A divided response
The full effect of the two strikes rule remains to be seen after the 2012 AGM season – when second strikes will likely be received - but it has already had some effect by focusing attention on companies' remuneration practices and heightening awareness of the need to engage with shareholders and their advisers.
Transurban received an 88% vote in favour of their remuneration report which had been rejected for the past three years. After last year's AGM the board undertook a comprehensive review of their remuneration framework considering shareholder feedback, market expectations and regulatory developments.
Changes implemented by Transurban, which will take effect from 1 July 2011, include:
- key management having greater exposure to equity through a change in remuneration mix;
- 30% of short-term incentives deferred for two years into securities and also subject to claw-back; and
- long-term incentives measured against relative total shareholder return rather than proportional EBITDA.
Even though these changes will only take effect after the period of the remuneration report voted on at this year's AGM, the 88% vote by Transurban shareholders shows an endorsement of the steps taken by Transurban.
There isn't universal acceptance though. There have been examples of companies not providing information about proxy voting on the remuneration report resolution, which may then influence whether, or how, other shareholders vote at the meeting. It has also been noted that a strike can be delivered by a very small number of shareholders, giving them a level of influence not previously enjoyed, particularly where large parcels of shares are in the hands of Key Management Personnel. Majority shareholders (who may not be eligible to vote on the remuneration report resolution) could also use their votes to reinstate the board at a spill meeting, regardless of the prior votes on the remuneration report.
There are also concerns that directors may decide not to stand for re-election following a spill resolution, so a new board would be required on very short notice, leading to instability for the company – probably not in the shareholders' interest.
The Parliamentary Secretary to the Treasurer, David Bradbury, has warned that boards who try to evade the two strikes rule will only spark calls for tougher regulation. With the government still to issue a response on other reports relating to executive remuneration (see below), there is plenty of scope for the government to seek to close perceived loopholes and make it more difficult for listed companies who do not enter into the spirit of the two strikes rule.
The role of proxy advisers
A key issue permeating the discussion has been the role played by proxy advisers. In September 2011, the Australian Institute of Company Directors released a report exploring the links between directors and institutional shareholders, the influence of proxy advisers and issues faced during the AGM season. The study revealed that directors have a low level of confidence in the ability of proxy advisers to understand the drivers for shareholder value (particularly when they have so many reports to review in the AGM season), but an overstated sense of their importance. Fund managers and superannuation funds generally do not simply accept the recommendations of the proxy adviser, but treat the proxy adviser's recommendations as simply one consideration in the process, which also involves engaging directly with the company.
It seems clear that the proxy advisers, as well as long-standing groups such as the Australian Shareholders' Association, will be around well into the future, so it will be increasingly important for companies to engage with them, as well as with shareholders, to ensure their recommendations take account of the information which the company sees as most important.