Q: With the annual general meeting season getting underway, I have been reading about remuneration reports and first strike votes. I have shares in some big companies. What do I need to know?
A: If 25 per cent or more of the shareholder votes cast at a listed company’s annual general meeting oppose the adoption of the remuneration report, the company has a “first strike” recorded against it.
If “comments” are made about the remuneration report at the AGM, the subsequent remuneration report must contain an explanation of the board’s action in response.
A vote against the remuneration report the next year is counted as a second strike. Following a second strike a spill resolution must be put to shareholders (at the same AGM). A spill of the board will occur if 50 per cent or more of eligible voters are in favour.
A spill meeting must be held within 90 days of a passed spill motion.
If the spill motion is not passed the slate is wiped clean. This can result in an anomalous situation, such as last year’s Mortgage Choice AGM, at which investors voted down the remuneration report.
It was the third year in a row that the company’s remuneration report had been voted down but technically it was a first strike.
After the previous year’s second strike shareholders were given the opportunity to spill the board. They voted not to do that and their decision had the effect of wiping the slate clean.
The rule restricts the ability of key management personnel (directors and senior executives) and their related parties to vote on the remuneration report and other “remuneration-related” resolutions (such as the spill motion).
The two-strikes rule was introduced in 2011, with the aim of increasing directors’ accountability to shareholders on executive pay issues.
Before the introduction of the rule, listed companies were required to put their remuneration report to a non-binding shareholder vote at the AGM.
Critics of the rule say it is used by activist shareholders to challenge companies on a wide range of issues, well beyond reviewing executive pay.
Banks in particular have high levels of “protest votes”, although the first strike against Commonwealth Bank last year was the first time a first strike had been recorded against a big bank.
According to a CIFR study, between 2011 and 2013, 306 companies (7.4 per cent of ASX-listed companies) received first strikes and 51 of them received a second strike. This resulted in 12 board spills.
Last year seven companies in the ASX 100 had first strike votes against their remuneration reports – up from four in 2015. First strike recipients were AGL, Boral, caresales.com, Commonwealth Bank, CSL, Goodman Group and Woodside Petroleum.
In addition, South 32, Tabcorp and Tatts Group has near misses, with more than 20 per cent of votes cast against their remuneration reports.
No ASX 100 companies had second strike votes against them last year.
Some of the changes that companies made in response to first strike votes in 2015 included: dropping plans to pay incentives where non-financial hurdles were met but financial hurdles were not; adjusting return on capital hurdles from peer-related measures to a financial hurdles; and moving short-term incentives into deferred or restricted equity.