Confusion reigns over new two-strike executive pay rules

The list of companies and directors that have fallen foul of the controversial new “two-strike” laws governing executive remuneration is getting longer, but neither the stock exchange nor the corporate regulators know what companies are on that list. And confusion reigns about how the laws operate, and the consequences for errant companies.

This year’s annual general meeting season will be the first test of the two-strike rule, under which a company’s board can potentially be spilled. Under changes to the Corporations Act, which came into effect on July 1, 2011, listed companies that received a vote of 25% or more against their 2011 remuneration reports last year are counted as having a “first strike” against them. If any of those companies receive another vote against their remuneration reports this year, it will trigger the “two-strikes” clause. Just what happens then is the source of some confusion.

According to the corporate governance specialists, Ownership Matters, for a board to be spilled there must be a conditional resolution put to and voted for by a majority of shareholders. “To suggest that company directors ‘face the axe’ as a result of the two-strikes laws is ridiculous,” says Dean Paatch, a director of Ownership Matters, commenting on a report in today’s Australian Financial Review. “It is ridiculous because institutional investors can distinguish between a protest vote and a conditional resolution.”

However, the CEO of the Australian Shareholders Association, Vas Kolesnikoff, tells LeadingCompany that there is a lot of confusion about how the laws operate in terms of when and how board spills are triggered.

The AFR reported that 565 directors are “facing the axe”, meaning they are potentially affected by the two-strike rule (see a list of companies affected below), naming 10 companies in the report today.

But Kolesnikoff is far from worried that so many directors are affected; he is more concerned that so few boards have been taken to task over exorbitant bonuses and executive remuneration.

Kolesnikoff’s examples include:

• Bluescope Steel, which lost a billion dollars in revenue, but still paid executives bonuses.
• The rising pay of Fairfax’s board and CEO despite stock prices falling from $5 to 60 cents over several years.
• QR National’s board arguing that shareholders accept that its financial targets be lowered by millions because of the recent cyclone and floods, and then approve bonuses for executives on the revised targets.

Julie Walker, associate professor in accounting at the University of Queensland, studied 240 listed entities and noted an increasing “no” vote against remuneration reports. “We found the average “no” vote on the remuneration report for our sample has increased steadily from 5.4% in 2005 (the first year of the vote) to 11.4% in 2009,” Walker writes on The Conversation.

The number of no votes is still very low. However, neither the Australian Securities Exchange (ASX) nor the corporate regulator Australian Securities and Investments Commission (ASIC) has a list of companies that have a first strike against them. The enforcement of the new laws is up to the voting courage of investors.

Companies that have incurred a “first strike” vote against their remuneration report.

The list below is compiled from a variety of sources (named) and is not complete.

1. GUD Holdings
2. Cabcharge
3. Challenger Financial
4. Transurban
5. Crown

Source: The Age

1. Southern Cross Exploration
2. Nido Petroleum
3. Guinness Peat Group
4. Beadell Resources

10.  Roc Oil

11.  Mirabela Nickel

12.  Heemskirk Consolidated

13.  Australian Pharmaceutical Industries

14.  Torian Resources

Source: The AFR

15.  Globe

16.  Pac Brands

17.  Austock

18.  GUD

19.  Signature

20.  Cabcharge

21.  Bluescope Steel

22.  Tassal Group

23.  News Corp

24.  Nexus Energy

25.  UGL

26.  Sirtex Medical

27.  Dexus

28.  Perpetual

29.  Emeco

30.  Fleetwood

Source: Australian Shareholders Association