“Two Strikes” Rule Working

Although over 100 companies faced the grim prospect of a “second strike”, only 13 companies actually received a “second strike” in the recently completed Australian proxy season (and only 2 had their board spill resolution approved). This seems to indicate that shareholders are taking this newly-granted responsibility quite seriously. Furthermore, companies are as well , as indicated by the increased dialogue and subsequent policy and design reform.

CGI Glass Lewis has found that “first strike” companies have been more proactive in consultations with, and feedback from, institutional shareholders, proxy advisors and remuneration advisors. As a result, their remuneration reports tend to be well explained with feedback from shareholders incorporated in those companies’ remuneration policy reviews.

Some companies, such as Bluescope Steel Limited, implemented remuneration freezes for executives until financial year 2013. Others, such as Crown Limited, undertook major efforts to improve their disclosure and explanation of remuneration practices. Some companies, such as Dexus Property Group, revamped their executive remuneration structures by introducing a deferred short-term incentive and a new long-term incentive plan, each of which, in our view, better align that company’s remuneration framework with shareholders’ long-term interests.

As previously mentioned, only 13 companies received a “second strike”. Of these, only two companies had their board spill resolution approved at their AGM. Subject to majority approval of a separate resolution (the “board spill resolution”) at the AGM, companies that receive two strikes (two consecutive votes of 25% or more against the remuneration report proposal) may face a board spill, where directors (except the managing director) would need to be re-elected to maintain their board seats.

This of course means that the two companies with majority-supported spill motions (Penrice Soda and Globe International) need to hold an extraordinary general meeting within 90 days to re-elect the board.