Company directors on notice: 2 strikes and you're out

Shareholders' pressure forcing directors to cut fees

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published July 18, 2012 12:58 pm AEST

Company boards are looking over their shoulders as new executive remuneration rules start to gain traction. The rules state that directors face having to stand for re-election if more than 25% of shareholders vote against the remuneration report for two consecutive years.

More than 100 ASX listed companies received their first strike against their remuneration reports last year, including Pacific Brands Limited (ASX: PBG) and Crown Limited (ASX: CWN).

Rio Tinto chairman, Jan du Plessis last week warned that executive pay levels had spiralled out of control and could not continue. "Too many businesses sometimes appear to have lost touch with reality," he said, according to the Australian Financial Review. In his speech, Mr du Plessis repeatedly referred to the breakdown of shareholders and public trust in major institutions.

In a sign that's likely to be repeated, PaperlinX Limited (ASX: PPX) and Perpetual Limited (ASX: PPT) recently announced plans to cut directors' fees. PaperlinX reduced directors' fees by 15%, while most of the company's senior managers in Britain agreed to take a voluntary 7.5% pay cut. Perhaps not surprising given the company's share price performance, with shares currently trading around 4 cents, compared to more than $4 a share back in 2006.

Perpetual's share price performance is not much better, with the share price sliding from over $80 down to around $23. The company is looking to cut $50 million of costs by 2015, including reducing the size of its executive team, and slicing directors' fees. Non-executive director fees have been slashed by an average 25%, while chairman, Peter Scott, took a 42% cut to his remuneration.

At a time when markets, company profits and share prices are down, it appears difficult for executives to justify large pay rises, and it seems even their existing salaries and bonuses. In what is a good first step for minority shareholders, boards are now moving to communicate more with shareholder representatives and advisers. The alternative is that they could get thrown out.

The Foolish bottom line

With the reporting season coming up in August and Annual General Meeting season following in October, we may yet see more companies freeze or even cut director's fees and executive's salaries.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. 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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