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Australia's proposed 'Two Strikes Rule' on pay faces opposition

We noted last month that Australia’s Productivity Commission had released a detailed discussion document which included a package of suggested changes to the Corporations Act and ASX listing rules. Over 50 submissions were made to the Commission following the publication of the discussion document and before last Friday’s deadline. The Commission is now preparing its final report.

One of the proposals included s requiring boards to face re-election if shareholders’ concerns on consecutive remuneration reports are ignored — a ‘two strikes’ rule. The ‘two strikes’ rule would be implemented via The Corporations Act 2001 such that where a remuneration report receives more 25 per cent or higher votes against, the board would be required to report back to shareholders in the subsequent remuneration report explaining how shareholder concerns were addressed and, if not then why not. If the subsequent remuneration report receives a ‘no’ vote above a prescribed threshold, all elected board members be required to submit for re-election at either: [a] an extraordinary general meeting or [b] the next annual general meeting.

Reaction to this proposal dominates the feedback received. The 25% threshold was considered to be too low by many respondents, with both the ASX and UniSuper suggesting an alternative 50% threshold. Chartered Secretaries Australia, although opposing the proposal, also backed a threshold of ‘over 50 per cent’ should the measure be introduced.

The Australian Shareholders Association favoured as an alternative to the ‘two strikes’ proposal that the remuneration report require the same majority as a special resolution in order to pass and if the report is not passed, that the Chairman of the Remuneration Committee stand for re-election at the next AGM.

Chartered Secretaries Australia opposed the ‘two strikes’ proposal ‘given the extremely negative consequences that could arise from an exercise of the proposed shareholder power to dismiss the entire board at one meeting, which could see a company without any experienced directors, significant damage to the share price and loss of value in shareholder investment’, suggesting that shareholders would be very reluctant to exercise the proposed power. It also expressed concern that ‘the proposal provides for a vote on the remuneration report to be treated as a vote of no confidence in the board’.

The Productivity Commissions final report to the Australian Government will surely make for interesting reading when it is published on 18 December 2009.

Further Reading

Productivity Commission Executive Remuneration Public inquiry

Executive Remuneration Inquiry Submissions

What do you think?