Australia: Executive Remuneration: Results of Spill Meetings put Effectiveness of 'Two Strikes' Rule in Question

The 'two strikes' regime is not achieving its policy objectives. It is costing corporate Australia without tangible benefit. Australia cannot afford to persist with this legislative experiment.

The 'two strikes' rule was introduced to give shareholders a greater say on executive remuneration. Experience to date does not support any direct connection between the rule and greater board accountability. The results so far show there is a high probability that any board spill meeting convened will be redundant, while the cost and administrative burden to companies is significant.

Can we afford the luxury of ineffective regulation that adversely impacts on our productivity and international competitiveness?

No. It's time for a re-think.

SECOND STRIKE REGIME

The 'two strikes' rule requires companies to propose that a special meeting be convened to consider a reconstitution of the board if the company's remuneration report receives two 'strikes' (for more detail, see Corrs In Brief Executive Remuneration Bill – Proposed Changes to Corporations Act).

If a spill meeting is required, all directors who approved the most recent remuneration report (other than any managing director) must stand for re-election at the spill meeting.

Key management cannot vote on the resolution to approve the remuneration report or to require a spill meeting at an AGM. However, they are not (and nor should they be) excluded from voting at a board spill meeting. As a result, voters who actually vote on the remuneration report and the decision to call a spill meeting are often a small minority of shareholders who may have motivations that have nothing to do with executive remuneration. The result of any board spill meeting is highly likely to be the re-election of the board.

Based on the outcome of spill meetings held so far, shareholders have no more demonstrable influence on the shape or quantum of executive remuneration than they had prior to the introduction of the two strikes rule. There is no evidence to support that this more costly regime is producing a better regulatory outcome than when shareholders had a non-binding vote on the remuneration report.

OUTCOME OF 2012 SECOND STRIKES

At AGMs held in 2012, 21 ASX listed companies suffered a second strike (nine companies with a first strike are yet to hold their subsequent AGM). Of those 21 companies, shareholders of only five also passed a spill resolution requiring a board spill meeting to be convened.

In one case (Rey Resources), the directors who would have faced re-election at the required spill meeting resigned either before or following the AGM, obviating the need for the meeting. Removal of the affected directors had also been the subject of a requisition served on the company by the company's major shareholder. Had the relevant directors not resigned, the continuation of their appointments would have been considered in any event, so the spill meeting would have been superfluous.

The case demonstrates there are opportunities for board review other than via the second strike regime. Listed companies are subject to regular board rotation requirements. In addition, substantial shareholders or a significant number of shareholders may requisition a general meeting to consider the composition of the board.

In the case of the now delisted Bowen Energy, the second strike and the spill meeting resolutions were passed by a very small minority of shareholders, excluding the company's 90% shareholder which subsequently proceeded to compulsory acquisition of the outstanding shares in the company. Regardless of the outcome of the AGM, the composition of the board was ultimately in the hands of the major shareholder, with the ability to control the results of the spill meeting.

At the three spill meetings held so far for which results are publicly available ¹, the incumbent directors were convincingly re-elected, likely because key management voted at the spill meeting and reversed the outcome of the AGM. Statistically, the result that should nearly always happen is an overwhelming re-election of the board.

IS THE REGIME WORKING?

The two strikes regime increases the cost and administrative burden of convening any AGM, as it is now necessary to include an explanation of the impact of the two strikes rule and details of the applicable voting exclusions. Companies that have received one strike must also include and explain a conditional spill resolution which will need to be put to the vote in the event of a second strike. The cost of conducting a poll, where necessary to ascertain clearly the outcome of voting on remuneration related resolutions, and holding a second meeting, are likely to be significant.

There is also the destabilising effect that such corporate action causes to a company's operations, particularly those with small management teams.

As a means of encouraging accountability in relation to remuneration, the impact of the regime is difficult to measure.

If the trend of spill meetings resulting in no board changes continues, the regime may become regarded as an empty threat to board stability and an unjustifiable expense for companies and their shareholders.

There is a pressing need for a cost benefit analysis of this regime to assess whether it is achieving its policy objectives and providing any greater protection for shareholders than the previous regime.

Footnotes

¹Penrice Soda Holdings, Globe International and Overland Resources

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