Two Strikes Better Than One

The remuneration committees of many Australian companies may be cursing the introduction of the two strikes rule as they hold their AGMs this season. Yet, Australia’s vote on remuneration policy is less restrictive than that just introduced in the UK.

First strike

In the UK, if a company’s financial year begins on or after 1 October 2013, it must hold a binding vote on Director remuneration policy at its next AGM. From then on, this vote must be held every three years or any time a company wants to make any changes to the remuneration policy.

Remuneration may not be paid outside the terms of the policy unless the payments have been approved by shareholders. If unapproved payments are made to Directors, those Directors who authorised them will be liable to indemnify the company for any resulting loss, unless a court determines the Director acted honestly and reasonably.

If the policy vote fails to pass, the company has to fall back on the last Directors’ remuneration policy approved by shareholders or convene an extraordinary general meeting (EGM) to approve a new policy. Given the rule has only just become effective, there is no agreed shareholder policy to fall back on – so if pay policies do not pass the vote, companies must hold an EGM.

As we have seen in Australia with the two strikes rule, which can require an additional spill meeting if an organisation incurs two strikes, there is reluctance to hold an EGM even if an organisation knows a spill vote is unlikely to pass. The costs of holding an annual general meeting, both in monetary terms and in director time, are considered to be high. Hosting an additional meeting requires further funds and time.  UK organisations will be particularly keen to avoid shareholder displeasure with this first vote.

Unfortunately, as we have seen in Australia in recent years, some organisations seeking to minimise negative comment on their remuneration report have adopted vanilla policies in order to be seen as following common practice, regardless of whether these policies are the best fit for the organisation and its strategy.

If Australia were to follow the UK down the path of further regulation, in order to avoid conflict or controversy Boards would likely implement “one-size-fits-all” approaches that may well not optimise shareholder returns.

Luckily, Australia’s regime provides Boards with two chances, not one, to engage with stakeholders on their remuneration policies. Boards are also able to pay their leadership team without draconian consequences even when votes fail.

Remuneration committees should avoid “me too” remuneration policies. Instead they should devote time to thinking through how their risk reward aligns with the strategic and operational intent of the company and promotes shareholder benefit. A “safe” plan may enable the organisation to pass a vote, but it will not become the foundation of a well performing leadership team.

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