In 2011, the shareholders of Crown Resorts took action against what they saw as excessive salaries and lack of disclosure over executive pay. At that October’s annual general meeting in Melbourne’s plush Crown Towers, they delivered the first ‘strike’ against the casino owners’ remuneration report, with 55 per cent of shareholders voting against it.
The ‘two-strikes’ laws
The shareholders were taking advantage of new powers over executive pay they’d been given under the ‘two-strikes’ laws, which allowed the shareholders to eject a company board over pay concerns. Under the laws, a company receives a strike if 25 per cent or more of shareholders vote against its remuneration report – the part of the annual report which outlines what key executives receive in pay and bonuses, and how they are calculated. If a company receives two consecutive strikes, then the investors can vote whether to spill the board – that is, declare all positions vacant and potentially elect new directors. Since the law took effect in 2011, shareholders have shown they are prepared to use their new power, even against some of Australia’s best-known blue-chip companies.
Investors handed the power
The strike against Crown prompted a swift and angry reaction from executive chairman James Packer. He said he disagreed with the laws, would use his own substantial shareholding to re-elect any directors who were ejected and would never reveal the information on bonus hurdles investors wanted to see. Yet by the following year Crown had obviously reconsidered. The key earnings hurdles were in the remuneration report and the company avoided a second strike. Investors have been handed a considerable amount of power, and its effects are being felt in the pay arrangements of not just those companies that had received a strike, but across the economy.
The effects of the law
The main effect of the two-strikes law has been in the effort companies make to communicate with shareholders over executive pay, regardless of whether or not they’ve received a strike or are at risk of getting one. “It has definitely promoted much more engagement between the remuneration committee chair, [the company] chairman, institutional investors and proxy advisers around remuneration issues,” says Mike Hogan, partner of human capital at Ernst & Young in Sydney. The laws are encouraging entire boards to pay a lot more attention to executive remuneration, rather than just leaving it all to the remuneration committee. Hogan says the legislation has given boards an extra impetus to “ensure that the remuneration approach they’re taking supports the business strategy”. “If it does that, then the vote should take care of itself,” he says.
A tailored approach
Many companies are adopting a more tailored approach to incentive payments, to award bonuses to directors for things over which they have more direct control. For instance, in the past many bonus schemes were based on total shareholder return – a measure of dividends and gain in share price over a year – but it was an imperfect measurement, that could see executives rewarded or penalised for extraneous factors which affected the company share price. Instead, more companies are awarding a larger proportion of bonuses based on other metrics such as capital efficiency, return on equity and earnings per share growth, which ensure that managers are more likely to be rewarded for a strong performance, and less likely to win a bonus because of good luck. Even when a company does receive a strike, more often than not they increase their interaction with investors rather than making wholesale changes to their remuneration policy, says Daniel Yin, senior consultant at Executive Remuneration Consultants Egan Associates.
Protesting against governance
In some cases shareholders are using the two-strike legislation to protest against governance matters other than remuneration, says Yin. “Shareholders are using it as a means to agitate for action within the companies, particularly for companies outside the ASX-100,” he says. These votes can cost a smaller company a significant amount of time and resources as they try to assuage shareholders’ concerns, regardless of the issue that triggered the vote. The effects of the global financial crisis that prompted the two-strikes legislation are still being felt in the setting of executive pay. Incumbent chief executives have won only modest pay rises over the past couple of years and many companies are using the hire of a new chief executive as an opportunity to reset the base pay. Remuneration consultants say pay rises this year will mostly match the inflation rate, although there might be some pick up in the second half of the year if the economy improves.