Two-strikes policy hits home

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

By InvestSMART · 21 Oct 2011

By InvestSMART ·
21 Oct 2011

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

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

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

GUD chairman Clive Hall was forced to defend his management team during the annual meeting, arguing the maker of Sunbeam appliances had delivered "superior shareholder returns" over the long term.

The Australian Council of Superannuation Investors said companies needed to revisit remuneration structures if they were hit with protest votes.

"Our members expect executives to be paid for performance," said ACSI chief executive Ann Byrne. "They expect there to be stretch hurdles for both short-term and long-term bonus payments."

ACSI represents investment mandates of about $300 billion.

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

Transurban has topped the list, the toll-road operator averaging a 55 per cent "no" vote against its executive pay report over three years. Transurban is scheduled to hold its annual meeting on Tuesday.

Challenger, which does not hold its meeting until next month, has received the highest single protest vote among big companies, with nearly 70 per cent of shareholders against the remuneration report last year. A further 10 companies, including Rio Tinto, Qantas and Downer EDI, remain on watchlists after receiving two strikes against their executive remuneration reports since 2008.

Rules introduced by the federal government in July make it tougher for companies to ignore protest votes. Under the two-strikes rule, if a company receives more than a 25 per cent no vote against a remuneration report at two consecutive annual meetings, then shareholders must vote on a board spill.

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

JPMorgan analyst Gerry Sherriff said the rules would lead to an overhaul of executive pay.

"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 policy has been bitterly opposed by company directors, and former BHP Billiton chairman Don Argus last week stoked more controversy, telling investors to sell their shares if they objected to executive pay.

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Frequently Asked Questions about this Article…

What is the Australian two-strikes rule on executive pay?

The two-strikes rule is a federal policy that increases shareholder power over executive pay. If more than 25% of shareholders vote “no” on a company’s remuneration report at two consecutive annual meetings, shareholders must then vote on whether to spill the board — potentially forcing a fresh election of all directors.

What happens after a company gets a protest vote under the two-strikes rule?

A protest vote that exceeds 25% puts a company on notice and increases pressure from investors to change pay arrangements. If the result is repeated at the next annual meeting (two strikes), shareholders must vote on a board spill. The article notes GUD Holdings was the first company hit with a strong protest vote and effectively had a year to respond to shareholders’ concerns.

If shareholders vote for a board spill, what are the next steps?

If a simple majority of shareholders vote in favour of a spill, the company must hold a fresh election of all directors within 90 days. That process can result in an overhaul of the board if shareholders back changes.

Which companies were highlighted as worst performers on executive pay?

The article named Cabcharge, Challenger Financial and Transurban as the companies receiving strikes related to protest votes of more than 25% against their remuneration reports in each of the past three years. Transurban averaged a 55% “no” vote over three years, while Challenger recorded nearly a 70% single protest vote in one year. Other firms on watchlists include Rio Tinto, Qantas and Downer EDI.

Why did GUD Holdings attract a large protest vote against its remuneration report?

Nearly 42% of GUD shareholders voted against the remuneration report after chief executive Ian Campbell received a 33% pay increase to $2.23 million while the company’s profits fell 14% over the year. GUD’s chairman defended the pay by pointing to long-term shareholder returns, but investors used the remuneration vote to register dissent.

How are institutional investors like ACSI responding to protest votes on executive pay?

The Australian Council of Superannuation Investors (ACSI), which represents about $300 billion in investment mandates, says companies hit with protest votes should revisit remuneration structures. ACSI’s CEO Ann Byrne says members expect executives to be paid for performance and for both short-term and long-term bonuses to have stretch hurdles.

Will the two-strikes rule change executive pay practices?

Analysts quoted in the article — including JPMorgan’s Gerry Sherriff — expect the rule to increase scrutiny and lead to an overhaul of executive remuneration, pushing boards to align pay more closely with company performance. The rule has been controversial among directors, however, and some (like former BHP chair Don Argus) have publicly opposed it.

What should everyday investors watch for at upcoming annual meetings?

Everyday investors should watch remuneration report votes (the percentage voting “no”), whether a company is on a pay watchlist or has already received strikes, and any announcements about changes to executive pay or board composition. The article mentions Transurban and Challenger as companies with notable protest histories and scheduled meetings where these issues may be raised.