Life after a Shareholder Pay 'Strike': Consequences for ASX-Listed Firms

Abstract

Abstract"Say on pay" legislation has been introduced in several countries but Australia's version, namely the "two-strikes" rule, is unique in that it empowers shareholders to vote on a board spill if the compensation report of a public company receives 25% or more dissenting votes for two consecutive years. We test the proposition that the "two strikes" rule has increased directors' accountability beyond executive pay because it has substantially lowered the cost to activists of organizing sufficient votes to threaten managers with a board spill. Consistent with this expectation, we find Australian firms respond to negative say-on-pay votes by curbing excessive CEO pay, reducing the growth rate of pay and changing the pay mix. In addition, the results suggest that the market regards negative SOP votes as a value-destroying signal since there is a negative market reaction, lower valuation and long-run underperformance. We also find an increase in CEO turnover but directors do not seem to bear reputational costs through the loss of outside directorships. The findings provide important insights to investors, company directors and regulators.

Executive Remuneration: Achieving Accountability through Disclosure

“…In a similar study encompassing an additional two years of strike data, Bugeja et al (2016) find that the two-strikes rule appears to have an impact on firms that receive a strike. The firm receiving one strike make some changes to the size and composition of CEO pay.…”

“…Shareholders are then able to vote on the remuneration report at the AGM. Votes against the resolution to adopt the remuneration report have generally been called 'no votes' in the Australian media, however terminology in the literature includes 'dissenting votes' (Bugeja, Rosa, Shan, Walter & Yermack, 2016;Clarkson, Walker & Nicholls, 2011), 'rejection votes' (Kimbro & Xu, 2016), 'dissatisfaction votes' (Alissa, 2015) and 'against' votes (Ertimur, Ferri & Muslu, 2010). If more than 25% of the votes cast at the meeting are negative and therefore do not support the resolution to adopt the remuneration report, this is classified as a 'strike'.…”

“…International research finds that when a country introduces say on pay legislation, firms adjust the CEO remuneration contract improving their pay for performance links (Burns & Minnick 2013;Cai & Walkling, 2011). This does not appear to be the case in the Australian setting with several studies finding no improvement in the pay for performance of firms in general, and specifically no improvement in pay for performance sensitivity for firms receiving negative votes under the two-strikes legislation (Bugeja, et al, 2016;Grosse et al, 2015;Monem & Ng, 2013).…”

“…However the research indicates that remuneration contracts exhibit no improvement in pay for performance link after one strike, and worsening pay for performance sensitivity after two strikes, which the authors propose may be an unintended outcome related to the imminent vote on the board spill. Chapter Four describes how respondents to the PC Inquiry were very concerned about unintended consequences from introducing the two-strikes legislation, and Bugeja et al (2016) indicates these concerns may have been justified. Bugeja et al (2016) also find that strike firms suffer a significant and negative market reaction after a strike.…”

“…Chapter Four describes how respondents to the PC Inquiry were very concerned about unintended consequences from introducing the two-strikes legislation, and Bugeja et al (2016) indicates these concerns may have been justified. Bugeja et al (2016) also find that strike firms suffer a significant and negative market reaction after a strike. While accounting profitability improves after a first strike, the market does not appear to value this improvement, possibly due to a belief in the market that the improvement is short lived due to earnings manipulation.…”