The Government’s proposed new rules on executive pay are causing a stir. Professional directors around the country are petrified that the changes are going to give renegade shareholders the ability to cause more trouble than they already do and are lobbying furiously to get a change of heart in government.
The proposed changes would mean that if for two years running a company has more than 25% of shares voted against its remuneration report, the whole board of directors would be up for election at a special meeting.
They needn’t worry too much. The proposed changes will result in less protest votes, not more. The reason voting down the remuneration report is so popular – four of Australia’s top 100 companies would have fallen foul of the new rules last year – is precisely because they don’t mean anything. Make the votes a big deal, and you’ll soon see Australia’s fund managers go back into their shells.
After all, shareholders already have the power to sack directors and call a special meeting whenever 5% of shareholders feel they have reason to do so. For all of the hubris over remuneration reports, very few institutional shareholders have been prepared to sack the directors who put the remuneration policies in place.
The change in law is not going to alter this status quo.
Most fund managers don’t want get on the wrong side of Australia’s boards. ‘Access to management’ is something they place an extremely high value on and, by voting against director appointments, they risk losing that access. Not only to the company in question, but to other companies as well if they come to be viewed as ‘renegade shareholders’.
Change the laws so that the second year’s remuneration vote carries a lot of weight and you’ll soon see the protest votes disappear. That would be disappointing. At least the current arrangements are creating plenty of embarrassment.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.