Patrick Durkin, a bureau chief at the Australian Financial Review, reported this week that Australian companies have found a way around the two-strikes rule. The two-strikes rule provides that if 25% of votes are cast against a company’s remuneration policy for two consecutive years, the company must put a spill resolution to shareholders that, if passed, could see the entire board standing for re-election. Two strikes and you could be out.
Since this rule was introduced, there have been few second strikes and spill resolutions. The reason for this is now clear – while some companies actively engage with shareholders to avoid a second strike, other companies are able to ignore a second strike entirely. A provision in Australia’s legislation allows companies to call for a show of hands at shareholder meetings to pass resolutions. If the board sees in advance that it has received a large proxy vote against its remuneration resolution, a decision to hold a show of hands instead is all it takes to wipe the slate clean. A ball, not a strike.
The Australian Financial Review gave evidence of this practice to the Australian Securities and Investments Commission, which in turn denied that companies were flouting the two-strikes rule. This, despite the fact that the intent of the two-strikes rule was to hold boards accountable to shareholders for a failure to respond to negative criticism of remuneration practices. If directors are able to protect their place on the board by holding a show of hands when the overwhelming evidence points to discontent, boards can continue the status quo with impunity. Government action requiring a poll for remuneration resolutions (or in fact all resolutions) will be needed in order to prevent this practice.
This is just one more example of companies finding a way around regulations that are inconvenient. We recently saw similar creativity employed by banks when the EU capped banker bonuses at a multiple of fixed pay. Banks merely shifted the money they would have paid as a bonus into a “fixed pay allowance,” thus getting around the cap. These examples highlight a common problem with regulation: legislators have failed to anticipate how companies will respond to regulations before forging ahead.
It is much easier to draft a regulation right the first time than it is to find the willpower to change a flawed, but already enacted, regulation. Any country considering enacting a two-strikes rule similar to Australia’s should take note and close any loopholes that would allow a board to ignore a second strike. Hopefully the Australian government will take steps to rectify the situation in Australia. Until then, we will wait for the umpire to call a strike a strike.