A good article on the 2 strikes policy.
http://www.morningstar.com.au/funds/article/two-strikes/4311?q=printme
Two strikes round one
-- | 31 Oct 2012
Tony Featherstone is a Morningstar contributor and a former managing editor of BRW and Shares magazines
Much has been written about the executive pay debate and the new two-strikes rule that gives shareholders more power to rein in remuneration.
Less considered is the rule's effectiveness in its first application in the recently concluded annual general meeting season, and what it means for companies that had a strike against their remuneration report and could face a board spill next year.
Shareholders of listed companies now have to vote on whether to spill all board positions if 25 per cent or more votes cast are not in favour of adopting the remuneration report at two successive AGMs.
A spill resolution must then be put to a vote at the second AGM and if passed with 50 per cent or more of eligible votes cast, requires a spill meeting within 90 days to elect directors.
Investor Weekly (a Morningstar publication) research shows about 9 per cent of ASX 200 companies received a vote of more than 25 per cent against their remuneration report.
That figure is down from a three-year average of about 14 per cent, had the rule been hypothetically in force from 2008 to 2010. In raw figures, only a small number of ASX 100 companies received a strike against their remuneration report.
Politicians and some investor groups claim this is evidence of the two-strikes rule's effectiveness.
That is partly true.
Certainly, there is evidence some boards of ASX 200 companies, especially those with more contentious remuneration policies, made extra effort to communicate their position on executive pay matters to superannuation funds, fund managers, proxy advisers and retail investor groups.
Cynics might argue the two-strikes rule has so far achieved little, other than costing boards huge time and effort to deal with the legislation.
For some companies that received a first strike on the remuneration report there may have been a good reason, such as aligning an executive's pay to non-financial performance, such as safety results, which institutional investors did not favour.
Others that have dominant shareholders may care little about the two-strikes rule, for there is no chance that 50 per cent or more of eligible votes will be cast to spill the board. Board spills from the two-strikes rule seem a remote possibility in many ASX 200 companies, given 50 per cent of the eligible vote is required.
The big problem is potential board instability in smaller companies, where minority interests can potentially use the rule for mischief.
One of Australia's most respected remuneration advisers, John Egan, of Egan Associates, says: "The principal and potential unintended consequence [of the two-strikes rule], although not thought through at the time of legislation, is the fact that more than 85 per cent of shareholders may choose not to submit a negative vote in relation to the remuneration report, yet find that their board, about whom they are either neutral or positive, will all have to stand for re-election should a significant minority of shareholders choose, for whatever reason, to vote against the remuneration report."
Egan says UGL Limited (UGL), which had noted shareholders' concerns and adjusted its chief executive's pay in the 2010 financial year, and had outperformed its traditional peers, received a negative vote of 30 per cent against its remuneration report, driven by less than 12 per cent of shareholders because of the spread of the share register.
This meant more than 85 per cent of shareholders were not opposing the remuneration report.
The next 12 months will show just how large these 'unintended' consequences from the two-strikes rule are.
The likely outcome is that few ASX 100 companies receive a second strike, and far fewer again have a board spill, which could create instability and hurt the share price.
The other likely outcome is that the two-strikes rule does little to rein in absolute executive pay and improve alignment between pay and performance.
Perhaps its greatest contribution might be to force boards to better explain their remuneration strategy to institutional investors and provide a clear remuneration report in the annual report.
That alone would make the two-strikes rule a worthy addition to the legislative landscape. A higher threshold, at least 40 per cent or 50 per cent to ensure minority interests do not have a disproportionate say on pay matters and outweigh the majority, would further strengthen the rule.
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