Unanimous disapproval of Australian government’s 2 strikes legislation by all stakeholders – latest survey results

Over 100 representatives from the four main governance constituencies – major superannuation funds, fund managers, non-executive directors and senior executives – attended the 5th annual CGI Glass Lewis & Guerdon Associates Remuneration Forum held in Sydney on 21 March, 2011 to discuss key current issues in the area of executive remuneration.

Participants were asked to provide anonymous feedback on the topics of the two main Forum sessions by completing a questionnaire distributed at the end of each session.

The answers to those questionnaires have been analysed by an experienced Sydney University researcher, Maroun Elias, who is independent of CGI Glass Lewis and Guerdon Associates.

The results of his analysis are below.


Responses to Session 1 Questionaire

Topic – The government’s legislative response to the Productivity Commission recommendations

The answers to the questionnaire on this topic indicated very strong opposition, from both corporates and institutional investors, to the government’s ‘two strikes’ test (94% opposition) and quite strong opposition to its remuneration consultant (67%) and “no vacancy” (63%) legislative changes.

There was moderately strong support for some of the other changes, including the prohibition of Key Management Personnel (KMP) participating in the non-binding vote, the introduction of new rules dealing with ‘cherry picking’ of proxies and the prohibition of the hedging of KMP’s incentive remuneration. 

 ‘Two-strikes” test

Under the ‘two strikes’ test, shareholders will have the right to vote on whether the whole board (except for the MD/CEO) should stand for re-election if a company’s remuneration report receives a ‘no’ vote of 25 per cent or more of votes cast in two consecutive years. 

While the participants recognised the importance of companies responding appropriately to a significant ‘no’ vote against the remuneration report, they considered the ‘two strikes’ test an overreaction with potentially unintended consequences. 

In relation to the 25 per cent threshold, 46% of the answers considered that a 50 per cent threshold is more appropriate, while 41% considered that the threshold should be based on the total voting shares rather than the votes cast. 

Notwithstanding their opposition to the ‘two strikes’ test, a majority of answers from corporate participants indicated that they were prepared for its proposed introduction on 1 July 2011.

Inclusion of a sunset clause

To offset against unintended consequences of the ‘two strikes’ test, the questionnaire asked participants to consider whether a sunset clause should be included in the legislation to give the test a trial period.  62.5% of the participants who responded to this question supported a sunset provision, with 58.3% of the supporters favouring 2 years as an appropriate period, and 16.7% 3 years. The final legislation does not contain a sunset clause.

KMP participation in non-binding vote

81% of the responding participants supported the prohibition of KMP’s voting on the non-binding remuneration report resolution.  But the participants believed that the prohibition should be limited in other cases to instances where the KMP has a material personal interest in the remuneration and that KMP should only be prohibited from voting on their own remuneration.

A summary table of the support for and opposition to key elements of the new legislation, plus the value that should be used for reporting equity-based remuneration, is provided overleaf.




SUPPORT for and OPPOSITION to the new legislation (nearest whole %)









Introduction of the ‘two strikes’ test










Disclosure and engagement rules in relation to remuneration consultants






Prohibition of KMP participating in the non-binding vote






Prohibition of hedging KMP’s incentive remuneration






Requirement for shareholder approval before public companies can declare ‘no vacant’ board positions






Introduction of new rules relating to ‘cherry picking’ of proxies





Requirement of remuneration disclosure for only the KMP of the consolidated entity





Reporting of equity-based remuneration on value at date of grant rather than amortised value







Responses to Session 2 Questionaire

Topic – Are governance guidelines frustrating the proper design of company- specific executive remuneration?

70% of the responding participants said that governance guidelines, such as those by proxy advisers, do not frustrate the proper design of company- specific executive remuneration.

This is probably because most influential guidelines recognise that remuneration structures should be tailored to fit the circumstances of each company and that, consequently, remuneration structures that depart from established guidelines may be appropriate for individual companies – and will be supported if they are cogently explained and justified.

Within that broad response, however, there were some interesting sub-responses:

          Many responding participants observed that the guidelines serve the larger companies but can place an unduly onerous burden on smaller companies.  

          50% of responding participants considered that the guidelines push companies towards adopting remuneration structures that are ‘safe harbours’ under the guidelines, with one-third of participants of the view that the new legislative changes will push companies further towards adopting ‘safe harbour’ remuneration structures. 

           Only 30% of the responding participants considered that Australian governance guidelines and legislation take sufficient account of the remuneration practices in international markets in which a company operates, suggesting that Australian governance guidelines and legislation are not sufficiently internationally aware or compatible. 

          Notwithstanding this, 67% of the responding participants considered that Australian governance guidelines and legislation do take sufficient account of the expectations of overseas executives, with some participants suggesting that the “war for talent” is overstated, particularly as the governance guidelines do not mandate a cap on executive remuneration.

          Some responding participants suggested that the compatibility between governance guidelines and the proper design of company-specific executive remuneration can be improved by adopting a principles-based approach to executive remuneration guidelines as opposed to a voluminous black-letter approach.  This was on the basis that the principles-based approach will ensure flexibility in the application of the governance guidelines and will allow companies to adopt remuneration structures that are better suited to their actual circumstances.

          Some responding participants commented that the governance guidelines help companies to engage with their shareholders and other stakeholders to determine what the market deems appropriate and acceptable practice.

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