Just for a bit of additional perspective, this blog post gives a...

Just for a bit of additional perspective, this blog post gives a bit of background analysis and data on some additional impacts for consideration.

https://www.therewardpractice.com.au/can-a-strike-affect-company-share-price/

Does The ‘Two-Strikes’ Law Really Matter?We researched whether or not a ‘strike’ can affect company share price – the results suggest yes it can make a material difference.September 20, 2023


Effective July 1, 2011 the Corporations Act wasamended to include what’s known as the “two-strikes” law.

The aim was to hold directors of publicly traded Australian companies accountable for board and executive remuneration. Fast forward a decade, whilst the number of companies receiving a ‘strike’ each year seems relatively minor (e.g., 17 companies in the ASX 300 in 2022), the impact of the ‘two-strikes’ law on the remuneration landscape has seen increased levels of transparency, strengthened alignment of pay with performance and greater shareholder engagement. There are, however, lingering questions of its effectiveness such as the ‘strike’ not always reflecting the views of majority shareholders and the significant influence of proxy advisors on voting outcomes. A further question is to what extent does a ‘strike’ influence shareholder views and the subsequent effect on share price?

What is a ‘strike’?

It works like this:

If a company’s remuneration report outlining salary and incentives of key management personnel (KMP) receives a ‘no’ vote of 25% or greater from shareholders at the annual general meeting, the company receives a first ‘strike’.

If the following year’s remuneration report also receives a ‘no’ vote of 25% or more, the company receives a second ‘strike’. When a second ‘strike’ occurs, shareholders vote then and there to decide whether company directors must stand for re-election. This is known as a ‘spill’ vote. If the spill vote passes (i.e., 50% or more of eligible votes cast), a spill meeting is held within 90 days and the directors stand for re-election.

What impact does a ‘strike’ have on a company?

When a company receives a ‘strike’, beyond the legal responses that follow, the personal impact on boards and executives can be profound. It is effectively shareholders saying “you’re on notice,” and may cause considerable reputational damage to the company and its board – but that may not be the only impact.Historical academic research of ASX companiesand aUS studyfrom 2020 shows that shareholder ‘no’ votes on remuneration may also trigger significant drops in share price – on average 15 per cent in the following year.

Some market pundits suggest that ‘say-on-pay’ votes are reflective of not only shareholder satisfaction around remuneration, but also broader governance and strategic direction. If shareholders are voting against remuneration reports, it may be an indication of dissatisfaction in general and can be viewed within the market as a ‘signal to sell’.

Can a ‘strike’ affect company share price?

To put this theory to the test, we looked at companies in the ASX 300 that received a strike from 2016 to 2022.

For companies that received a ‘strike’ during this period, we posed two questions relating to the share price in the year that followed:

1) What is the likelihood of a share price reduction*?

The graph below shows that there is a greater than 50% chance of a share price drop following a ‘strike’.

2) If there was a share price reduction*, what was the average drop?

The graph below shows that if there is a share price drop it is by approximately 30% on average.

*Note calculations based on closing share price day prior to AGM and closing share price last trading day of financial year.

	The results of this analysis reinforce the findings from the UBS research and academic studies, suggesting a shareholder ‘no’ vote on the remuneration report can materially hurt the value of the company.

How can companies avoid a ‘strike’ ?

To minimise the risk of organisational complications that may arise as a result of a ‘no’ vote on remuneration reports, we offer the following 3 suggestions:

Design the right structure

Developing a strong remuneration structure and strategy that is tailor-made to suit a company’s size, growth stage, industry and goals is the first step towards mitigating a risk of a strike. When a company’s remuneration structure is appropriately aligned with these aspects, it can appear as indicative of good governance across the board. With ‘at risk’ pay comprising up to 70% of executives total remuneration in ASX300 companies, getting incentive structures right should be a key focus. See our blogDesigning Employee Incentives For ROIfor more information.

Determine appropriate quantum

An effective remuneration benchmarking methodology is a useful means of developing appropriate quantum when it comes to executive pay in particular. Equally important is ensuring that incentive payouts are in alignment with overall company performance. This can help a company steer clear of negative voting outcomes. See our most recentRemuneration Pulsefor more information on market trends regarding remuneration quantum.

Provide effective disclosures

Clear and comprehensive communication around what is being paid, combined with detailed rationale aroundwhyandhowit’s being paid go a long way with company stakeholders. It’s easy (and common) for companies to omit key details in remuneration disclosures and that can have an effect on shareholder votes. See our blog3 Strategies To Improve Your Remuneration Reportfor more information on how to create an effective rem report.