Last month we brought you an evaluation of the controversial ‘two strikes rule’ (2S Rule) (found here) and how it has affected executive remuneration resolutions at this year’s AGM season in Australia. In our previous blog post we highlighted the number of ways in which the 2S Rule can be utilised by shareholders for reasons unrelated to executive pay, but in this post, we highlight a recent example of where the 2S Rule has been used to achieve its regulatory objective – holding executives accountable to shareholders.

Aurizon Holdings Limited is a large Australian transportation company, born out of the privatisation of Queensland Rail (formerly known as QR National). Since it was floated 3 years ago, it has received strong criticism over its remuneration packages, particularly in relation to the granting of share options to its CEO Lance Hockridge resulting in a 34% rise in his total pay for FY13 to A$6.1m.

Before the meeting, the Australian Shareholders Association (ASA) called for the Aurizon chairman John Prescott, to step down as chairman because it believed there needed to be ‘‘boardroom accountability after three successive years of remuneration controversy’’. ASA also made the following public statements in the lead up to Aurizon’s 2013 AGM:

Aurizon has breached the faith of shareholders on remuneration matters over the past three years since it became a public company.

… in light of past discretionary payments, ASA cannot accept that the CEO’s base pay should have been increased from $1.65 million to $1.93 million.

Some shareholders were angry that the company had not raised the hurdles for executives’ long-term bonuses after its October 2013 share buy-back scheme was completed. Also, shareholders felt that it was problematic that Aurizon’s directors only hold approximately 0.05% of the company’s issued capital, raising concerns about whether their interests are sufficiently aligned with those of shareholders. Shareholders in the company took heed of the ASA’s concerns and Aurizon received a 28% ‘no’ vote against its remuneration report (resulting in its first ‘strike’), a 19% ‘no’ vote to the grant of performance rights and 11% ‘no’ vote against the re-election of independent director of Russell Caplan. The interesting aspect to all this is that the company’s share price has actually performed quite well over the past year, increasing in value by approximately 20%.

Aurizon is an example of the 2S Rule being used by shareholders to send a message to the company’s board that the company’s remuneration practices deserve a rethink. It will be interesting to see whether Aurizon makes changes to its remuneration practices in the 2013-14 FY, or whether it persists with its current policies and risks receiving its second ‘strike’ leading the company into a spill motion.