Three years on, and it is timely to stop and take stock of the effectiveness of the controversial ‘two-strikes’ rule.
A few interesting observations, based on Australian Financial Review (AFR) survey data:
- A ‘strike’ (i.e. an against vote of more than 25%) has been recorded at approximately 6% of meetings over the three years since its introduction.
- In total, 40 companies have recorded two strikes – 18 companies in 2013 and 22 in 2012.
- 17 of the 18 companies that recorded a second strike were outside the ASX 200 (Cash Converters being the exception).
- A spill resolution was carried at only 2 of the 18 companies that were required to put up this resolution in 2013, requiring a spill meeting to be held.
- Only 6 ASX-listed companies in total have been required to hold a spill meeting since the rule was introduced.
- No incumbent directors have lost their board seat at a spill meeting. Any directors who have been ‘voted down’ at a spill meeting have been new directors seeking election (more often than not, having been put forward by a substantial shareholder).
- Eight companies have technically recorded three consecutive strikes (although the strike rate resets after the second).
An issue with the current operation of the rule is that directors and KMP executives will use their substantial shareholdings to avoid a board spill, given the restrictions that prevent them voting on the remuneration report and spill resolutions do not apply for board elections.
These observations could perhaps lead to the conclusion that the two-strikes rule has not been effective in achieving the government’s original policy aims – the phrases ‘charade’ and ‘toothless tiger’ have been bandied about by a number of commentators. But that is if we assume the ‘desired’ result is a board spill… it is not.
A board spill would lead to significant instability, and potentially increased share price volatility. This is not in investors’ short or long term interests. This issue was discussed at length in our Remuneration Forum last year (see our article HERE). However, if we consider that the desired result is better engagement with stakeholders, clearer and more transparent disclosures, and boards being more active in remuneration governance – then the two-strikes rule has been effective.
It will be interesting to see if the new government makes any changes to the current operation of the rule. A few of the anomalies we would suggest fixing include:
- changing the definition of a ‘strike’ to 25% of all shares (i.e. on the register) rather than voted shares. This would significantly reduce the potential for the two-strikes rule to be misused by a substantial shareholder, and more closely represent the views of the shareholder group as a whole. We note in particular that the “strikes” in many of the companies outside of the ASX 300 came about when the majority of investors did not have enough interest to actually vote, allowing parties with other interests to exert undue influence;
- removing the limitation that a ‘spill resolution’ can only be put to the vote every 2 years. It is anomalous that the strike rate ‘resets’ after the second consecutive strike. If a company receives a third consecutive strike, it should have to again put up a spill resolution – otherwise the serial offenders are essentially getting a ‘free kick’ in the off year.