This reporting season is the second since the two strike rule was introduced. As the AGM season for 2012 kicks off, ASX-listed companies should look to address remuneration concerns raised by shareholders when reporting on executive pay or risk a potential board spill.
A brief glance over the changes
On 1 July 2011, shareholders obtained the ability to vote to spill the board over executive pay concerns. If a company‟s remuneration report receives a „no‟ vote two years in a row, a resolution must be put to shareholders to remove the board (two strike rule).
Recent related changes include voting restrictions on key management personnel (KMP) and their closely related parties, undirected proxy voting on remuneration related matters, and cherry-picking of directed proxy votes. Under the recent changes, affected KMP cannot vote on remuneration related matters and chairs cannot vote undirected proxies on the remuneration report without the express authority of the relevant shareholder(s).
More generally, the recent changes impact:
- the disclosure requirements for the remuneration report
- the nature of the engagement and ongoing relationship with remuneration consultants
- the format of AGM notices and proxy forms
- voting procedures
- contingency planning for spill procedures, and
- board succession planning.
What two strikes means
If, after 1 July 2011, a company receives two strikes in consecutive AGMs, a resolution must be put to shareholders at the second AGM to decide whether another meeting should be held to elect a new board (spill resolution). If the spill resolution is passed by a simple majority, the further meeting to elect a new board (excluding the managing director (MD)) must be held within 90 days (spill meeting).
What companies can do this AGM season
Several companies going into this AGM season are already on their first strike. We have seen a succession of executive pay freezes and bonus cuts at major companies in an attempt to pacify unhappy shareholders. While for some this approach might address immediate concerns over executive pay (and curb the risk of triggering a strike), below is an outline of what companies can consider doing to avoid striking out without necessarily slashing executive pay.
Companies with near strikes
Companies should consider why their shareholders are unhappy and be proactive in responding to their concerns before the AGM. Being proactive should involve:
- communicating with active or vocal shareholder groups opposed to the remuneration report
- ensuring the company‟s remuneration practices reflect good corporate governance, are appropriate to the company‟s circumstances and otherwise align with shareholder returns
- considering the company‟s recent economic performance in light of the proposed remuneration report
- reviewing the company‟s remuneration practices if need be – the remuneration should be reasonable and clearly linked to performance
- discussing existing practices with remuneration consultants to ensure compliance with the recent changes
- planning an effective communication strategy with shareholders as a whole and facilitating open dialogue between shareholders and the board
- ensuring the remuneration report fully discloses the remuneration of KMP, including the terms of engagement and independence of remuneration consultants, and
- encouraging shareholders to exercise their vote in favour of the remuneration report.
Companies with one strike
Addressing shareholder concerns by companies on one strike is a priority. At the upcoming AGM, these companies must outline the board‟s proposal for action in response to any shareholder comments or, alternatively, the board‟s reasons for deciding not to take responsive action. They must also include in this year‟s notice of meeting an additional resolution which will be activated if a second strike is triggered. This additional resolution is to vote on whether to hold a spill meeting. The notice must also outline the process for the use of proxies at the spill meeting (that complies with the recent changes).
In addition to being proactive (as suggested for companies with near strikes), first strike companies should also consider how the new procedures brought about by the recent changes can help mitigate the risk of striking out. In particular, companies should:
- ensure that remuneration consultants are not unduly influenced by KMP – this will breach the new provisions and be viewed unfavourably by shareholders;
- determine who is entitled to vote and who is excluded – the voting restrictions apply to a resolution to adopt a remuneration report;
- encourage all "entitled‟ voters to vote – not all shareholders entitled to vote are required to vote. The rule only requires 25% of votes cast on the resolution
- encourage shareholders to appoint a proxy (other than KMP or their related parties) and direct that proxy holder to vote in favour of the resolution to adopt the remuneration report
- obtain express authority on undirected proxy votes – the chair may only cast undirected proxy votes in relation to the remuneration report with the express authority of the nominating shareholder
- get proxy forms right – update forms where remuneration matters are being considered, where a KMP will chair the meeting or where the chair will vote undirected proxies
- explain to shareholders that undirected proxy votes given to a chair, KMP or their related parties will not be counted unless specific rules are followed
- for business certainty and continuity, consider the appointment of an MD – they are excluded from being subject to the spill meeting, and
- if need be, seek ASIC relief for a proxy holder to vote undirected proxies in favour of the resolution to adopt the remuneration report. To obtain relief, ASIC must be satisfied that no unfair prejudice to shareholders will result.
Companies that get two strikes
A second strike at the upcoming AGM will trigger the spill procedure. If the spill resolution passes, a spill meeting must follow. The affected directors (excluding the MD) cease to hold office with immediate effect, but may stand for re-election if eligible under the company‟s constitution. A spill meeting is not needed if the directors in office will no longer hold office at the date of the spill meeting. Large shareholders may have the right to nominate a new director(s) at the spill meeting.
The spill meeting must comply with the minimum notice period in the Company‟s constitution, the Corporations Act 2001 (Cth) and ASX Listing Rules. If there are less than three directors remaining after a spill meeting (including the MD), the nominees with the highest percentage of favourable votes at the spill meeting are appointed, regardless of whether they received majority approval. To avoid an unfavourable outcome, companies on their first strike (particularly those with a high percentage of „no‟ votes) should give early thought to an alternative board of preferred nominee directors ahead of the upcoming AGM. Note that the recent changes restrict a company‟s ability to set board limits. If an affected director is re-elected, the term of office continues as if the spill meeting had not occurred.
Further changes planned
Further changes are expected to the disclosure of executive remuneration, following recent recommendations by the Corporations and Markets Advisory Committee. The proposed changes will require listed companies to disclose all remuneration of KMP in the current year, in previous years (but paid in the current year) and in the future.
Under the proposed changes, listed companies will also be required to disclose payments to retiring KMP (under contract of employment and otherwise) and the number of options granted to KMP that have lapsed during the current year.