The absurdity of equating businesses with parliaments and directors with politicians completely passed him by. To confuse the two is to make an egregious error. What Morgan is apparently incapable of seeing is that when a government legislates for greater transparency in matters of executive pay it is in fact strengthening property rights of shareholders.

To argue, as Morgan did, that if shareholders don’t like their CEO’s salary package they should just sell their shares is downright arrogant. This is akin to saying that if the owner of a hotel does not like the way his manager is running it then he should sell it to someone else.

Morgan cannot seem to get it into his skull that it is the shareholders who really own the company and it is they who should make the final decision regarding executive pay packages. To conceal from them the details of these packages is to treat them with contempt. Morgan is living proof that the rights of shareholders require further protection.

Alan Kohler argued that

Most company directors, when asked to call a vote on their remuneration report, would say: what remuneration report? That’s because the laughable aspect of CLERP 9, apart from its name, is that it is built on laws regarded as optional by most directors and not enforced by the Australian Securities and Investments Commission.

The new non-binding vote on executive salaries is not really a vote on executive salaries; it’s a resolution to adopt the company’s remuneration report. Except the great majority of companies don’t have one.

Many don't even show the salaries of the top five executives, as required by law since 1998, but instead stick to the old $10,000 bands. These merely show the number of executives in each band; you have to guess who's who.

And as for the remuneration policies –– that is, why the top five executives get paid what they do –– forget it. It’s a total, entirely deliberate, mystery.

That despite the fact that s.300A of the Corporations Act clearly requires a remuneration report to be included in the annual report that contains discussion of remuneration policy, discussion of the relationship between that policy and the company's performance, and what each of the top five executives got paid.

The best one around, perhaps the only one that really does the job, is BHP Billiton’s. It’s 32 pages long, with full and detailed disclosure of exactly how senior executive salaries and bonuses are calculated. But that’s because BHP Billiton is also listed in London, where they take these things seriously.

What Kohler is saying is that directors have been ignoring their legal duties. And this was said in The Age on 9 October 2003 –– when Morgan was still CEO of Western Mining Corporation. Someone’s got a damn cheek –– and I don’t think it’s Kohler.

Morgan also agued that transparency is not in the interest of shareholders because if CEOs total remuneration packages are made public this will have the effect of raising the cost of hiring them. The word for this is idiocy. In a free market CEO salaries are determined the say way as everyone else’s.

A CEO will only be hired so long as the value of his salary does not exceed the value of his services. One has to be very careful on this point. Companies are not hiring managerial ability when they hire CEOs but a particular type of decision-making ability that is entrepreneurial in content. Additionally, if the CEO’s reward fully reflected the full value of his decisions he would not be hired. Although this issue is too complicated to be discussed in a short article it is enough to know that transparency in his salary negotiations cannot in anyway raise the value of his services. This has already been determined. Only an economic illiterate like Morgan could seriously suggest otherwise.

The primary function of directors is to protect and advance the interest of shareholders. Failure in this endeavour will be eventually reflected in shareholder returns. This will result in the shareholders changing the board by either voting out the current incumbents or selling out to another company. Unfortunately, foreign investment restrictions and anti-trust legislation tend to hinder this process by protecting inadequate directors.

Now one would have to be incredibly naïve to believe that every director and CEO has always put the interests of shareholders first and that there are never any shenanigans in the boardroom. Just as unions can exploit shareholders for a time, unscrupulous directors and CEOs can also exploit them by keeping them ignorant of boardroom transactions, including directors’ fees and executive salary packages.

If, for example, a CEO decided to feed his intellectual pretensions by putting his mate on the payroll as his personal speechwriter, despite protestations by some board members, he is in fact exploiting shareholders. And by creating a phoney position for him he is also actively deceiving them. This kind of behaviour is just as improper –– and dishonest –– as hiring a bimbo who cannot distinguish between a parasol and a computer consol. The same reasoning holds if a CEO raids shareholders’ funds to buy personal influence in a political party or various think tanks.

I’m quite sure that Mr Morgan has known of at least one case of a CEO who has abused his position in this way. Yet he still attacks the idea of greater transparency. The least he can do is publicly declare that if CEOs want to fund their pals they should do so at their own expense.

This leads me to Morgan’s posturing on minimum wages. The only criticism he seems capable of coming up with is that the minimum is 58 per cent of the median wage. So what? This figure has as much economic meaning as the leftwing Alex Millmow’s complaint that profits are now 23 per cent of GDP (The Age, Cyclical woes ahead with return to ‘70s?, 17 November 2005). Furthermore, he should at least have had enough sense to realise the tackiness of a multimillionaire buying a $750,000 painting just after appearing on television to argue that people on the minimum wage are overpaid.

Morgan has neither the knowledge nor the intellectual capacity to argue the free market case. That he believes otherwise comes from a character defect that allows him to confuse the size of his ego with the size of his intellect. Nevertheless, despite his intellectual shortcomings –– or is it because of them? –– he still wields considerable influence with the Victorian Liberal Party. This does not bode well for the Party or the future of free market economics in this state.

Gerard Jackson is Brookes’ economics editor

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