Whether Australia’s highest paid executives like it or not, the Senate has now passed the executive remuneration reforms and some of the companies they run have felt the brunt.

Pacific Brands and Crown Casinos are among listed companies that have already incurred the wrath of shareholders determined to stop unreasonable pay and bonuses, recording a first ‘strike’ under the new rules.

In AGMs last year, 36 of the top 500 companies — or seven per cent of the All Ordinaries — recorded a first strike. As the laws require, if the strike occurs at two consecutive AGMs, the shareholders can force a board spill and a further shareholder meeting to determine whether the board should be re-elected or permanently removed.

The “two strikes rule” has become the big headline, but this mechanism for throwing out executive remuneration is simply the most potent part of the package of reforms brought in by the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act 2011. The intent of the act is to address conflicts of interest and increase transparency and accountability in executive remuneration. Does it work? The practical upshot has been the stiffening of the rules around disclosures and reporting, and in this regard, human resources consultants can vouch for its effectiveness.

Stakeholders come into play

As part of the new consultation process, other stakeholders come into play. Jairus Ashworth, Aon Hewitt’s head of reward in Australia, says retail shareholders associations and big institutional investors are now integral to the process. “We need to know if they will vote for or against the package and take that feedback back to the board,” says Ashworth. “From there it is up to the board whether they put forward the package, even if the shareholders don’t agree with it,” he explains.

Vas Kolesnikoff, chief executive of the Australian Shareholders’ Association, agrees that remuneration consultants now need to be in even greater accord with the investor community. “Once they have the data and the information, they need to go and talk to shareholders,” he says.

Ashworth is irked by the fact that a company now has to disclose who its HR adviser is and the nature of the advice, but not whether the advice is adopted. “They don’t have to say whether they adopted the HR consultant’s recommendations,” says Ashworth. “If a board decides against advice, we are still linked to their decision — whether we agreed with it or not.”

Many fear two strikes will be used as a blunt tool to attack the company for any reason, but Egan believes that it will by its very nature neutralise the excesses. “The basis on which pay issues are leveraged is going to be lower,” says Egan.

Responding to change

Already there are signs that big companies are responding to the changes. The government now has a discussion paper on clawback provisions on bonuses, which have been paid on flawed accounts. Rio Tinto and Leighton Holdings have indicated they will insert bonus clawback clauses into executive contracts. “We all want companies to do the right thing and we all know what the right thing is,” says Kolesnikoff.

Other parts of the legislation have caused confusion. The new regime stipulates that chairs cannot now vote undirected proxies in favour of a remuneration report. Share registry group Computershare found that 66 per cent of undirected proxies — where shareholders usually appoint the chairman to vote on their behalf — went uncounted last year under the two-strike rule.

Many say this loss of votes can be easily fixed; proxy forms can be crafted to ensure that they are properly directed. Some companies are putting a very prominent, bold statement below the chairman’s appointment saying that if you appoint the chair, you acknowledge that you are authorising him to vote for the remuneration package.

Others say that undirected proxies should remain exactly that — undirected. “These votes should not be counted and used. They should go nowhere,” says Kolesnikoff.

Everyone agrees that there is a new order being ushered in for executive pay that is more prescriptive and legalistic than it has ever been. “Just conveying in a simple to understand way what you’re trying to do is getting harder,” says Ashworth. “The big challenge is to make sure the message in reports is clear — it’s very easy to get lost in the numbers.”