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Boards told to heed protest votes

SOME of the nation's most powerful investors have put corporate Australia on notice to respond to protest votes against excessive executive pay or face a boardroom overhaul.

SOME of the nation's most powerful investors have put corporate Australia on notice to respond to protest votes against excessive executive pay or face a boardroom overhaul.

The warning came as homewares manufacturer GUD Holdings yesterday became the first company to be hit with a protest vote under the tough new "two-strikes rule" on executive remuneration, giving the company a year to appease shareholders.

Nearly 42 per cent of GUD shareholders voted against the company's remuneration report, which last year gave the chief executive, Ian Campbell, a 33 per cent pay increase to $2.23 million, even as profits fell 14 per cent.

The GUD chairman, Clive Hall, was forced to defend his management team to the annual meeting, arguing the company had delivered "superior shareholder returns" over the long term.

The Australian Council of Superannuation Investors, the peak lobby group for some of the biggest industry superannuation funds, said companies needed to revisit remuneration structures if they were hit with a protest vote.

"Our members expect executives to be paid for performance. They expect there to be stretch hurdles for both short-term and long-term bonus payments," the council's chief executive, Ann Byrne, said. The council represents combined investment mandates of some $300 billion.

A list of Australia's worst performers on executive pay emerged yesterday with three companies - Cabcharge, Challenger Financial Services and Transurban - receiving a "strike" which relates to a protest vote of more than 25 per cent against their remuneration reports in each of the past three years.

The toll road operator Transurban has topped the list, averaging a 55 per cent no vote against its executive remuneration report over three years. Transurban is scheduled to hold its annual meeting on Tuesday. Meanwhile Challenger, which does not hold its meeting until next month, has received the highest single protest vote among major companies with nearly 70 per cent of shareholders voting against the remuneration report last year.

A further 10 companies including Rio Tinto, Qantas and engineering major Downer EDI remain on shareholder watch lists after receiving two strikes against their executive remuneration reports since 2008.

Any shareholder protest is likely to cost more than just a company's reputation. Analysis prepared by the brokerage JP Morgan found companies that received a "strike" against their remuneration report underperformed the benchmark S&P/ASX 200 by more than 3 per cent in the month following the vote.

New rules introduced by the government in July made it tougher for companies to ignore protest votes. Under the so-called two-strikes rule, if a company gets more than 25 per cent no votes on a remuneration report in two consecutive years, shareholders vote on a board spill.

If a simple majority of shareholder votes favour a spill, then a fresh election of all directors must occur within 90 days.

The JP Morgan analyst Garry Sherriff said the new rules would lead to an overhaul of executive remuneration. "The two-strikes rule puts greater scrutiny on boards to devise executive remuneration structures better aligned with the performance of the company," Mr Sherriff said.

The two-strikes policy has been opposed by company directors, and the former BHP chairman Don Argus stoked controversy last week by telling investors to sell their shares if they objected to executive pay.

ACSI's Ms Byrne said there was an increasing trend for boards to approve short-term bonus payments for just average performance.

"We have reminded boards that bonus payments should be bonuses for doing something over and above your normal job," she said.

The parliamentary secretary to the Treasurer, David Bradbury, warned this week boards trying to dodge the two-strikes rule would only spark calls for tougher regulation.

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