Australia: Two strikes rule: a top priority this AGM season

Boardroom Radio
Last Updated: 26 August 2011
Article by Andrew Hay and David Bushby

The AGM season is fast-approaching, so what should boards and senior management be thinking about? Andrew Hay tells Boardroom Radio about the impact of the new two strikes rule and other issues affecting boards and senior management.

Find the link to the audio here.

Two strikes rule: a top priority this AGM season
David Bushby, Boardroom Radio
Andrew Hay, Partner, Corporate Advisory / M&A, Clayton Utz


David Bushby  We're speaking with Andrew Hay. He's a partner in the Corporate Advisory team with Clayton Utz in Brisbane. Welcome back to BRR Andrew. 
Andrew Hay  Thanks very much David and thanks for having me. 
David Bushby  Andrew, with the AGM season fast approaching listed companies are now facing new rules on executive remuneration, new proxy rules, diversity issues, etcetera, but in the current turbulent market conditions which of these rules will be top of mind this season? 
Andrew Hay 

David, from what we're seeing the two strikes rule in relation to the remuneration report seems to be in the forefront of boards' and senior management's minds at the moment.

The reason, I think, is out of those selection of different rules that we're going into, this tends, or is seen to be, the most controversial of the new rules. It seems to be controversial because even though it is a vote in relation to the remuneration report there is a possibility for this particular new rule to be used to create instability, and even to create a possible or instigate a possible spill of directors and influence control on companies. And within this economic instability this just creates a further instability for companies and boards and senior management to get their heads around. 
David Bushby  Absolutely. Well, given that scenario how can companies prepare for this? 
Andrew Hay 

Look, this vote is supposedly a non-binding vote and at one stage this has been compromised to the form of the rule that it is now, the two strikes rule.

It was contemplated that it might have been a binding vote at some stage but, in essence, it is around the remuneration report, and the policy is that if the remuneration report receives a substantial no vote at two consecutive AGMs the board, excluding managing director, must put themselves up for re-election.

How do they deal with that? Well really the emphasis is on trying to get the remuneration report as correct and in order and clear as they possibly can, and address the matters that concern the stakeholders of the company in relation to the remuneration report and, therefore, hopefully satisfying the stakeholders within the company so that they haven't got any gripes with the remuneration report.

What does that mean? Well, ASIC has identified three areas where it believes in the general sense that companies should be improving their disclosure with this year's remuneration report.

The first of those is really stating the board policy in relation to the nature and amount of remuneration for the key management within the company.

The second is performance conditions within short term incentive plans.

The third is setting out clearly the terms and conditions upon which cash bonuses or performance bonuses or share-based compensation is actually delivered within the company.

So if they can get clearer, more better defined remuneration reports, hopefully that will alleviate the concerns of stakeholders. The problem is that with the rule there is no real sense that the concerns of shareholders and stakeholders really are only limited to that remuneration report. It may well be something else outside of that remuneration report and unfortunately it's going to be very hard for the board and senior management to try and counteract those sorts of concerns. 
David Bushby  Well the two strikes rule is certainly an important one but there are other changes, as I alluded to earlier. Which of those changes are also going to be a high priority? 
Andrew Hay 

In no particular order, some of the other major changes that we will see coming through in this AGM season.

Firstly, the new diversity policy, which is encouraging more gender balance onto boards, more females onto boards and senior management roles.

There's the issue surrounding undirected proxies granted to chairs and how companies deal with those undirected proxies, whether they encourage more direct proxies being given to chair or whether they encourage another person to take those undirected proxies that are not connected with key management personnel.

Thirdly, there are not so much new rules but lessons to be learned from the Centro decision, including delegation and the use of delegation by boards and also financial reports from the boards.

Over and above the lessons from the Centro case, ASIC has also issued a watch list that it will be going through in relation to financial reports and particular items within those financial reports that it will be looking for companies to generally improve on, as compared to the 2010 season. 
David Bushby  Oh we'll certainly keep an eye on the strike rate, come November. But we'll leave it there for now and thanks again for your time today Andrew. 
Andrew Hay  Thanks for that David. 
David Bushby  That was Andrew Hay, partner in the Corporate Advisory team at Clayton Utz in Brisbane. Listeners if you have any questions for Andrew about this interview, please email him on

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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