Australia-NZ: Analysing the Governance Divide

While Boards in Australia deal with a wide variety of remuneration regulation and guidelines, New Zealand’s remuneration disclosures have changed little over the last two decades.

Australia and NZ comparison

1993 legislation implemented in 1997 required the total remuneration and benefits of NZ Directors to be disclosed and the pay of executives earning over NZ$100,000 to be disclosed in bands of $10,000.

According to the NZ Privacy Commissioner, it had received multiple complaints following the introduction of the rule stating that it was detrimental to executives’ privacy, was unfair and could lead to kidnapping or extortion attempts. Yet the rule remained and still operates today.

In essence, not much has happened to New Zealand’s remuneration disclosure over the last twenty years, apart from many organisations now including the elements of the CEO’s remuneration in more detail. Contrast this with the developments in Australia.

  • 1987: Listed companies required to disclose total annual cash and non cash remuneration of executives earning over $100,000 in $10,000 bands.
  • 1998: Introduction of section 300A in the Corporations Act, requiring disclosure of a remuneration policy and details of pay elements and amounts (including base salary, short and long term incentives and other payments) for Directors and the top five highest paid executives.
  • 2003: ASIC issued guidelines requiring companies to place a reliable valuation on options granted as part of remuneration. Companies could choose Black–Scholes, Lattice (Binomial) or Monte Carlo valuation methods.
  • 2004: Australian companies were required to include remuneration information in a specific remuneration report within the company’s annual report and allow reasonable opportunity for shareholders to make comments on or ask questions about the report, made subject to a non-binding vote.
  • 2007: Disclosure requirements were redefined to apply to cover the key management personnel of a company as outlined in accounting standards. A new disclosure framework was created, transferring accounting standards requirements and Corporations’ requirements into the Corporations Act and aligning them to remove inconsistencies.
  • 2009: Shareholders were required to approve Director and executive termination benefits exceeding a cap of over a one year’s base salary.
  • 2011: Two strikes legislation was introduced. Companies were required to disclose the extent to which they received remuneration recommendations and how much those recommendations cost.
  • More legislation was proposed by the former Labor Government in the 2012/2013 financial year, but it was not passed before the change of government in September 2013. Since then the focus has been on reducing red tape rather than adding to it.

The contrast between remuneration transparency in Australia and New Zealand is significant. Whereas Australia was one of the top five performers in the KPMG and Association of Chartered Certified Accountants’ global corporate governance study for corporate governance principles concerning remuneration structures, New Zealand trailed behind all of the developing countries except Japan and Canada. Overall, Australia achieved 4th place out of 25 countries studied for corporate governance as a whole, while New Zealand received 15th place.

In prosecuting its low disclosure stance, New Zealand might argue that it has been Australia’s detailed disclosure that has led in part to a large increase in CEO remuneration over the last twenty years, as executives seek to “keep up” with their peers.

Research conducted by Dr Helen Roberts from the University of Otago examining the remuneration of New Zealand executives over the five years after the 1997 implementation of the disclosure regulations found that the ratio between average CEO cash remuneration and total worker pay rose from 10.84 to 13.29 (a 23% increase) over five years based on real 1997 dollars. If median CEO remuneration is considered, the ratio increases by 28%.

For comparison, research Egan Associates conducted for the 2013 productivity discussion paper showed that the ratio between average total annual remuneration of CEOs in the ASX 100 and Australian average weekly earnings rose in the five years from 1998, when Australia introduced the next step of remuneration disclosure, from approximately 36.6 to 55.5 (a 52% increase). If median CEO remuneration is considered, the ratio increases by 64%.

Australia’s increase is certainly higher. Does this mean that the hypothesis is correct?

To examine this, consider that the median market capitalisation of ASX 100 companies rose by 30% in the 1998 to 2003 period. In comparison, for the 1997 to 2002 period, the median market capitalisation of the companies used in the New Zealand sample rose by 2.5%. As another point of reference, while the average New Zealand worker’s wage increased by 4% in real terms, the average weekly earnings in Australia also increased approximately 4% in real terms in the five years after the introduction of the legislation.

Examining the effect of currency during this period is also relevant. According to the Reserve Bank of Australia, the Australian dollar appreciated against the New Zealand dollar then fell again, ending slightly higher than at its starting point.

AUD-NZD Exchange Rate

Considering these factors, although New Zealand’s remuneration increases were lower for the sample companies than that of the top 100 Australian companies, the change in market capitalisation was also lower, potentially supporting at least part of the difference.

Of course, this analysis does not discount the potential inflationary effect of disclosure on remuneration. One thing is certain, however. Australia’s disclosure (and that in other countries) has had an effect on transparency and scrutiny of Board and executive remuneration, which in turn has caused the retirement of a number of concerning practices and inspired a swathe of research and contemplation on how best to improve motivation for top talent, with practices constantly shifting to ensure alignment with shareholder interests.

As ISS said in its most recent proxy voting guidelines regarding NZ:

“Executives are employees of shareholders, and it is therefore appropriate for shareholders to be informed as to the level of executive remuneration, and how it is determined. It is also appropriate for shareholders to be given a non-binding vote on a company’s general approach to executive remuneration, and a number of jurisdictions, including the UK, Australia, Sweden, and the Netherlands, have adopted such non-binding votes. These votes can be a valuable and relatively inexpensive way for shareholders to communicate concerns over remuneration to a company.”

Although New Zealand will need to consider the potential consequences of increasing levels of disclosure before changing requirements, the benefits, even if qualitative, should be given equal consideration. New Zealand is a global exporter and rising star of the current global economy – its corporate governance practices should befit that status.