two strikes and your out

I wonder if this two strikes policy is causing Kevvy some grief? could this cirumvent his golden share rule, the one that prevents him from being booted? was this action by the productivity commission caused by boards just like CHF where the directors pay themselves very very well, but are not tied to any sort of reward scheme, if they don't deliver then they can't ask for excessive pays? these boardmembers can't be voted out any other way other than this new scheme called by some the "two stikes nad your out" rule?
Is it being too strict on these sorts of boards, those who are virtually non productive and seemingly over paid?

Don't think so!


Stephen Bartholomeusz
Two strikes too strict

The Productivity Commission’s draft report on proposed reforms to executive remuneration has generally been well received, with one obvious exception. Its proposed 'two strikes' test, which could result in spills of entire boards, has ignited a flood of opposition from business groups in the second round of submissions.

The arguments against the two strikes test are quite consistent and were presented again in submissions to the commission by the Business Council and ASX today. The proposal that has alarmed business groups is the commission’s recommendation that two successive non-binding votes of 25 per cent or more in relation to remuneration reports would trigger a spill of the entire board.

The BCA, saying it was "strongly opposed" to the draft recommendation, says that the proposal elevates the issue of the remuneration report above other key strategic issues to be decided by boards; that it would put inappropriate power in the hands of minority shareholders; that it could be used for ulterior motives; that it could distract boards from strategic decisions; that it could create instability and uncertainty and that it could affect a company’s access to capital.

ASX argues, in effect, that the proposal is over-kill and that the problems identified by the commission didn’t warrant the response. There didn’t appear to be a strong case for why remuneration should be treated so differently to other significant corporate decisions. ASX was also concerned about giving minority shareholders undue influence as well as the impact on directors’ willingness to serve on boards.

One could argue that a relatively small number of recalcitrant boards have provoked the PC recommendation by ignoring shareholder opposition to their remuneration practices. There are companies with recidivist records on remuneration issues who appear unconcerned that they regularly attract big protest votes.

It is unclear where the two strikes policy came from – it doesn’t appear anyone of substance argued for it in the initial submissions – nor why the commission should think it would be effective.

It is already open today to shareholders speaking for only five per cent of capital to call a meeting to sack a board. A two strikes policy with 25 per cent trigger points is actually a more demanding threshold than the one already available.

The existing mechanism for turfing boards isn’t, of course, tied to the sensitive and often controversial issue of remuneration. A routine remuneration-specific voting regime might excite sufficient protests to trigger a spill whereas it is most unlikely shareholders would use the existing law to call an extraordinary meeting to force a spill on remuneration issues.

It might also be quite counter-productive – institutional shareholders in particular would be reluctant to create the kind of upheaval and instability that would be risked if a board actually faced a spill over remuneration issues.

At the moment institutions and others vote freely, knowing that a big protest sends a message but, because it is non-binding, doesn’t destabilise the board or company.

They also already have the option – and have in a couple of instances threatened to use it – of targeting the chairman of the remuneration committee or simply any director facing re-election as a way of giving the non-binding vote teeth where companies ignore their protests.

With some exceptions (there would probably be about a dozen groups that have had recurring strong protest votes) companies generally have responded to shareholder protests against their remuneration practices. They make a bigger effort to explain and justify why they’ve done what they’ve done and in a number of instances have redesigned their incentives schemes in response to shareholder agitation.

If the commission were determined to introduce its two strikes policy an obvious way to ensure that it wasn’t quite as distracting and intimidating for boards – and was more consistent with the voting procedures for other shareholder issues – would be to make the threshold for at least the second strike a more conventional majority vote.

The policy, however, is unnecessary, could have some adverse unintended consequences and would undermine an element of corporate governance that is gradually becoming more effective. Given the weight of submissions and discussion highlighting the flaws and risks within the proposal, hopefully it won’t re-surface in the final report when it is handed to government in mid-December.

http://www.businessspectator.com.au/bs.nsf/Article/Too-much-spillage-pd20091110-XN9HF?OpenDocument&src=kgb