In its recently released Corporate Governance 2012 full year report, AMP Capital says the 'two-strike rule' on remuneration has provided investors and acquirers of companies with substantial benefits, vindicating the company's long-standing support for the rule.
Introduced in 2011 as part of the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act, the two-strike rule provides greater capacity for shareholders to force a spill motion on issues of remuneration.
"By analysing the pay structures of chief executives and directors, investors can gain considerable insights about not only who but also what a company values," the January 2013 report states.
"Over the years, AMP Capital has met with many company representatives to discuss governance issues including remuneration, however since the introduction of the government's two-strike rule there has been a much broader scrutiny of this important issue," the report says.
AMP Capital's head of environmental, social and governance (ESG) research, Ian Woods, says the two-strike rule, while also shining a spotlight on debates around remuneration, has more broadly led to an increasing focus from investors and company boards on a range of "other important issues" relating to corporate governance and transparency.
Dr Woods says AMP Capital's commitment to reporting on corporate governance stems from its own obligations as an investor. "As a large investor and owner of companies on behalf of our clients, we have a responsibility to engage with boards on a broad range of issues such as management of talent, environmental risks and sustainable practices," he said.
Putting this commitment into practice, AMP Capital voted against or deliberately abstained from 25 per cent of resolutions pertaining to remuneration reports at the recent annual general meetings of 332 companies in which it has holdings.
Twenty of the companies in AMP's portfolio could have potentially received a second strike, the report explains. Of these, only two - Cabcharge Australia and Linc Energy - did receive two strikes, though neither were forced to hold a board spill as the motions were not supported by a majority of shareholders.
"Given that these companies received a second strike, we would expect them to make it a priority to engage with shareholders in the coming year and address concerns raised," the report states, establishing a potential future barometer of the two-strike rule's effectiveness.
Notwithstanding the glowing report card handed down by AMP Capital's ESG research team, the two-strike rule remains contentious.
"The two-strikes rule is at the forefront of boards' and senior executives' minds at the moment," Clayton Utz corporate advisory partner Andrew Hay said in a blog post on the firm's website.
"It is controversial because the possibility for it to be used to force a leadership spill could create uncertainty in companies," he wrote.
Simon Rear and Phil Lucas of Allion Legal suggest that company leadership should be wary of the rule and the enhanced powers it provides to shareholders.
"Companies and boards, especially those facing the potential of a no vote at a subsequent AGM, will need to carefully consider their strategy regarding meeting disclosure and changes to remuneration and will need to liaise with key shareholders and stakeholders whilst being wary of opportunistic approaches at a time when the board may have its back against the wall," they said.
A survey of senior executives on the government's remuneration reforms conducted by law firm Mallesons found that opposition may be perhaps more widespread - if unspoken publicly - among Australia's company leaders.
"The reforms . only add compliance costs and provide a larger voice to activist minority shareholders," one survey respondent said.
