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‘Two strikes’ board spill rule will have significant investor relations implications

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On 20 June 2011, the ‘two strikes’ rule, which will allow shareholders to spill a company’s board if the company’s remuneration report receives strong ‘no’ votes over two consecutive years, passed into law.  Whether or not you agree with the new law (and it has been controversial), companies will need to consider the investor relations implications.

The new rule can be seen to empower minority interests, as a ‘no’ vote of only 25% or more in two consecutive years will trigger a spill resolution (which, if passed, will require the board to call a further general meeting at which all of the directors who were directors of the company at the time the board approved the directors’ report (other than the managing director) will face re-election).  Accordingly, companies will now have a greater imperative to engage with and understand the concerns of all shareholders, not just focus on institutional or large shareholders.

Parliamentary Secretary the Hon David Bradbury MP stated that the new rules will give shareholders ‘unprecedented power to have a say over executive remuneration’.  While the two strikes rule will provide shareholders with a new and influential tool to hold boards accountable for remuneration decisions, what Mr Bradbury’s statement fails to recognise is that there is, of course, nothing stopping the remuneration vote from being used to send a message to the board in relation to any number of issues concerning shareholders.  In any event, general company performance and other issues of concern to shareholders ultimately link back to whether shareholders consider the board is delivering as it should, and therefore whether directors are earning their keep.

A company that receives a strong ‘no’ vote on its remuneration report in one year will, of course, have until its next annual general meeting to address shareholder concerns and avoid a second consecutive strong ‘no’ vote that will require a spill resolution.  Nonetheless, companies will need to ensure that they are aware of and address all significant issues or potential issues, through a consideration of all shareholders, well ahead of general meetings.