David Murray has no truck with the view that Australian executives are overpaid. Nor does Murray, who was parachuted into embattled financial services group AMP earlier this year to steer it out of the hurricane triggered by the banking royal commission, have any time for so-called balanced scorecards, which take into account a raft of performance measures to determine an executive’s pay.
Remuneration is a perennial hot potato for directors and sometime source of frustration for investors. Last month Telstra chairman John Mullen said executive pay was the “single most difficult issue” for the directors of large companies. Telstra and Tabcorp were among the companies that received strikes against their remuneration report in this latest round of annual meetings, potentially paving the way for investors to force a spill of their boards.
Mullen told the telecom behemoth’s shareholders that Australian executives were paid too much, echoing the sentiment expressed earlier in the year by the Australian Council of Superannuation Investors (ACSI), which calculated that median take-home pay for the top 100 chief executives rose 12.4 per cent to $4.4 million last year.
Murray isn’t having any of it. Shareholders, he says, must accept that Australian companies and their employees operate in an open, global system that, by the way, has brought enormous prosperity to these shores.
“We operate in a market economy,” he says. “The greatest changes in policy in Australia in recent history, which everybody believes have been responsible for this extended period of growth, have been the opening up of our market economy by [former prime ministers Bob] Hawke and [Paul] Keating. So we can’t have it both ways, where we believe in a market, and then we say: ‘But, we don’t believe in attracting talent from that market to do complex executive work’.”
Murray, who chaired the financial system inquiry, is one of the country’s most formidable business people. He has a sizeable task in helping to restore consumer and investor trust in AMP, which in the Hayne royal commission was found to have charged fees for no services and lied to the corporate regulator. Good governance is critical to his mission.
Balanced scorecards ‘not right’
On the issue of pay, the AMP chair also argues the system of balanced scorecards, which is becoming increasingly popular and which uses a range of financial and non-financial targets to determine bonuses, is “not right”. It leads to box-ticking and averaging.
What should replace them? Judgment.
“You need an experienced board that says: ‘I don’t care about a balanced scorecard. I don’t care about a whole lot of other factors. My judgment is that the basis on which these earnings are being made, while it may look OK, it’s not OK.’ And make that call,” Murray says.
He might well say the same thing about the latest trend in remuneration structures, the hybrid model, where long- and short-term incentives are collapsed into a single bucket. While it is popular among the director class, many shareholders remain unconvinced.
“Maybe this is the point we’ve got to with remuneration and governance generally, that everyone ticks the box on structures, or comes up with new names like hybrid. The remuneration is designed to reward what you want done.”
Actually, Murray argues that the pay revolt has been caused not by the quantum of executive pay, but the lack of trust in corporate Australia. “The issue is not the structure or the level of remuneration. The issue is they can’t explain it. They need the credibility to be able to explain it.”
AMP was slapped with a strike against its remuneration report this year. In May, while Mike Wilkins was acting executive chairman and shareholders were fuming over the fee-for-no-services scandal, 61 per cent of investors voted against the report.
No box ticking
But if shareholders think Murray is about to kowtow to them in an effort to avoid a second strike next year, they have another thing coming. AMP won’t be ticking any boxes.
Rather, Murray and his fellow directors will bring their sense, experience and wisdom to the fore. Again, it’s all about judgment. “We’ll make our judgment and put it up, and if we get a strike, we get a strike,” Murray says. “We’ll make our very best judgments about what this company needs to do.”
Murray has been at the helm of AMP only since June, but he has wasted no time in joining, nay leading, the public discourse around corporate governance and regulation.
His willingness to make his views known is perhaps explained by one of his key motivations for taking on the chairmanship of the former mutual, which this year lost CEO Craig Meller and chairman Catherine Brenner.Murray is determined to play a key role in mopping up the financial services sector that has been so battered by the financial services royal commission.
Even Coalition government ministers, who initially rejected the need for the inquiry, have come out one after the other to condemn the misbehaviour of the banks.
“It was clearly possible to make a difference,” Murray says. “The degree of difficulty is high. The main issue was the credibility of the financial sector. AMP is one of the important players. This won’t work unless all of the main players lift their credibility in the future. Trying to do that was important.”
Murray’s desire to pick the industry up by the proverbial bootstraps is understandable. He has spent his working life in the sector. Besides chairing the financial system inquiry, he was the inaugural chairman of the Future Fund and a former chief executive of Commonwealth Bank. Indeed, he began his working life as a teller in 1966 at the bank’s Lindfield branch on Sydney’s north shore, and went on to work there for 39 years.
However, Murray is less inclined to talk about AMP’s business strategy. The Sydney-based company has 2600 financial advisers, the largest planner network in the country. Late last month the group sold its life insurance business for $3.3 billion, said it would float the New Zealand wealth management arm and revealed a sharp rise in third-quarter net cash outflows, sending the shares into a tailspin.
“That’s up to the [new] CEO to produce a business model. How advice is done in the future is obviously pretty important,” he says.
Francesco De Ferrari, a 17-year veteran of Credit Suisse, is due to start in December.
What Murray will say is that the sale of the life insurance business was the right move. “In my mind there was no doubt that the transaction is right,” he says. The problem, as he sees it, is that investors lack confidence that the organisation is capable of making good decisions. “We’ve got to get that trust back.”
If Murray is a man under pressure, which would be understandable given AMP may face criminal charges and is a business potentially in need of a new model, there is no outward sign of it. When asked if his reputation might be on the line, Murray responds: “I can’t see how it could be on the line with AMP. I wasn’t on the board.”
That said, Murray will be highly concerned if the financial advice and funds management firm is shown to be lacking in integrity. Business mistakes are undesirable, but “the credibility of the organisation is fundamental”.
Another challenge for AMP, some might say, is the lack of women on the board after directors Holly Kramer and Vanessa Wallace resigned after the damning revelations in the banking royal commission. The third female director, Patty Akopiantz, will step down at the end of the year, leaving the board with no women. Meanwhile, the Australian Institute of Company Directors has a target of 30 per cent women for boards of ASX 200 companies and ACSI has a policy of recommending against the re-election of directors on companies with poor board gender diversity.
Unsurprisingly, this box ticking does not go down well with Murray. “The shareholders effectively kicked out all the female directors. What are we supposed to do now?”
And no, he will not be looking for women directors in particular. “We need hard-nosed business people, very experienced, who have the capacity to make judgment calls about the executive and the business. That’s what we need, whether they’re male or female.
“We, on an urgent basis, started to reform the board and find a serious change agent from outside Australia, and they [shareholders and proxy advisers] can send us a letter. If they don’t like what we’re doing for their own reasons, then I assume they’ll vote against us at the next [AGM], and they’ll disrupt the company more. That’s up to them.”
If Murray wants to take a leading role in improving governance in financial services, by his own admission there is a lot of work to do.
“If you look at the interim report from [royal commissioner Kenneth] Hayne, how can any financial institution in Australia argue that [the ASX governance] guidelines have been successful? It actually says that governance is a problem. It’s a pretty fancy argument to disconnect the two, so I think we’ve got to face up to the fact that they haven’t been effective.”
What we need, Murray says, is more judgment and less prescription.
“If I go way back to [a] discussion about beliefs and setting the tone from the board, that actually encourages [a] statement of a purpose, which is positive. If you’re trying to align the issues of companies with the institutional investors, or all investors, as efficiently as possible in the capital market, then explain more clearly what you’re about and how you go about it. They can make a choice.”