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Perspectives on Cyber Risk
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Australians reportedly think CEO pay of $600K is unethical

Australians reportedly think CEO pay of $600K is unethical

August 7, 2017 12:25 PM | Print this page

The Governance Institute of Australia have released their second annual Ethics Index which shows a gap between Australians’ expectations and their perceptions of ethical behaviour across industry. The survey of more than 1000 people found that: 'while Australian society, overall, was seen as "somewhat ethical" (with an index rating of 39), large corporations, the banking finance and insurance sector, every level of government and political representatives all had significantly negative ratings on ethics'.

The findings according to Governance Institute of Australia CEO Mr Burrell 'make[s] it very clear that societal, not environmental, issues pose the greatest ethical dilemmas for Australians. Decisions about immigration, euthanasia and terrorism all rate as more ethically challenging than those relating to climate change, the environment and renewable energy'.

Key points

  • Executive Remuneration: 77% of Australians believe a CEO salary of $3m a year (50 times the average Australian’s yearly income) is unethical. Fifty five percent of Australians believe an annual CEO salary of $660,000 is unethical, but most believe a $300,000 salary package is ethical.
  • Ethical standards of large corporations and their CEOs: the report finds that Australians are unhappy with the ethical standards of large corporations and their CEOs, particularly in banking and finance, as well as parliamentarians, unions and large sections of the media. By contrast, health and education professionals, charities and the ABC are seen as having much higher ethical standards. The media release accompanying the report comments: 'Clearly the Government’s announcement that the 10 May Federal Budget includes a new "Banking Executive Accountability Regime" that gives the Australian Prudential Regulation Authority strong powers to oversee bank executives and their salaries, has done little to arrest widespread community concerns about the lack of ethics, transparency and accountability in the sector'.
  • Whistleblowing: The report identifies whistleblowing as among the 'top 5 elements ensuring ethical conduct' in society, ranking equally with 'a strong legal framework' and ahead of 'strong, inquisitive media and oversight by regulators'. Protection for whistleblowers is considered very important, yet Australians are not convinced they are treated ethically. These results were also reflected in Griffith University’s interim findings, announced in May, of their world’s largest research project into whistleblowing, which has raised the question: to whom should whistleblowers blow the whistle. 'Governance Institute has been saying for some time that regulator-specific provisions across many pieces of legislation do not provide the best protection for those exposing misconduct. We are of the very strong view that whistleblowers need a ‘stand-alone’ one-stop-shop to provide the best protection for those seeking to disclose wrongdoing. In fact, this perceived lack of protection might well be why so many whistleblowers resort to the media' Governance Institute CEO Mr Burrell said.

Other findings

  • CEOs and Directors perceived as drivers of ethical culture: Australians continue to rate chief executives and directors as the most important 'gatekeepers' influencing ethics in organisations. Board chairs and senior management are also seen as important drivers of ethical conduct, showing that these roles are perceived to wield considerable influence over this aspect of corporate culture.
  • Culture perceived as more important than regulation: Laws, regulations and financial penalties are seen to influence ethical behaviour, but are not considered as important a factor as the ‘tone from the top’ set by directors and C-suite executives.
  • Directors, CEOs and Company Secretaries perceives more ethical than unethical but executive officers rated poorly: Company secretaries, directors of Australian companies and chief financial officers rate as more ethical than unethical, while board chairs, foreign company directors, chief executives and senior executives are all seen as unethical on balance: 'Boards and the C-suite still need to lift their game. The role of leadership in promoting ethical conduct in the business sector is viewed as important by 56% of Australians, and these leaders are seen to have the key role in influencing ethical behaviour, yet neither they nor their organisations are perceived to be very ethical'.
  • Most professional organisations perceived as strongly ethical: The survey found that professional and business associations, including the Governance Institute of Australia, Australian Medical Association, Farmers’ Federation of Australia, Engineers Australia and Chartered Accountants Australia and New Zealand are considered strongly ethical. However, some others are rated poorly, with the Real Estate Institute of Australia receiving negative ratings.
  • Listed companies perceived as marginally more ethical than unlisted companies: ASX listed companies fared marginally better than unlisted companies but both categories are judged by most in the neutral to positively ethical range. Foreign companies operating in Australia compared poorly to their Australian counterparts with most respondents placing them on the neutral to unethical end of the scale. This suggests that the transparency and accountability obligations of public companies allow for greater insight into their behaviours and conduct than is possible for private and foreign companies that are not subject to the same disclosure requirements. Regulatory oversight, financial penalties and scrutiny by activists’ groups are not seen to have the same degree of importance in relation to ethical conduct as corporate leadership and those accountability and transparency frameworks.

The Australian Institute of Company Directors reportedly considering amending future CEO contracts to enable disclosure of CEO pay in wake of events at the CPA
On a related topic, The AFR writes that the Australian Institute of Company Directors (AICD), the nation's largest professional body for company directors, is unable to 'legally divulge the salary of its past two CEOs because of a confidentially clause within their contracts'. However, The AFR writes that the AICD is reviewing this with a view to removing the requirement in future CEO contracts. The AFR quotes AICD Chairperson Elizabeth Proust as saying 'The issue is we're not a listed company and the governance and the constitution of an organisation needs to be fit for purpose. The question [of pay disclosure] is being discussed in the next period of time by the HR committee and the audit committee of the AICD in relation to just that question'. Asked if the existence of the clause was an illustration of good governance, Ms Proust reportedly replied: 'No it's not. But it's history and we're not repeating it in the contract that I'll be responsible for signing.'

Reportedly, the AICD's last annual report showed that key management personnel, including then CEO John Brogden, earned a collective $3.74m.

[Sources: The AFR 02/08/2017; Governance Institute of Australia Media Release 01/08/2017; [registration required] Ethics Index; Griffith University 'Strength of Whistleblowing Processes Report May 2017]