Over 140 of the S&P/ASX 200 companies have June year ends and will hold their AGMs between late September and late November. The busiest dates for AGMs are between 24 and 28 October, with 9 & 10 November and 24 & 25 November other busy days in the calendar.
Two-Strikes Rule
A change to the Corporations Act has now become effective, which provides that where two ‘strikes’ (being an against vote of 25% or more) are received on the remuneration report, that a Board Spill resolution is put to shareholders at the second meeting.
The rule will apply to votes on remuneration reports on or after 1 July 2011. When determining whether a company has recorded two consecutive ‘strikes’, only AGMs after 1 July will be taken into account. Thus AGMs in 2011 may only constitute first ‘strikes’.
Further, if the remuneration report receives a 25% no vote, the next year’s remuneration report must include an explanation of the board’s proposed action in response or, if the board does not propose any action, the board’s reasons for inaction.
Key management personnel and closely related parties will be prohibited from participating in the remuneration vote, and may not vote undirected proxies on all remuneration related resolutions.
Average dissent at S&P/ASX 100 companies on the remuneration report in 2009/10 was 10.97%, down slightly on the previous years 11.10%. In the past year, 15 S&P ASX 200 companies received against votes in excess of 25%, with 5 reports defeated (Crane Group, Challenger, Paperlinx, Transurban and Billabong International). Other companies to receive in excess of 25% against votes included Rio Tinto Ltd and AGL Energy.
Board Spill Resolution
In the event of a second ‘strike’ on the remuneration report vote, at the second AGM an additional vote must be taken, being the Board Spill resolution. Companies receiving a first ‘strike’ in 2011 will thus have to include a conditional resolution on their AGM notice in 2012, to be voted upon if a second ‘strike’ is received’.
If the Board Spill resolution is passed, all of the Board other than the CEO will be required to put themselves forward for re-election at a general meeting to be held within 90 days.
It is rare in Australia for all directors to stand for re-election at the same AGM, with most providing that directors stand for re-election at least every three years. The CEO generally only stands for first election to the Board at Australian companies and is not subject to further re-election.
Termination Payments
The Australian Government has introduced new provisions intended to curb excessive ‘golden handshakes’. The new legal provisions limit the maximum termination payment that can be made without shareholder approval to one year’s base salary. Previously, shareholder approval was only required for termination payments in excess of seven times remuneration.
The inclusion of statutory superannuation contributions, unpaid leave and statutory long-service leave are not considered to be contentious, and are specifically excluded from the legislation.
However shareholders may wish to review carefully proposals to allow for bonus or long-term incentive payments to be made on termination.
If the 12 months’ salary threshold is exceeded, shareholder approval is required for the following:
• Accelerated or automatic vesting of long-term incentives;
• Pensions;
• Payments such as non-compete clauses; and
• Payments made in lieu of giving a notice of termination.
The measures are effective for contracts entered into, renewed, extended or amended on or after 24 November 2009. The prior shareholder approval requirements apply to contracts before that date.
‘No Vacancy’ Resolution
Section 201N of the amended Corporations Act 2011 requires shareholder approval to be sought should the Company wish to restrict the number of directors sitting on the Board below the maximum allowed under the company’s constitution.
This provision has been introduced in response to companies stating ‘no vacancy’ when faced with shareholder requisitioned candidates for the board, despite the Board not being at the constitutional maximum. Where ‘no vacancy’ has been declared, in order to get elected shareholder nominees have to receive not only more votes ‘for’ than ‘against’, but must also receive more ‘for’ votes than one of the existing directors.
This provision comes into effect for Board limits set on or after 1 July 2011, and thus the first such resolutions, which provide for a one-year authorisation to set a lower board limit, could be seen during the 2011 proxy season.
‘Cherry Picking’ of Proxies
Previously, the law required all directed proxies held by the Chair to be voted, however, non-Chair proxy holders can choose which proxies to vote. This enabled non-Chairs to not exercise votes that did not accord with their own views on a resolution, and to exercise only those votes that did support their position.
The law has now been changed so that the proxy holder is required to vote as directed and where the proxy does not vote, that these default to the Chairman who must vote these proxies as directed.
For institutional investors sending voting instructions through the appointment of a proxy, these legislative changes will be welcome, as the measure will reduce conflicts of interest and ensures the wishes of shareholders cannot be ignored.
ASX Corporate Governance Code Updates
The ASX Code has been updated with formal commencement of the new provisions effective for financial years commencing on or after 1 January 2011. However the ASX Council has stated that it considers that in the case of the diversity provisions, companies should report on the new recommendations in respect of years commencing 1 July 2010 or later. Thus we can expect to see reporting on the diversity provisions in the upcoming proxy season.
The Code introduces a recommendation that companies establish a policy on diversity, with the policy or a summary of that policy to be disclosed. Companies are also recommended to establish ‘measurable objectives’ and to report annually on progress. Companies should disclose in each annual report the proportion of women employees in the whole organisation, women in senior executive positions and women on the board.
A detailed section of the ASX Code sets out the suggestions for the content of a diversity policy. Further provisions on gender diversity relate to the board selection processes and the mix of skills and diversity the board is looking to achieve.
Among the early reporters, Telstra has reported that as at 30 June 2012, 32% of employees, 25% of executive management and 22% of the non-executive directors were female.
Other changes to the ASX Code include an upgrade of the existing guidance on the composition of the remuneration committee to a formal recommendation that committee consist of a majority of independent directors, is chaired by an independent director and includes at least 3 members.
Among the further additions include the inclusion of a statement in the meeting documentation as to whether the board support the proposed candidates standing for election to the board.
Remuneration Consultants
In Remuneration Reports for financial years commencing 1 July 2011, listed companies must report on the remuneration consultants they use, what other services they provide, the nature of the advice provided and the cost. The first such disclosures are thus expected ahead of proxy season 2012.
ACSI Guideline Updates
In August 2011, the ACSI released the latest version of its governance guidelines. The Guidelines build upon the provisions of the Corporations Act and the ASX Corporate Governance Principles and reflect the expectations of Australian superannuation funds as investors in listed companies. The Guidelines provide greater detail on the issues that are important to superannuation funds as long term investors.
The revised 2011 Guidelines include new provisions on:
• Board workload;
• Board evaluation;
• Voting on a poll;
• Pre-emption rights; and
• Disclosure of environmental, social and corporate governance policies and practices.
Manifest has included the new best practice provisions into it research reports and voting guidelines for the 2011 AGM season so that clients may continue to apply ‘local best practice’ standards in the Australian market.
Manifest Coverage
Manifest provides guaranteed coverage of the S&P/ASX 200 for 2011, while companies outside of this benchmark index may be covered by request. Core policy coverage of the ACSI Corporate Governance Guidelines and the ASX Code is supplemented by Manifest’s unique custom remuneration benchmark tool which grades execute page disclosures and policies from A-F using local market best practices
Contacts & More Information
If you would like to receive a sample Australian research report please contact info@manifest.co.uk
If you would like to speak to someone about a specific Australian research or voting question please contact:
Asia: Mark Bytheway +61 3 8621 2000 | Europe/USA: Paul Hewitt +44 1376 503500
Last Updated: 8 October 2011