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Australian Commission Modifies "Two Strikes" RecommendationSubmitted by: Martin Lawrence, Australia-New Zealand Research

Australian companies receiving more than 25 percent opposition on remuneration report proposals over two successive years will trigger an automatic resolution authorizing a vote on the full board, under recommendations made to the Australian government by the Productivity Commission.

The recommendation, contained in the government think tank?s Jan. 4 final report on executive pay, represents an adjustment to the commission?s draft ?two strikes? recommendation that drew criticism from Australia?s corporate lobby. The draft recommendation called for an automatic vote on directors in the event of 25 percent opposition to the remuneration report in two successive years.

Under the revised proposal, a board that suffered a 25 percent ?against? vote on its remuneration report would be required to include a contingent resolution at its next annual meeting. This resolution, which would only be put to shareholders should the remuneration report suffer another vote of more than 25 percent against, would subject the board responsible for the remuneration report to re-election at an extraordinary meeting, to be held within 90 days, should a majority of shareholders support the ?board spill? resolution. In other words, three votes rather than two would be needed to trigger a vote on directors.

The change followed criticism by business advocates that the initial ?two strikes? proposal could lead to an automatic board ?spill? simply if there were two large votes against the remuneration report in consecutive years.

The final report also recommended that boards be stripped of their ability to fix the number of directors to make it harder for non-board endorsed candidates to be elected. The panel recommends that any board seeking to declare ?no vacancy? in response to an investor candidate would have to seek shareholder approval for the no vacancy declaration.

This change, opposed by the Business Council of Australia, which represents large company CEOs, was in response to the routine declaration of no vacancy by boards. After such declarations, any non-board-endorsed candidate must receive a majority of votes to be elected and out-poll an incumbent director.

Notably absent from the Productivity Commission?s draft and final recommendations was any move to close a loophole created by changes to Australian Stock Exchange listing rules in 2005 that effectively removed the requirement for shareholder approval of grants of equity to directors if the shares granted were acquired using company money. Australian shareholder groups have been campaigning against this loophole for several years.

Among other recommendations put forth by the commission was a proposal to prohibit senior executives from voting on remuneration reports, and proposals encouraging greater disclosure of votes cast by institutional investors.

Full post as published by Institutional Shareholder Services -- Corporate Governance Blog on January 12, 2010 (boomark / email).