Productivity Commission backs down on “two strikes and you’re out” rules on executive pay

The Productivity Commission has backed down on its controversial recommendation that companies would automatically be forced to hold a spill of all board positions following two successive protest votes against a company’s executive pay policies.

Under the Productivity Commission’s draft proposal, any company where 25% of shareholders voted against the remuneration report in two successive years would have to hold elections for every position on the board.

But following an outcry from business groups, the Commission has watered down this proposal in its final report released this morning.

Companies that see two successive “no” votes of 25% or more against remuneration reports will be required to hold an additional vote on whether the board should be spilled.

If this is approved by 50% of shareholders or more, an extraordinary meeting would need to be held within 90 days.

The Commission says the changes would help reduce the risk of minority shareholders using remuneration votes to destabilise a company, but will still allow shareholders to hold boards to account on executive pay.

“In short, shareholders would be given control over the message they wished to send to boards, encouraging all boards to maintain a commitment to the development of well-structured pay arrangements,” the report says.

But the Australian Industry Group which was opposed to the original two strikes proposal, has lashed the new proposal.

“The revised ‘three strikes’ proposal has the potential to divert the attention of company boards from their core task of overseeing the profitable running of their business,” AIG chief Heather Ridout said in a statement.

She described many of the recommendations as “heavy handed”.

“While we welcome some of the findings including recommendations not to adopt salary caps, and the emphasis on improving governance, we urge the government to consider very closely business concerns on a number of other proposals. 

Under other changes recommended by the Productivity Commission, companies would not be allowed to leave a board position vacant without the approval of shareholders, a move which the Commission hopes will help to break any “old boys” networks that operate in Australia’s corporate world.

The Commission has also recommended that companies be required to produce “plain English” remuneration reports to boost disclosure of executive pay.

“Company efforts to improve the readability of their reports would be bolstered by guidance on best practice, with boards encouraged to include a discussion of their approach to remuneration setting and the variables and risks considered,” the report states.

The Federal Minister for Financial Services and Corporate Law, Chris Bowen, says the Government will respond to the recommendations in the first quarter of the year.