Lower Defeat Thresholds for Minority Shareholders and Corporate Governance: Evidence from the Australian “Two-strikes” Rule

52 Pages Posted: 30 Nov 2016 Last revised: 11 Jan 2021

See all articles by Martin Bugeja

Martin Bugeja

University of Technology, Sydney; Financial Research Network (FIRN)

Raymond da Silva Rosa

The University of Western Australia - Department of Accounting and Finance; Financial Research Network (FIRN)

Yaowen Shan

University of Technology Sydney (UTS) - School of Accounting; Financial Research Network (FIRN)

Terry S. Walter

University of Sydney; University of Technology, Sydney - School of Finance and Economics; Financial Research Network (FIRN)

David Yermack

New York University (NYU) - Stern School of Business

Date Written: June 28, 2020

Abstract

This study assesses the causal impact of minority shareholder empowerment via lower defeat thresholds in “say-on-pay” on CEO compensation and career consequences for directors. We exploit the adoption of the Australian “two-strikes” rule as a quasi-exogenous shock, which empowers shareholders to vote on a board dismissal if a firm’s remuneration report receives 25 percent or more dissent votes for two consecutive years. Using a difference-in-differences methodology, we find that firms respond to a “strike” by curbing excessive CEO pay, enhancing the pay–performance link and replacing CEOs. Under the two-strikes regime, independent directors are held more accountable for poor oversight and experience significant reputational penalties in terms of turnover and the loss of outside directorships upon receiving a strike. The results are mainly driven by firms receiving a non-majority strike, indicating that the effectiveness of the two-strikes regime is largely sourced from lower defeat thresholds.

Keywords: Say on pay, Two-strikes rule, Lower defeat thresholds, ASX firms

JEL Classification: G34

Suggested Citation

Bugeja, Martin and da Silva Rosa, Raymond and Shan, Yaowen and Walter, Terry Stirling and Yermack, David, Lower Defeat Thresholds for Minority Shareholders and Corporate Governance: Evidence from the Australian “Two-strikes” Rule (June 28, 2020). CIFR Paper No. 130/2016, Available at SSRN: https://ssrn.com/abstract=2876925 or http://dx.doi.org/10.2139/ssrn.2876925

Martin Bugeja

University of Technology, Sydney ( email )

Australia
61 2 9514 3743 (Phone)
61 2 9514 3669 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Raymond Da Silva Rosa (Contact Author)

The University of Western Australia - Department of Accounting and Finance ( email )

School of Business
35 Stirling Highway
Crawley, Western Australia 6009
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Yaowen Shan

University of Technology Sydney (UTS) - School of Accounting ( email )

P.O. Box 123
Broadway NSW 2007
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Terry Stirling Walter

University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

University of Technology, Sydney - School of Finance and Economics ( email )

Haymarket
Sydney, NSW 2007
Australia
+61 2 9514 3860 (Phone)
+61 2 9514 7711 (Fax)

HOME PAGE: http://datasearch.uts.edu.au/business/finance/staff/StaffDetails.cfm?UnitStaffId=5373

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

David Yermack

New York University (NYU) - Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY 10012-1126
United States
212-998-0357 (Phone)
212-995-4220 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~dyermack

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