Directors lash out at ‘two-strike’ rule

It’s not perfect – but at least directors have received a wake-up call

ASX-quoted company directors appear to be furious about new rules forcing them to stand for re-election if more than 25% of shareholders vote against the remuneration report for two consecutive years.

Today it was the turn of PaperlinX Limited (ASX: PPX) and property developer Lend Lease Limited (ASX: LLC), with both companies suffering their ‘first-strike’. More than 47% of shareholders voted against PaperlinX’s remuneration report, while 26% of Lend Lease’s shareholders voted against its report.

Cochlear Limited (ASX: COH) and Fairfax Media Limited (ASX: FXJ) are two big-name companies that suffered their first strikes this AGM season, after disappointing investors over the previous financial year, but still increasing director’s pay packets. The AGM season still has some way to go, so we could yet see more companies score a first or second strike.

Directors may be angry about the rules, but the pendulum has well and truly swung the way of shareholders. After years of excessive pay packets and bonuses, with no input from the owners of the company, the shareholders are fighting back. Too right.

Professor Richard Puntillo of the University of San Francisco summed it up best when he stated,

“In theory, publicly traded corporations should have shareholders as their kings, boards of directors as the sword-wielding knights who protect the shareholders and managers as the vassals who carry out orders.

But in practice, this idea has been perverted and managers have become kings who lavish gold upon themselves, boards of directors have become fawning courtiers who take money in return for an uncritical yes-man function and shareholders have become peasants whose property may be seized at management’s whim.”

The system is not perfect. The two strike rule could be used for political reasons by majority shareholders, and shareholders could also vote against the remuneration report for reasons other than the level of compensation directors receive. But at least it appears to have directors communicating more with shareholders, and earning their pay rather than taking it for granted.

Here at The Motley Fool, we take nothing for granted. But we do take our research seriously. If you only invest in one company this year, make it our “Top Stock for 2012-13”. Operating in two hot markets — one set to double by 2012, the other predicted to grow 5x over the next five years — this stock is a solid growth play that also boasts strong recurring revenue, zero debt, and lots of cash. Get its name and full research case in this brand-new FREE report.

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Motley Fool writer/analyst Mike King owns shares in Cochlear and Fairfax. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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