THERE is no coincidence that the Occupy Wall Street protest against income disparity is spreading like wildfire throughout the world and arrived in Sydney over the weekend as protesters gathered outside the Reserve Bank of Australia to make a stand against corporate excess.
In Australia it coincides with the start of annual general meeting season, where shareholders finally get to vote whether to accept or reject proposed executive salary packages. With headlines such as "Qantas bosses' salary up $5 million", "Banks' pay practices in spotlight", "Corporate fat cats cash in" and "Leighton's $30 million man", the issue of pay was always going to be a corker this year.
And unlike previous years, shareholders finally get to have some bite. It marks the first year the new "two strikes" rule applies, which means if 25 per cent of shareholders reject two consecutive remuneration reports, a resolution is automatically put to dump the board, and it will pass if supported by 50 per cent of votes. The company would then have 90 days to hold another meeting to have a full board re-election.
The mood and new powers of shareholders has hit a raw nerve with directors, who last week released a report through their lobby group, the Australian Institute of Company Directors, trying to discredit proxy advisers whose job it is to make recommendations on how shareholders should vote on things including executive pay packages at AGMs. The report was launched by company director Don Argus, who inflamed the situation by telling investors that if they don't like executive pay levels and big bonuses, "they can sell the shares it's as simple as that".
But the renewed focus on executive pay and the anxiety it has produced among directors is a huge positive, according to the architect of the two-strikes policy, Professor Allan Fels, the co-author of the Productivity Commission report on executive pay. "Last week's debate highlights the importance of the new law and it seems to have caused some anxiety, which is a good thing given there are still a significant number of excessive pay outcomes," he said. On the two-strikes rule, Fels is even less coy. "It is an extremely well balanced and some would say unduly soft law that sensibly puts pressure on boards to do the job well and better than they did in the past."
For Fels, the spat between proxy advisers and the institute keeps the debate alive. But Argus's comments, well, they were just plain wrong. "Most shareholders would resent having to incur significant costs selling shares. It is better to put more pressure on boards to manage pay properly," Fels said. "And, in any case, a significant number of shareholders in index funds can't sell shares."
The brutal reality is it is incumbent on boards to ensure they do the right thing by the people who own the company the shareholders when it comes to remunerating themselves and senior executives. Shareholders should have the power to do something about it, rather than having to dump their shares in protest.
In the case of Qantas, its shareholders would lose a fortune if they dumped the stock to protest the fact that Qantas chief Alan Joyce received a 71 per cent pay rise to $5 million at a time when it had to suspend dividend payments and is embroiled in industrial disputes with its workforce over its demand for small pay increases.
There is also the issue of Godzilla termination payouts, including Leighton's massive payout for Wal King that could be as high as $30 million, or Foster's recently appointed boss John Pollaers, who stands to get a termination fee as well as payment for the 960,000 shares the company has proposed he be granted under its long-term incentive scheme, which is worth at least $5 million.
Investors have had a gutful of watching their share prices tank, companies putting out warnings of profit declines, dividend cuts and too much debt but still getting big pay packets.
Most of all shareholders are fed up with the boards' flagrant disregard of the interests of shareholders the people for whom they are supposed to be acting. For years, shareholders had a non-binding vote when it came to remuneration reports, and as such most companies treated their votes with contempt. It says something about such a system. Rubber bullets bounce.
While the brouhaha gathered steam, independent senator Nick Xenophon and the Australian Shareholders Association promoted a plan to force the nation's leading companies to divulge their average or median staff wage every year. Research released last month confirmed there has been a huge jump in CEO remuneration over the past decade, far in excess of share price gains, and far in excess of the increase in the average weekly wage.
The Australian Council of Superannuation Investors' report found that the median CEO fixed pay in the top 100 Australian companies rose 133 per cent and the median bonus increased 190 per cent in the decade to 2010. That far outstripped the 31 per cent increase in the S&P/ASX 100 Index over the period.
With all this going on, it is no surprise that many directors are going into a meltdown and bracing for some big protest votes against board reappointments and excessive pay.
The majority of boards do the right thing but there are too many examples of companies acting in the interests of the club rather than shareholders. One hopes the new two-strikes rule will result in more communication with shareholders to bring shareholder returns and executive pay into alignment.
aferguson@fairfaxmedia.com.au
Frequently Asked Questions about this Article…
What is the “two‑strikes” rule and how does it give shareholders more power over executive pay?
The two‑strikes rule means if at least 25% of shareholders vote against a company's remuneration report in two consecutive annual meetings, a resolution is automatically put to spill (dump) the board. That spill motion succeeds if a majority (50%+) supports it. If carried, the company has 90 days to hold a meeting to re‑elect the full board. The change gives shareholders more bite over executive pay compared with the old non‑binding votes.
How can everyday investors influence executive pay at AGMs?
Everyday investors can vote on remuneration reports at AGMs — and under the two‑strikes system those votes can force serious consequences for boards. Investors can consult proxy adviser recommendations (which many use to decide votes), lodge votes themselves, and watch for companies’ responses after a first ‘strike’. The article highlights that increased voting power encourages more communication between boards and shareholders.
What role do proxy advisers play in shareholder votes, and why are some directors critical of them?
Proxy advisers research issues and make voting recommendations to shareholders on matters such as executive pay. Some directors and lobby groups (like the Australian Institute of Company Directors) have tried to discredit proxy advisers, arguing overreach, while proponents say their guidance helps ordinary shareholders vote informedly. The debate keeps scrutiny of pay practices alive, according to Professor Allan Fels.
Would selling shares be an effective way for investors to protest excessive CEO pay?
Some directors have suggested investors can simply sell shares if they dislike pay levels. The article points out this is often impractical: selling can incur significant costs, many investors are in index funds and cannot easily sell individual holdings, and Professor Fels argues it’s better to use voting power to pressure boards to manage pay properly.
Which high‑profile companies and executives were highlighted as examples of excessive pay?
The article cites several examples: Qantas CEO Alan Joyce reportedly received a 71% pay rise to $5 million at a time dividends were suspended; Leighton faced a potential ‘Godzilla’ termination payout for Wal King of up to $30 million; and Foster’s newly appointed boss John Pollaers was proposed to receive a termination fee plus 960,000 long‑term incentive shares worth at least $5 million.
How has CEO pay grown compared with market returns and average wages?
Research referenced in the article (from the Australian Council of Superannuation Investors) found that over the decade to 2010 the median CEO fixed pay in the top 100 Australian companies rose 133% and the median bonus rose 190%. Over the same period the S&P/ASX 100 Index increased about 31%, showing CEO pay grew far faster than market returns and typical wage gains.
What are “Godzilla” termination payouts, and why should investors be concerned?
“Godzilla” termination payouts is a colloquial way the article uses to describe very large exit payments to departing executives. Investors should care because huge termination fees can reward executives despite poor shareholder returns and weaken alignment between executive incentives and long‑term shareholder interests — Leighton’s possible $30 million payout is given as an example.
Are there other transparency reforms being proposed to address pay disparity?
Yes. The article notes a proposal promoted by independent senator Nick Xenophon and the Australian Shareholders Association to require leading companies to disclose their average or median staff wage annually. This, together with the two‑strikes rule and heightened public scrutiny, is intended to improve transparency and pressure boards to align executive pay with shareholder and staff interests.
Call 1300 880 160
Start a chat
Schedule a call
