Lower Defeat Thresholds for Minority Shareholders and Corporate Governance: Evidence from the Australian "Two-Strikes" Rule

This study assesses the impact of minority shareholder empowerment via lower defeat thresholds in "say-on-pay" votes on CEO compensation and career prospects for directors. We exploit the adoption of the Australian "two-strikes" rule as a quasi-exogenous shock, which empowers shareholders to vote on board dismissal if a firm's remuneration report receives 25 percent or more dissent votes for two consecutive years. Using a differencein-differences methodology, we find that firms respond to a "strike" by curbing excessive CEO pay. Under the twostrikes 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 subsequent to receiving a strike. The results are mainly driven by firms receiving a nonmajority strike, indicating that the effectiveness of the two-strikes regime stems largely from the lower defeat threshold.