Directors of listed companies may face automatic spill motions under new remuneration rules unveiled by the Government yesterday.
If a listed company's annual remuneration report receives a 25% NO vote two years in a row, the AGM will then have to vote on a motion to spill the entire board. If that motion is passed, the company will convene (within 90 days) a general meeting. Immediately before that general meeting, all board positions will be vacated, forcing directors to renominate for their positions.
This is just one of the significant changes contained in draft legislation which the Government has just released.
Other changes include:
- Remuneration consultants - Companies that are a disclosing entity will have to disclose details of the use of remuneration consultants. Remuneration consultants will have to be engaged by non-executive directors, and report to non-executive directors or the remuneration committee (rather than company executives).
- Restrictions on remuneration report vote - Key management personnel (KMPs) and their closely related parties will be prohibited from voting on the remuneration report. They will also be prohibited from voting undirected proxies on all remuneration related resolutions. This restriction would also apply to votes on the "Two Strikes" spill motion.
- Hedging of remuneration - KMPs and their closely related parties will be prohibited from hedging the KMP’s incentive remuneration.
- No Vacancy rule - Public companies will need member approval before making a "No Vacancy" declaration. A "No Vacancy" declaration currently allows a board to restrict the number of directors to less than the maximum in the company's constitution.
- Directed proxies must be voted - Currently, only the chairman is required to vote directed proxies. Under the draft legislation, all proxy holders will be required to cast all of their directed proxies on all resolutions.
- Remuneration report in consolidated entity - Remuneration disclosures currently apply to key management personnel of consolidated and parent entities (and the five most highly remunerated officers, if different). Under the draft Bill, disclosures will be confined to key management personnel of the consolidated entity.
The Government has also released a discussion paper on a proposal to claw back remuneration paid to company directors and executives where a company’s financial statements are materially misstated.
Details of the Two Strikes Rule
The "first strike" would occur if a remuneration report for a listed company received a NO vote of 25 per cent or more.
The next year's remuneration report would be required to explain whether and how shareholders’ concerns had been taken into account.
If that second remuneration report also received a NO vote of 25 per cent or more at the AGM, the Two Strike Rule would automatically apply.
The AGM would be presented with a motion to call a "spill meeting". The notice of the AGM would have to inform members of the possibility of a spill motion and presumably would include a proxy form to cover that eventuality.
If the "spill motion" were passed by a simple majority:
- the company would be required to call the spill meeting within 90 days;
- all board positions would be vacated immediately before the spill meeting;
- the spill meeting would vote on whether to re-appoint the existing board.
This requirement would be subject to two exceptions:
there would be no need to hold the spill meeting if the entire board resigned and was replaced before the spill meeting was due to be held;
the spill motion would not affect managing directors who, under listing rules, continued to hold office indefinitely without being re-elected to the office.
The spill meeting would only vote on whether existing directors would remain in office. There would be no opportunity to vote in a different board. If the meeting did not re-elect at least two directors, the draft Bill says that the two directors with the highest votes would be elected. This ensures that the company retains the minimum of three directors required by the Corporations Act (the managing director and two non-executive directors).
Existing directors who were re-elected at the spill meeting would effectively be deemed to have continued in office as though the spill had never happened: in other words, their existing terms of office would be unchanged.
The Two Strikes proposal appears to be aimed more at forcing directors to assuage shareholders' complaints about remuneration than turfing them out of office.
That is, presumably, why the trigger for the "spill motion" is a mere 25% vote against the remuneration report, while the spill motion itself requires a 50% vote. In most (if not all) cases, the rejection of the spill motion would be obvious before the vote was even taken (where the vote to reject the remuneration report was less than 50%). Nevertheless, the disruption and adverse publicity caused by even having to hold a spill vote would encourage boards to try to avoid the 25% NO trigger.
Perversely, it is not inconceivable that the Two Strikes rule will end up reducing the number of votes against remuneration reports. Institutional investors who may be tempted to send a shot across a board's bows by casting a non-binding vote against the remuneration report may not be so eager if the outcome is a spill motion which could adversely impact on the company's market price.
What happens now?
The draft Bill is stated to begin on 1 July 2011. However, there would effectively be a one year transition period for the Two Strikes Rule, because it will only apply where both remuneration votes have taken place after 1 July 2011.
In the meantime, the Government is taking submissions on the draft Bill until 20 January.