Directors on notice as shareholder get chance to dump boards over executive pay

Company directors are on notice to ensure their pay packets are in step with shareholder expectations, with new laws allowing for a vote on a board spill if more than a quarter of votes oppose remuneration reports at two consecutive annual meetings.

The so-called ‘two-strikes’ rule, passed last night in the Senate and coming into effect in July, was recommended by the Productivity Commission a couple of years ago after shareholders complained that salaries were not reflective of company results.

Any spill motion – putting the board up for re-election – would require majority shareholder support.

While the new legislation has won the support of shareholder groups, it falls short of calls from the Greens that executive pay be capped at 30 times the average wage within a company.

The Coalition also failed to amend the laws in the Senate so that the 25% threshold applied to all shares, rather than votes cast.

The chief executive of the Australian Shareholders’ Association, Vas Kolesnikoff, welcomed the news, saying it was a step in the right direction.

“At the end of the day more can be done, but less can be done too,” Kolesnikoff told SmartCompany.

“This seems like a reasonable compromise to start the process of getting boards and shareholders a bit more engaged,” he said.

“A lot of directors have had concerns about remuneration as well, and this means there are now consequences for not engaging.”

Kolesnikoff says he expects more recommendations from the Productivity Commission’s report to come in over time.

“It’s not as if all companies will be subject to board spills – there will only be a small handful, particularly the disengaged boards, but it’s just to remind boards they must be engaged.”

But the Chartered Secretaries Australia chief executive Tim Sheehy is a critic, telling the Australian Financial Review that the laws will cause “huge problems with the voting process. It has just not been thought through,” he said.

But Small Business Minister Nick Sherry told Parliament the laws will improve the accountability of company directors on remuneration, and promote a culture of responsible remuneration practices.

The laws also seek to beef up disclosure of remuneration consultants, and ban directors from voting on the pay of key executives or hedging their remuneration.