Two-Strike Rule- Literature Review

Two-Strike Rule- Literature Review

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Two-Strike Rule- Literature Review

The Two strikes Rule was established to ensure accountability and responsibility amongst directors for salaries and bonuses accrued to organizational executives. The rule provides shareholders of an organization with the capabilities of inducing reelections against the board of directors of an entity if they are not satisfied with the remuneration and benefit packages issued to the executives of the organization. This was affirmed as law through amendments to the Corporations Act on 1st July 2011.

The First strike takes place when an entity’s remuneration report accrues a negative vote of more than 25% by the shareholders during an annual general meeting of a company. The report provides an outline of the salaries of the respective directors and any bonuses. The Second Strike takes place when the entity’s subsequent remuneration report is voted against by 25% or more of the shareholders. The enactment of this legislation is illustrative of the contentious nature of executive compensation in modern business settings. Initially, shareholder voting on the remuneration reports in Australian forms had little or no effective on the compensation of executives.

The identified literature it is evident that executive compensation remains an important issue in modern organizations. It is indicative that highly talented and qualified executives usually attract high compensation levels and bonuses. In addition, it is also evident that externally selected and hired executives usually accrue high compensation when compared to internally hired executives. However, it is noted that internally hired executives perform effectively in terms of their roles as qualified accountants and decision-makers in the organization. This is attributed to experience in operational and functional issues within the organization and more so culture based knowledge within the organization.

It is important to note that critics argue that the laws are ineffective and costly given that the legislation has not resulted in changes within the composition of company boards. However, the laws have prompted organizations to relate compensation and benefits to performance. In addition, organizations have also been prompted to alter their remuneration structures to ensure that exceptional performance is rewarded whereas poor performance is discouraged through low pay and bonuses.

The legislation has brought about increased scrutiny on compensation of executives prompting organizations to shift their basic elements of executive compensation namely salaries, cash bonuses and the various equity options provided. For instance, organizations are shifting towards equity based compensation rather than cash bonuses because of controversies and negative implications of such compensation forms. Compensation and bonuses have become intricately connected to critical and specific performance measures within Australian organizations. This also includes provision of specific activities and actions executed by an executive, which resulted in the achievement of the bonuses.

Research suggests that the enactment of the two strikes rule resulted in significant negative effects fin terms of market value for companies listed in the Australian stock exchange. The effects of the legislation were less pronounced for companies that had instituted strong controls and corporate governance standards. Similar initiatives and legislations in other countries such as Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) sought to provide shareholders of public entities with the advisory capacities in compensation formulas utilized for the executives. After the establishment of this act in the United States, companies listed in the New York Stock Exchange linked compensation to performance by the executives.

Research indicates that remuneration or compensation structure sin Australia is context and company specific. The Two Strikes legislation is termed as one of the most far-reaching reforms on corporate governance in corporate Australia. It has been hailed as an internationally appropriate and competitive system for executive remuneration to ensure accountability and responsibility to the shareholders. However, it is argued that the legislation has given rise to unprecedented and unintended consequences in corporate Australia.

Critics note that the two strikes legislation has provided shareholders with ulterior motives with avenues to abuse the system and destabilize management of public organizations. In addition, it has been associated with the disenfranchisement of shareholders rather than empowering them. The separation of ownership from control, in the interactions between executives as management and shareholders as the owners of an organization is a classic illustration of the principal agency relationship.

In this principal-agency relationship, the primary challenge is usually for the principals to develop compensation or remuneration systems that encourage the utility-maximizing, self-interested and risk averse agents to act in a manner that denotes the best interest for the principals desiring to optimize and maximize the performance and value of the organization. If an agent has observable efforts, the optimal remuneration or compensation contracts are usually based on the performance or efforts of the agent. When any agent fails to optimize on performance, the most fathomable avenue for control is to reduce agency costs for the principals. This affirms the importance of the legislation in enabling organization to develop cultures that focus on performance as a key determinant in development of compensation or remuneration systems and packages for the executives.

 

 

 

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