Two Strikes and You’re Not Out: A Study of Australia’s Shareholder Say on Pay Regime

Abstract

In 2011 Australia implemented legislation which attached consequences to the mandatory shareholder vote on the executive remuneration of a corporation, widely termed the ‘two-strikes say on pay’ rule. Under this rule, a corporation that attracts a vote of 25% or more against their resolution to approve the remuneration report in two consecutive years must allow shareholders to vote on a resolution requiring all board directors to stand for re-election. This thesis examines the development and implementation of the two-strikes regime and its operation over a four-year period from 2014. The research questions examine whether the operation of the two-strikes regime has realised the policy goals set out for the regime in its development process. In order to identify how the two-strikes regime emerged and the policy goals of the regime, an examination of the legislative process, led by the Australian Productivity Commission, that established the regime is performed. Analysis of the published materials of the Productivity Commission inquiry, reveals that the commissioners intended for the regime to empower shareholders to hold board directors accountable for excessive executive remuneration, to strengthen shareholder engagement with corporate boards on their remuneration, as well as to provide a last resort option for dealing with unresponsive boards. To assess the operation of the two-strikes regime in achieving those policy goals a sequential mixed methods approach is adopted. A regression analysis of voting strikes on the remuneration report is followed by a qualitative analysis of media reporting on executive remuneration to support the findings of the quantitative analysis. Using a sample of 704 shareholder votes on the remuneration report for large Australian corporations between 2014 and 2017, the analysis demonstrates that larger short-term benefits paid to the executives with the greatest total remuneration increase the likelihood of a voting strike being received, whereas long-term benefits and equity remuneration are not significantly related to the likelihood of receiving a strike. In addition, greater media coverage of a corporation’s remuneration practices is also linked to a higher likelihood of receiving a voting strike on the remuneration report. To further elaborate on these findings, an analysis of 200 news articles and an interview with a principal of a proxy advisory firm is conducted to identify reasons for why shareholders vote against the remuneration report resolution. The awarding of pay for poor performance and poor communication with key stakeholders in respect of remuneration, primarily institutional shareholders and proxy advisers, are most commonly related to shareholder voting dissent. In addition, increased communication with these stakeholders following shareholder voting dissent moderated shareholder dissent in the subsequent year, with shareholders being more forgiving of excessive remuneration. Conversely, a small number of corporations conversely attempted to deny the existence of or divert shareholder attention away from perceived concerns about their remuneration practices, which is observed to have limited success in ameliorating shareholder dissent. Overall, the findings reported in this thesis suggest that shareholders assess the executive remuneration of an Australian corporation primarily on a pragmatic legitimacy basis, rather than on solely the excessiveness of executive remuneration as suggested by optimal contracting theory. Positive media coverage of a corporation’s executive remuneration and communication with institutional shareholders are alternative legitimising actions which may positively influence the outcome of the shareholder vote. Shareholder reliance on these alternative sources of legitimacy potentially reflects the difficulties in shareholder comprehension of remuneration reports in assessing whether executive remuneration is optimal, limiting the power granted by the two-strikes regime to shareholders to hold directors accountable for excessive remuneration practices. In addition, the reluctance of shareholders to pass a board spill resolution for especially unresponsive corporations over the sample period supports the assertion that the two-strikes regime may have limited effectiveness in dealing with such boards, as shareholders are unwilling to risk destabilising the corporation through a board spill to assert their discontent with executive remuneration.