ISS and the 2-strikes rule in the 2012 AGM season

ISS published its “2012 Voting Season Preview: Australia and New Zealand” on 19 September 2012. Not surprisingly, the main focus is on the 2-strikes rule and the companies that have received a first strike in the FY2011 AGMs (1st strikers).


ISS intends to evaluate the remuneration practices at 1st strikers on the same basis as they assess the remuneration practices at all other ASX-listed. However, ISS will pay particular attention to the extent to which first strikers have endeavoured to redress the remuneration concerns raised by investors. ISS will evaluate all board spill resolutions on a case-by-case basis, and independently from the remuneration report resolution.


ISS’s “business as usual” sentiment verifies Guerdon Associates’ assessment, and is consistent with ACSI’s stated approach to 1st strikers (see our summary article HERE).


The ISS paper also considers the pay-performance relationship in the incentive scheme structure and other remuneration related issues. The recent, high-profile display of remuneration “austerity”, in the form of incentive forfeitures and pay freezes or reductions, is encouraged by ISS as “sending a powerful message: contrary to popular opinion, annual bonuses are not entitlements”.


However, ISS opines that the same kind of restraint and voluntary forfeiture is also seen as a signal that the incentive policy is flawed, as it reveals a disconnect in the pay-performance relationship. Why would a CEO have to give up his/her incentive pay, their argument goes, if there is a strong link between company performance and pay in the first place? It will be interesting to see what, if any, changes are made to incentive structures by companies where the CEO has felt the need to forego bonus payments.


ISS highlights the inadequate disclosure of STI performance conditions. While ISS recognizes legitimate company concerns about divulging commercially sensitive information such as annual budgets, it points out ways to improve disclosure without revealing information that will give an advantage to competitors. Retrospective disclosure of specific targets and the related incentive outcomes is suggested as a solution to engender a degree of confidence in the remuneration policy, along with prospective disclosure of target and maximum STI levels, the performance metrics used and relative weightings, and the extent and reasons for board discretion use among others.


The directors of companies with a first strike will be interested in an August 2012 study, conducted by the Melbourne Institute and Global Proxy Solicitation, which revealed that 53% of the respondent investors would be more likely to vote against remuneration proposals if a company had already received a first strike in 2011; only 6.5% said they would be less likely to vote against a 1st striker when considering a second strike.


This study also revealed that 68.4% of the investors surveyed would be prepared to throw out boards that received a second strike at the 2012 AGM.


See the ISS report HERE.

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