is also possible that employers may be less willing to hire older workers. The bill provides no adjustment time for employers, resulting in a $150 million immediate cost to employers of workers over 70 years old. Secondly, the bill requires that the payments of the superannuation guarantee charge are not tax deductible for businesses. It is estimated that corporate profitability could therefore fall by up to $150 million in 2011-12 were this bill to be passed.

The abolition of this age limit may also lead to a push for other limits to be abolished. It is important that there is an age limit on superannuation contributions. This stems from the significant tax concessions from saving through superannuation compared to other forms of saving. The purpose of these concessions is to encourage savings and maximise retirement income from superannuation. Were there to be no age limit, there would be an incentive for people to maximise tax payments through making voluntary superannuation contributions.

We have to be careful of inequity in the superannuation system. The Henry review went to some of these equity issues in superannuation, pointing out that a 15 per cent flat tax on superannuation contributions is one of the few flat income taxes that exist in our system. This tax is much lower than some taxpayers’ marginal rates—for example, a person earning over $100,000 faces a marginal tax rate of 45 per cent. The consequence, according to the Henry tax review, is that in 2005-06 only five per cent of taxpayers earned over $100,000 but those taxpayers accounted for 24 per cent of concessional contributions to superannuation. On the other hand low-income earners enjoy the least tax concessions. Most face effective marginal tax rates of zero to 15 per cent. That means they receive little or not tax concessions from superannuation. In 2010 over three million low- and middle-income earners did not obtain any tax concession, so abolishing the age limit would only worsen their position.

Another source of inequity is the much lower cap on tax concessions for co-contributions than on salary sacrifice contributions. Although co-contributions provide a higher rate of concession, it only applies to the first $1,000 of voluntary contributions as compared to the $25,000 cap on salary sacrifice contributions. That means that low-income earners still receive much less in tax benefits than high-income earners.

I spoke about the reforms that we on the Labor side implement on superannuation compared to the tinkerings that those on the opposition benches tend to put in place. These tinkerings can have substantial equity implications. I will mention in the context of this debate the changes in 2007, when the Howard government allowed most workers of age 60 and above to withdraw their superannuation tax-free. Retirees who previously earned high incomes were the ones who benefited. In addition, people were allowed to transfer up to $1 million in their superannuation accounts before 30 June 2007. Wealthier people took advantage of this, topping up their accounts with large amounts of funds so they could later be claimed back tax-free. The result was $22.4 billion transferred to superannuation accounts by individuals in the June quarter of 2007—triple the amount transferred in the June quarter of 2006. Many commented at the time that that was doubtless going to lead to a substantial redistribution of income towards richer individuals. So, while the coalition place themselves in such debates as the friends of older Australians, as supporters of the superannuation system, history tells us quite the opposite.

What the government will be doing instead is implementing a package of reforms that builds on our legacy in superannuation. We will be increasing the superannuation guarantee rate from nine to 12 per cent and introducing a new contribution for low-income earners—reforms that those opposite oppose.

The government’s Stronger, Fairer, Simpler superannuation reforms and the reforms flowing out of the Cooper review into superannuation will see an increase in replacement rates for a worker on median wages, who is currently aged 30, from around 71 to 76 per cent. Put in dollar terms, that worker could expect an additional $108,000 in their retirement benefits.

These are reforms which are holistic and which take into account the entire superannuation system. These are not reforms that are opportunistic, that are tinkering or which potentially introduce inequities into the system. These are reforms that reflect Labor’s ongoing commitment to a fair superannuation system for all Australians.
Add your reaction Share

AIDS, Tuberculosis and Malaria

I spoke in parliament last week about tackling some of the worst diseases that afflict people in developing nations, including Tuberculosis.
Private Members’ Business
World Tuberculosis Day (21 Mar 2011)


Tuberculosis, as the previous speaker, the member for Riverina, has noted is a disease from the times of ancient Egypt. It inflicts upon the world 1.7 million deaths each year. Each untreated sufferer of tuberculosis can infect another 10 to 15 people around them. Our region is in a part of the world where many other countries have high tuberculosis rates. Indeed, almost half the world’s tuberculosis fatalities occur in the Asia-Pacific region. The 10 countries with the highest tuberculosis rates include China, India, Indonesia, the Philippines, Thailand and Vietnam. Tuberculosis is a curable disease and considerable progress has been made in its treatment and diagnosis in the last 20 years. What is required is more generosity and more leadership, which is why the Labor government are committed to increasing our aid commitment to 0.5 per cent of GNI. I note at this stage that the UK government, despite having budget challenges that are far greater than our own, has continued its pledge to increase UK aid to 0.7 per cent of gross national income.

Seventy per cent of aid that targets tuberculosis comes via the Global Fund to Fight AIDS, Tuberculosis and Malaria. It is important in this context to acknowledge the role that the global fund has played. The role of the global fund and the role of foreign aid have at least been bipartisan policies in this parliament, and I hope that this continues to be the case. Two reasons that are often cited for cutting back on foreign aid—and reasons which arose in the recent debate when the coalition suggested that they would find budget savings by reducing foreign aid to Indonesian schools—are national interest and corruption. It is true that the global fund has recently had disturbing revelations about corruption. There have been suggestions that global fund resources have been misused. As a result, the global fund’s executive director, Michel Kazatchkine, announced a series of changes, including tougher controls and monitoring, a doubling of the budget of the independent inspector general and a panel of international experts to review procedures.

We should be rigorous about reducing corruption but the fact that we see corruption does not mean that we should shut down our support of the global fund. The global fund concept has been effective. The global fund makes countries compete for money based on their ability to implement programs—driving a race to the top among recipient countries. The global fund is also effective because it brings together resources from a range of different sources. These include government moneys, wealthy philanthropists, such as those who support the Bill & Melinda Gates Foundation, and businesses. An interesting idea highlighted in a recent article in the Economist is RED, which was created by Bono and is a brand attached to products and services from firms such as Apple, Gap and Starbucks. This scheme has so far raised $160 million to go to the global fund to help reduce the prevalence of tuberculosis in the world.

It is important, as we wrestle with the challenge of corruption, that we recognise that the main game is cutting poverty. The problem of corruption and aid is a bit like the challenge of a footy coach trying to reduce injuries. No footy coach wants the players to hurt themselves but neither does a footy coach go out and say to the players, ‘Blokes, the main thing here is that we do not have any injuries at the end of the game.’ A strategy which guarantees zero injuries is also a strategy that will earn you the wooden spoon. We should be rigorous in reducing corruption as we go through, and we should do in the global fund as we do in the Australian aid program: try and reduce corruption whenever we can.

A generous foreign aid program is an expression of who we are as Australians. It is also a program that is in our national interest in bringing about a safer region and a region in which there is more trade. Of Australia’s 20 nearest neighbours, 18 are developing countries. So our aid program needs to be a strong one if we are to invest in a richer and safer region. I want to thank my friend and colleague the honourable member for Werriwa for bringing this motion before the House for debate this evening.
Add your reaction Share

CEO Pay

I spoke in parliament last week about Labor's reforms on executive remuneration.
Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Bill 2011
Second Reading (24 Mar 2011)


Corporate reform encourages innovation and entrepreneurship, and Australian corporations such as Qantas and Billabong, Westfield and CSR have had a long history contributing to the nation’s prosperity and continue to underpin our economic growth. Great managers are critical to business success. At their best, successful managers create jobs and ensure that employees have rewarding careers. The job of politicians is to ensure that we continue to attract great managers, including some from overseas, yet to make sure that pay does not become detached from performance.

When I speak with my electors, their concerns are not primarily about pay packets but what that great social commentator Mark Knopfler called ‘money for nothing’. It is fine to be well paid if you are delivering, but golden handshakes, salaries that encourage excessive risk-taking and pay packets that go up merely because the entire stock market is rising are what worry Australians. As my electors say to me, ‘If the firm is underperforming, why should the boss get a pay rise?’

From the late 1980s onwards a number of high-profile collapses dominated the headlines. Overseas we had Enron, WorldCom, Lincoln Savings, EIEI and BCCI. In Australia we had the HIH Insurance Group. In too many of these cases lavish remuneration was a feature of the way the company was managed. Just before Enron’s collapse, Kenneth Lay, as chief executive, was one of the highest-paid executives in the US, earning $5 million a year. Although the Labor Party is a party that has fought for higher wages, it is a failure of corporate governance if such compensation is detached from performance.

In Australia we have seen a steady growth in CEO salaries which has outpaced salaries in the broader community. According to the Productivity Commission and its report, Executive remuneration in Australia, over the period 1993 to 2009 the average earnings of CEOs in the top 100 Australian firms rose by an average of 7½ per cent per year. Over the same period, average salaries across the economy rose by an average of 3.7 per cent a year. In 1993 the average earnings of a CEO in a top 100 Australian firm was about $1 million. By 2009 this had risen to around $3 million.

We can go further back still and look at how these top earnings have changed over the long run of history. While I was at the Australian National University I did work with Tony Atkinson where we looked at how the income share of top income groups in Australia had changed going back to the 1920s. One way of looking at this is to look at the income share of the richest one per cent of Australians. That is a group who in 2007 had earnings of $197,000 a year or more. That top one per cent of Australians in 1921 had 12 per cent of household income. Then we saw a compression: we saw the top earners income share steadily drop until 1980, when that group had about five per cent of all national income. Then we saw a rise again until by 2007 the top one per cent had 10 per cent of household income, double they share in 1980.

We see an even starker pattern if we look at the top 0.1 per cent—the richest 1/1,000th of Australian adults. In 2007, this was a group earning $693,000 a year or more, and their income share of the Australian pie followed a similar trajectory. In 1921, they had four per cent of all household income. That fell till 1980 when they had just one per cent of household income. And then that income share rose again so that, by 2007, the richest 1/1,000th of all Australians again had four per cent of household income.

Too much inequality can cleave us one from another, and leave us a more fragmented society. It is an issue about which many Australians are, I think, rightly concerned. As the Parliamentary Secretary to the Treasurer pointed out in his second reading speech, it is important that our Australian remuneration system be internationally competitive, but it is also important that it is tied to performance—that executives are rewarded for the work they do and the value that they bring to their firms.

We should remember that executives need to be accountable to shareholders. Shareholders, of course, are the owners of the company. They are the ones who have placed their capital on the line. And it is appropriate that they have freedom to choose the executives they want and freedom, within broad limits, to set the appropriate remuneration.

A critical part of this reform is giving shareholders more say over how the pay of company executives is set. The government has been aiming to encourage shareholder engagement through transparent disclosure of how remuneration is delivered. Shareholders need to have the information to convey their views through the non-binding shareholder vote, and to hold directors accountable for their remuneration decisions.

Crises can test us. Sometimes in a crisis institutions are found wanting. And so it was with executive remuneration through the global financial crisis. Australia’s exposure to the global financial crisis was much smaller than that of the United States, due partly to our industrial structure and partly also to the rapid response by the Reserve Bank and by this government through its fiscal stimulus package. But the global financial crisis did highlight to us some of the issues around remuneration structures that focused too much on short-term results, that rewarded excessive risk-taking and risked promoting corporate greed. As I said, most Australians do not mind well-paid CEOs. What they worry about is CEO pay that is detached from performance.

With the legislation put to the House today, we will be empowering individual shareholders so that they have the muscle to take the fight to the institutional and directors’ associates. We are putting forward the ‘two strikes’ rule, where shareholders will be empowered to vote out a company’s directors if the remuneration report receives a consecutive no vote from a quarter or more shareholders at two annual general meetings.

As the parliamentary secretary has pointed out, once this second strike is triggered, shareholders will then be given an opportunity to vote on a resolution to spill the board and subject the directors to re-election. The spill resolution of course requires 50 per cent of eligible votes cast, as would be the norm with most resolutions in a board meeting. If that spill resolution is passed, then a spill meeting will be held within 90 days at which the shareholders will be given the chance to vote on the re-election of the directors, one by one. There have been concerns raised over this measure. But I would point interested members of the community to the extensive consultations that the Productivity Commission and this government have done, and particularly to the consultations around the threshold level of a 25 per cent no vote. The Productivity Commission chose that level on the basis that it was appropriate because it was in line with the 75 per cent majority required for the passage of special resolutions.

This bill also focuses on an issue around the independence of remuneration consultants. People have reasonably argued that, in the past, remuneration consultants have sometimes looked a little like the fox guarding the henhouse. We need to guard against a risk that remuneration committees will simply ratchet up pay one after the other. We need to create opportunities for remuneration consultants to bring the best objective advice as to appropriate remuneration to the company. It should be the case that remuneration consultants are able to confidently go to a company and suggest that the remuneration is too high. This ought to happen in more than a trivial number of cases, and I doubt that it presently happens in many cases.

The bill also contains measures to require boards or remuneration committees to approve the engagement of a remuneration consultant. Those consultants will be required to declare that their recommendations are free from undue influence, and they will have to provide their advice to non-executive directors or the remuneration committee rather than directly to company executives, who are themselves, of course, affected by the report.

In addition, boards will be required to provide an independence declaration stating whether, in their view, the remuneration consultant’s recommendations are free from undue influence. The board will then have to mention their reasons for reaching this view. The company will need to disclose in its remuneration report key details regarding the consultants, such as who the consultants were, the amount they were paid, and the other services that the consultant provides to the company.

Another important set of measures in this bill prohibits closely related parties from voting on remuneration. The bill will address conflicts of interest by prohibiting the company’s directors and key executives, or key management personnel and their closely related parties, from voting their shares in the non-binding vote on the remuneration report. Currently the Corporations Act does not prohibit key management personnel who hold shares in the company from participating in the non-binding shareholder vote on remuneration. This is in order to prevent both real and perceived conflicts of interest which can arise when key management personnel vote on their own remuneration packages.

The bill also prohibits the hedging of incentive remuneration, and that is, naturally, because the hedging of incentive remuneration is at odds with the rationale for incentive remuneration and can undermine the whole purpose for which companies put in place incentive remuneration. The bill also prevents the cherry-picking of proxies. Directed proxies must be voted—a reform which I certainly believe is long overdue.

Naturally, the bill has received considerable support from experts. Les Goldmann, the policy manager of the Australian Shareholders’ Association, said:

I don’t think that shareholders are going to use the power irresponsibly, I think shareholders will use the power very responsibly and only in cases where there is clearly something that the board and the shareholders think the board ought to be accountable for.

We do think the Government, in particular Minister Bradbury, have been very brave in pushing forward with this legislation and we applaud their efforts in that regard and I think that small shareholders and corporate governance area in Australia will be grateful for their efforts for many generations to come.

Stuart Wilson, former CEO of the Australian Shareholders Association, said:

At the outset there doesn’t seem to be an appetite from institutional investors for turfing entire boards. I don’t think it will come to pass. … However, I think the simple threat or embarrassment, or potential for that to happen, will see to it that there will be significant improvements on remuneration in the next couple of years.

He also said:

This has been a topic that’s been discussed ad nauseam for the last few years. The Productivity Commission had a lengthy consultation period—everyone got their say.

Alan Fels, former head of the ACCC, said of the two-strikes test:

This change will make a chairman more careful in making their original decisions about executive remuneration.

Ann Byrne, CEO of the Australian Council of Superannuation Investors, said:

We are pleased that the government has maintained a key recommendation of the Productivity Commission—a ‘two strikes’ test on remuneration reports. We believe that this test will only apply to a small minority of companies who have displayed intransigence and a lack of response to shareholders. Only those companies that continue to put up egregious pay propositions and blatantly ignore the views of a substantial group of shareholders should be concerned with these provisions.

The member for North Sydney wants less regulation generally, but he is unable to point to specific examples of where he would reduce regulation. Like the coalition’s position in the election that they would like to cut spending when their spending package had an $11 billion black hole, the coalition are all talk and no walk.

This bill, on the other hand, is in a great Labor tradition of promoting economic growth with an eye to equity. This bill recognises that capitalism requires checks and balances if innovation is to flourish. We on this side of the House, the party of true small-’l’ liberalism in Australia, believe in markets. Labor is the party that floated the dollar, cut tariffs, brought about major competition reforms and is now using market based mechanisms to price carbon and deal with dangerous climate change. But we also believe in an appropriate role for government. That is why we brought about fiscal stimulus when the global financial crisis hit. And that is why, with this legislation, we are empowering shareholders by providing appropriate checks and balances as a reasonable and sensible means of dealing with executive remuneration.
Add your reaction Share

Ken Henry and Ian Chubb

I spoke in Parliament last week about the extraordinary contributions to public life of two great Canberrans - Ken Henry and Ian Chubb.


Statements by Members - Dr Ken Henry
21 Mar 2011


I rise to acknowledge the contribution of Dr Ken Henry to economic policy making in Australia as a major player in Australian economic policy making for 2½ decades and as Secretary to the Treasury for the past decade. Great policy making involves both ideas and advocacy. Like John Maynard Keynes and H.C. ‘Nugget’ Coombs, Ken Henry has been unafraid to engage in pointy-headed discussions with the best economists but also unrepentant about the need to dive into the political process.

As Laura Tingle noted in an article in the Australian Financial Review on 4 March, Dr Henry has been involved in so many important debates in Australian policy making—the GST debate, environmental debates and the debate over fair taxation of the minerals that are the birthright of every Australian. Dr Henry has redefined the mission statement of the Treasury to focus on wellbeing. He has broadened the scope of economic policy making to include issues such as Indigenous affairs and education. Under him the Treasury now brings down regular Intergenerational reports. He produced a major tax review, a seminal document that will influence Australian taxation debates for decades.

Having previously been seconded to Treasury, I can attest how much members of the department will miss him. Perhaps the same is not so true for some of the senators before whom he has appeared. For now, Australian policy making will be poorer for missing Dr Henry’s speeches and I wish him well in the next stage of his career.

Statements by Members - Professor Ian Chubb
24 Mar 2011


I rise to acknowledge the contribution of Professor Ian Chubb AC to the Australian higher education community over a three-decade career. Originally trained as a neuroscientist, Professor Chubb was a fierce advocate for the Australian higher education sector both in his role as Vice-Chancellor of the Australian National University and as President of the Australian Vice-Chancellors Committee. Known affectionately as ‘Chubby’ to ministers and even prime ministers, he was particularly vocal about the need for increased funding for universities. Professor Chubb was similarly unafraid of addressing big and controversial issues, calling for bold reform, not mere tinkering. He was direct, too. In 2009, when I was appointed an economics professor at ANU, it was a characteristically straightforward Ian Chubb who gave me the news in a phone call that went something like: ‘Mate, you’re a professor. Well done’—followed by hanging up.

Professor Chubb was rare among vice-chancellors in that he gained the respect and admiration of students, both undergraduate and postgraduate. His commitment to student income support and student organisations gained him many friends among students at the ANU and at other universities throughout Australia. My office manager, Louise Crossman, was a former ANU Students Association executive officer. She says, ‘He must have been pretty good because we never had any reason to occupy Chubb’s office, which was unusual and disappointing because I really wanted to occupy something.’

Professor Chubb was the well-deserved recipient of the ACT Australian of the Year Award in 2011. I wish him well in retirement and hope that he will continue to make a valued contribution to Australian public life.
Add your reaction Share

Poddies for Labor

I appeared on Late Night Live with Phillip Adams in Sydney last night, discussing the future of the ALP with Rodney Cavalier, John Falkner and Deirdre Grusovin. If the topic piques your interest, you can podcast the main program and a subsequent half-hour of Q&A. A transcript of the main program is also available.

The segment will also be televised on ABC24 at some point. I'll post the link when I have it.
Add your reaction Share

Labor Pains

My opinion piece today is on NSW Labor. Full text below.

There have also been some interesting reflections recently by former NSW Premier Bob Carr and Luke Foley MLC.


ALP Must Look to Members, Australian Financial Review, 29 March 2011

In the 2002 Winter Olympics, Australian speed-skater Steven Bradbury won gold after the four leading skaters crashed into one another and fell to the ice. The way Barry O’Farrell won the NSW election bears some similarities to the way Australia got our first Winter Olympics gold medal.

On the fundamentals, NSW Labor was expected to lose. The last state government to be re-elected after 16 years at the helm was the Queensland government in 1986 – the year John Farnham topped the charts and Crocodile Dundee was released. In the 21st century, governments that have been around for 1½ decades have all the popular appeal of a mullet haircut and a denim jacket.

Yet while longevity predicted a Labor loss, what occurred was the political equivalent of hanging, drawing and quartering. The party of McKell, Wran and Carr suffered the worst defeat of our 120-year history.

In my view, this does not reflect any crisis of ideology. Ask any Labor representative what our party stands for, and you’ll hear the same themes: opportunity for every child, open engagement with the world, dignity in work, a voice for invisible Australians.

What the NSW election loss pointed to are the major challenges with our party structures. Labor’s 2010 National Review (also known as the ‘three wise men report’ after its authors Steve Bracks, Bob Carr and John Faulkner) noted that in the past decade, more than 100 ALP branches have closed in NSW. It concluded: ‘The Labor Party now faces a crisis in membership.’

While it is true that our membership share is smaller than ever before, recent trends are merely a continuation of what has occurred for the past sixty years. In the early-1950s, 1.2 percent of Australian adults were members of our party. Today, the share is around 0.3 percent.

People are failing to attend Labor Party meetings for the same reasons that activity is declining in most other political parties, in Rotary and the RSL, in unions and churches. Compared with two decades ago, we are less likely to know our neighbours and have fewer trusted friends.

The decline in social capital is driven by several factors, including long working hours, car commuting and television. Australia needs a renaissance in community life – including in our political parties.

Another way to see the link between Labor Party activism and broader social capital is to look across the country. As I found in my book Disconnected, Canberra outperforms the rest of the nation on many social capital measures. ACT residents are more likely to play sport, to volunteer, and to donate to charity. It is probably not a coincidence that Canberra also has an active Labor Party membership.

Although plenty of the factors that affect ALP membership are outside our control, there is still much that Labor can do to make joining more attractive. The National Review recommended more party democracy, new policy forums, a campaign training academy, and better online engagement.

We should acknowledge that there are two models an organisation can follow: low cost–low power, or high cost–high power. When you look across other groups, those that are cheap to join (AFL clubs, GetUp) tend not to provide their members with much say in how the organisation is run. By contrast, groups that empower and provide generous services (unions, scouts) generally require a substantial commitment of time or money.

For Labor, this means that we could expand the number of positions that are directly elected by the membership and train every member in the latest community organising techniques. Or alternatively we could follow the UK Labour model of allowing under-27s to join for a penny, and stop asking members to attend branch meetings. But we should not do both. It would be a mistake to give more power to our members and ask less of them in return. This tension will lie at the heart of party reform debates leading up to our National Conference in December.

For NSW Labor, the challenge will be to recover the passion and energy that Kristina Keneally embodied, but which her government was seen to lack. As for Mr O’Farrell, let’s wish him luck and hope that he is able to govern in the spirit of the moderate wing of the Liberal Party. If the last four years have taught Macquarie Street politicians anything, it should be that ‘crash or crash through’ often ends with a bang.

Andrew Leigh is the federal member for Fraser, and author of Disconnected (UNSW Press, 2010). By coincidence, he was Barry O’Farrell’s Labor opponent in the 1995 election.
Add your reaction Share

SkyNews AM Agenda

Add your reaction Share

Stay in touch

Subscribe to our monthly newsletter

Search



Cnr Gungahlin Pl and Efkarpidis Street, Gungahlin ACT 2912 | 02 6247 4396 | Andrew.Leigh.MP@aph.gov.au