(This article is not investing advice.)

We recently reviewed total shareholder return (TSR) performance after the AGM for companies that have received a remuneration report “strike” i.e., at least 25% of votes cast against the remuneration report.

Listed companies may receive a high vote against the remuneration report for reasons that are not necessarily directly related to the remuneration policy or executive pay outcomes. Voting against the remuneration report is one of few avenues available for ASX investors who want to voice their concerns with overall performance. For example, poor TSR for the previous financial year increases the likelihood that companies will receive votes against the remuneration report at the AGM (see HERE).

However, boards may typically seek to address investor concerns after receiving a strike if the reason for the strike is that investors are displeased with e.g., the company’s strategy, the alignment between executive remuneration and shareholder interests, or other factors within the board’s control. If that is the case the share price performance may be expected to improve after a strike which could present an opportunity for investors to earn excess returns.

To test this we reviewed the TSR performance for companies on the ASX 300 that received a strike between FY2020 and FY2022. The sample included 49 companies with 9 companies receiving more than one strike in the period.

The TSR for each company was calculated for holding periods of 6 and 12 months after the AGM date when the company received a strike. Each company’s TSR was compared to the total return for the S&P/ASX 300 Index and a sector index to calculate excess returns. The sector indices (e.g., S&P/ASX 200 A-REIT, S&P/ASX 300 Metals and Mining) were chosen to remove potential industry-specific factors that could have impacted returns during the holding period.

The results indicate that buying shares on the AGM date in every company that receives a strike can produce excess returns over a holding period of 6 months after the AGM. The average excess return was in the range 5% to 9% compared to buying the ASX 300, and in the range 3% to 10% compared to buying the sector index for each company as illustrated in Table 1.

However, the median excess return was negative in each year suggesting that this is a risky strategy as the high average return is dependent on a few companies that are TSR “outliers”:

Table 1: Excess 6-month return vs ASX300 and sector indices

 

And for holding periods of 12 months after the AGM both the average and the median excess returns were negative, suggesting that any effect subsides after 6 months:

Table 2: Excess 12-month return vs ASX300 and sector indices

 

The results show that although investing in companies receiving a strike can produce above average excess returns for a short period of time compared to buying the ASX 300 or the sector index, the reasons for the returns are probably unrelated to boards responding to a strike (assuming companies take steps to respond to a strike). In fact, investors may notice that companies receiving a strike in the upcoming AGM season are more likely to underperform the market for the next year. This finding is probably more telling, inferring that a board that does not govern well does not change overnight.

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