How the two-strike rule became a big stick

“There is potential for misuse,” she says. “Where it’s being used for matters unrelated to remuneration… we don’t think that’s a good corporate governance outcome.

“When it’s used for issues other than remuneration… the boundaries are blurred, and I don’t think it helps anyone’s understanding, and therefore the governance framework.”

The intended consequences: Executive pay has fallen

Fox says this is a shame because she thinks in most cases, the two-strikes rule has had a beneficial impact on corporate governance.

“I think the rule has largely worked the way it was supposed to. It’s really enhanced shareholder engagement. There’s a consensus across the board about that. Most companies were already placing a high priority on shareholder concerns. But what the rule has done is it’s bought outliers [companies that weren’t engaging], into the fold.”

This draws to light an important consideration. The two-strike rule’s negative effects – the spilling of boards and the like – are very clear. But a lot of the good it does happens behind closed doors. After receiving a first strike, many companies have worked hard to avoid a second, often by lowering or clarifying aspects of their executive pay. In this sense, the rule is working, even if such positive stories are less likely to make the front page.

Stephen Mayne, the research director of the Australian Shareholders’ Association, which represents retail shareholders, is a big fan of the two-strike rule.

On executive remuneration, the rule’s intended purpose, Mayne says the regime is having a “profoundly positive” effect. “Executive remuneration is being wound back.”

He’s dubious about whether its use in non-remuneration power struggles is a bad thing. “It only takes 5% of shareholders to propose a spill motion or call an EGM,” he says. “If 25% use a second-strike to do the same thing in a small number of cases, well, big deal. All it does is trigger an exercise in corporate democracy.”

Mayne’s sentiments are backed by a recent survey of executive pay in the ASX100, conducted by the Australian Council of Superannuation Investors, which found executive pay declined 8.9% in 2011, largely due to a fall in awarded bonuses.

However, Colvin is wary of attributing this to the two-strikes rule, saying the decrease in total salaries is what you would expect in a challenging economic environment.

“It’s the market doing what it’s supposed to do,” he says. “As the tide goes down, so does remuneration. If you don’t hit your hurdles, you don’t get your bonus.”

Revitalising the AGM

But there’s another benefit to the two-strike rule, Mayne says. In September, the Australian government’s corporations and markets advisory committee released a discussion paper questioning whether the AGM still served its function. It cited problems with attendance, and questioned whether the AGM was still an effective vehicle for shareholder engagement.  

Mayne, who for years has been one of the few shareholders turning up to AGMs, says the two-strike rule has energised the AGM once again.

“We’ve seen AGMs such as Seven West and Whitehaven Coal, the one at Fairfax, Cochlear and Echo, they’ve all been highly relevant and energised because of the discussion and disclosure triggered by the two-strikes regime.”