Good governance supports long-term value creation, market confidence and economic resilience. In Australia, the Two Strikes Rule (the Rule) has become a foundation of the approach to good governance: a clear mechanism through which investors can raise concerns about executive remuneration. After 15 years, it is timely to review corporate and investor practice and the effectiveness of the Rule.
But first, why was the Rule created in the first place? In 2009, the Productivity Commission launched an inquiry into executive remuneration in Australia, triggered, as its final report said, by “concern that executive pay had got out of hand. This perception was fuelled by practices in financial institutions abroad that were seen as a key contributor to the global financial crisis.”
In 2011, following the Productivity Commission’s inquiry and recommendations, legislation creating a new regime – the Two Strikes Rule – came into force. Under the Rule, a remuneration report with an ‘against’ vote of 25% or higher receives a ‘strike’. If, at the following year’s AGM, the remuneration report receives another against vote of 25% or greater, the company faces a motion to spill the board, passed on a simple majority. If this resolution is passed, directors are required to stand for re-election at a separate meeting within 90 days.
At the time, some had concerns that the Two Strike Rule would overemphasise “remuneration, irrespective of financial performance or the good governance, of the company”, and feared a spill motion may be used for “strategic purposes” and the company may be vulnerable to misuse of the provisions by people seeking to strategically gain a board seat (or seats).”
But analysis 15 years after the Rule began shows those fears did not materialise, and just one company in that time (Jupiter Mines, 2021) faced a spill motion.
Instead, the Rule has become an important feature of Australia's corporate governance framework, giving investors a clear mechanism to raise concerns about executive remuneration and encourage boards to respond.
The Rule has acted as a moderating force. Australia has not experienced the significant increases in remuneration packages seen in some other markets. It has encouraged boards to respond to investor concerns, improving disclosure and supporting boards to consider whether remuneration structures are aligned with long-term company performance The Rule has not eliminated excessive pay or poor remuneration design, but it has proved to be a highly useful mechanism for increasing accountability on remuneration.
ACSI’s members invest in companies due to the investment case. Where they see misaligned incentives which may affect longer-term investment outcomes, the Rule provides an opportunity for ongoing engagement to address these concerns. This engagement has enabled boards to implement accountability and remuneration approaches that are relevant to their business, market and strategy, without requiring a one-size-fits-all approach. It remains true, however, that it is possible for corporates and investors to see the same facts and disagree, for example on the true achievement of performance aims or the correct level of accountability for management failings. The Rule provides a sound basis for engagement on these issues.
Over the past 15 years, the Australian governance landscape has changed significantly. Regulatory settings have evolved, investor stewardship practices matured, and expectations of accountability increased. The Rule is an important part of this broader picture and investors view a vote on remuneration implementation as a foundational right and responsibility. By strengthening the link between executive pay and long-term performance, the Rule has supported better governance outcomes and delivered benefits for Australian superannuation fund members.
