The government’s ‘strengthening’ of the current non-binding vote on the remuneration report by moving to the ‘two strikes and a spill resolution’ is almost complete.  The Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Bill 2011 was introduced to the House of Representatives on 23 February 2011.  While most of the procedural problems that would have made it impractical have been fixed, the 2-strikes process still risks undermining the usefulness of the vote on the remuneration report as a governance measure.

 

As proposed in the Bill, shareholders will be required to vote on whether to spill all board positions if the vote in favour of the remuneration report at two successive AGMs is 75% or less.  The “spill resolution” will be put at the second AGM and, if passed with 50% or more of the eligible votes cast, will require a meeting (the “spill meeting”) to elect directors to be held within 90 days (unless all of the directors other than the MD who were in office at the second AGM have been replaced on the board at that time).  The Bill includes a mechanism to ensure that a minimum of 3 directors remain after the spill meeting.  Directors who survive the spill meeting serve for their original term of office, without extension.

 

Feedback from institutional investors and proxy advisers suggests that that the new two-strikes regime will discourage institutional shareholders from voting against a remuneration report at all.  Many do not want the risk that this could result in a requirement to include a spill resolution on the agenda for the next AGM.  They believe that a spill of the board is a very serious matter, and the threat of a spill could cause a fall in a company’s share price.  What fund manager is going to shoot themselves in the foot by voting against the remuneration report?  The stock loses value, they under perform their benchmark, and their own performance pay suffers.

 

Such concerns suggest that the government’s attempts to separate the second strike vote and the vote on the spill resolution, and the requirement for a majority vote on the spill resolution, will not work.  The incentive for institutional shareholders to vote against the remuneration report at the second AGM would be even stronger than at the first meeting, given the risk a no vote could trigger the spill resolution.

 

A major concern is that the two-strikes approach elevates executive remuneration to an unwarranted level of importance.  It really does not make sense.  Two successive votes in favour of the remuneration report of 75% or less can trigger a spill resolution.  But elsewhere the Corporations Act allows a simple majority vote to approve transactions with director or substantial shareholder related parties whose interests may conflict with those of ordinary shareholders.

 

Furthermore, precedent suggests that shareholders do not see concerns about remuneration matters as significant enough to cause a spill of the board.  Under the Corporations Act, 100 shareholders or shareholders representing 5% the issued voting capital effectively already have the power to call for a spill resolution or hold a spill meeting on any issue, including concerns with a company’s remuneration policies and practices.  We are not aware of this power having been used because of dissatisfaction with remuneration matters since the non-binding vote on the remuneration report was introduced.

 

The non binding vote has worked well – in many cases, no votes of as little as 10% have been sufficient to prompt boards to respond to and address shareholder concerns about remuneration matters.  We would prefer to see the current non-binding vote continue unchanged. 

 

If the two strikes regime has to proceed, the minimum successive ‘no’ votes required to force a spill resolution should be lifted from the proposed 25% to 50%. 

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