Australia proposes ‘say on pay’ enhancements

In Canada, the Ontario Securities Commission recently invited comments from the public about on ‘shareholder democracy’ issues, including whether it should develop proposals to require public companies to give their shareholders an advisory vote on executive compensation¹. This is the first tentative foray of a Canadian regulator into mandating say on pay.

Shareholders of Australian public companies have been having their say on pay by law since 2005. The Australian Parliament is currently considering amendments to its say on pay rules that are aimed at increasing the impact on companies of significant shareholder votes against.

The ‘two-strikes’ test is a key proposed change included in the Corporations Amendment Bill 2011 (the Bill). If 25% or more of all shareholder votes are cast against a company’s remuneration report, this ‘first strike’ requires that the company respond to the negative vote in the following year’s compensation report. The company is free to decide how it will respond to the shareholder pay vote. If it makes changes to its compensation policies and practices, it must disclose this and identify the changes. If it elects to ignore the votes cast against on its pay, it must say so.

The ‘second strike’ occurs if 25% or more of votes cast on pay are again voted against the next year. The second strike imposes far more onerous requirements upon the company than the first. The Bill requires that strike two triggers a shareholder vote within the meeting to decide whether the directors must stand for re-election. The vote on director reelection is called a ‘spill resolution’, If the director re-election resolution is supported by 50% or more of votes cast, the directors must stand for re-election at a “spill meeting” within 90 days.

The Australian government invited the public to comment by January 20, 2011on the two strikes test and other proposed corporate law amendments in the Bill. A review of the comments that were submitted reveals that although the requirement that companies respond to the first strike was generally well received, the board spill resulting from a second strike was almost universally panned by investors and corporate spokespersons alike. The thrust of much of the opposition to spill votes was that director elections should not be triggered by fewer than 50% of shareholder votes.

The Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Bill 2011 wasintroduced in the Australian House of Representatives on February 23, 2011.

¹OSC Staff Notice 54-701 – Regulatory Developments Regarding Shareholder Democracy Issues, January 14, 2011.
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