Views on improving the integrity of global capital markets
26 September 2012

“Say on Pay” in Australia: Two Strikes and You’re Out

Proxy season in Australia is about to begin and has the potential to greatly influence the shape of executive compensation, not only down under but in other developed markets where “say on pay” has been an issue (I’m talking to you U.K. and U.S.).

For those unfamiliar with Australian rules governing the proxy vote, you need to read up on Australia’s “two-strikes” rule. Under the rule, if 25% of shareholders vote against a company’s remuneration report at two consecutive annual general meetings, the entire board may have to stand for re-election within three months. Key management personnel (KMP), and parties related to them, are not permitted to vote in the original vote on executive pay but may vote concerning board elections. Therefore, it is possible that shareowners my “spill” a board with a second-strike vote only to have that board reappointed by insiders

In the first year under the two-strikes rule in 2011, approximately 9% of ASX 200 companies received their first strike, meaning that each of these companies will be especially careful to avoid a second strike.

It should come as no surprise that Australian issuers are none too pleased with the two-strikes rule. A recent survey by law firm Allens Linklaters of its listed company clients revealed that a majority of respondents thought the rule should be scrapped altogether, with 70% saying “significant reform” to the AGM was necessary. The same survey showed that 61% believed directors facing election to a board should be required to answer questions from investors. Survey participants also felt that the rule was being used for a purpose other than dealing with executive pay, such as using it “as a protest vote often not related to remuneration” or as a tactical measure by a shareholder with a control purpose.

Investors disagree with issuers on the matter, feeling that the two-strikes rule is simply a tool that helps increase board and management accountability.

Thus far in 2012, Australian companies and executives have been cautious on compensation matters. Executives have been forgoing bonuses and ruling out raises in a year of lackluster results and stagnant share prices. But it is safe to say that some of the restraint on pay is due to fear of the two-strikes rule.

This year alone, there have been a string of such announcements from the likes of BHP Billiton chief Marius Kloppers and Rio Tinto’s Tom Albanese, whose companies faced lackluster performances due to a faltering commodities market. The trend isn’t limited to companies that post losses, either. ANZ Bank CEO Mike Smith and Commonwealth Bank CEO Ian Narev have both promised restrained pay policies this year, even though both companies have enjoyed rising earnings.

Data from executive compensation consultancy Egan Associates showed that pay for CEOs among the largest 100 companies on the ASX fell from an average of about $3.3 million to $2.8 million over the four years leading up to 2011, a tendency that has shown every sign of continuing in the current year.

The Corporations and Markets Advisory Committee is currently undertaking a review of AGMs in Australia, and is asking for comments until 21 December. With the advent of the two-strikes rule, the AGM and engagement between investors and issuers has gained increased importance; so get your comments in if you want to weigh in on the debate.

Expect interest in the outcomes around the two-strikes rule from other markets dealing with their own evolving say-on-pay rules. Although say-on-pay advocates in the U.S. and Canada are not presently pushing for a rewrite of the rule, investors and regulators in both the U.K. and in the EU have pushed for say-on-pay rules with more teeth. Regulators in the U.K. and EU have each floated the idea of making the say-on-pay vote somehow binding, and not simply advisory. Will regulators in these markets look to Australia’s two-strikes rule as a model? Stay tuned.

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About the Author(s)
Matt Orsagh, CFA, CIPM

Matt Orsagh, CFA, CIPM, is a director of capital markets policy at CFA Institute, where he focuses on corporate governance issues. He was named one of the 2008 “Rising Stars of Corporate Governance” by the Millstein Center for Corporate Governance and Performance at the Yale School of Management.

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