First strike votes against remuneration reports can deliver short term investing gains

Buying shares in companies which cop a first strike vote against their remuneration report can deliver excess returns, Guerdon Associates says, but it’s not as simple as buy and hold.

Guerdon says companies which get a first strike will on average outperform, but only briefly.

Companies which get slapped with a first strike protest vote against their remuneration report will on average outperform in terms of shareholder returns, Guerdon Associates says, while warning there are caveats to their findings.

The remuneration and board consulting firm reviewed the performance in terms of total shareholder returns for ASX300 companies which received a first strike vote against their remuneration report at annual meetings between FY2020 and FY2022.

Guerdon calculated the excess returns generated against the ASX300 and also sector specific indices, and found that money could be made by investing in companies on the day they receive their first strike vote.

But, the firm warns, holding the stock for too long would turn those returns negative.

“The results indicate that buying shares on the AGM date in every company that receives a strike can produce excess returns over a holding period of six months after the AGM,’’ Guerdon said.

“The average excess return was in the range 5 per cent to 9 per cent compared to buying the ASX 300, and in the range 3 per cent to 10 per cent compared to buying the sector index for each company.

“However, the median excess return was negative in each year suggesting that this is a risky strategy as the high average return is dependent on a few companies that are total shareholder return ‘outliers’.

“And for holding periods of 12 months after the AGM both the average and the median excess returns were negative, suggesting that any effect subsides after six months.’’

While the firm found that investing in firms which received a protest vote could provide above average excess returns, it does not conclude that the link is causal.

“The results show that although investing in companies receiving a strike can produce above average excess returns for a short period of time compared to buying the ASX 300 or the sector index, the reasons for the returns are probably unrelated to boards responding to a strike (assuming companies take steps to respond to a strike).

“In fact, investors may notice that companies receiving a strike in the upcoming AGM season are more likely to underperform the market for the next year.

“This finding is probably more telling, inferring that a board that does not govern well does not change overnight.’’

Guerdon said protest votes could be unrelated to actual remuneration - a criticism of the “two strikes” framework often put forward by boards.

“Voting against the remuneration report is one of few avenues available for ASX investors who want to voice their concerns with overall performance,’’ Guerdon says.

“For example, poor total shareholder return for the previous financial year increases the likelihood that companies will receive votes against the remuneration report at the AGM.

“However, boards may typically seek to address investor concerns after receiving a strike if the reason for the strike is that investors are displeased with, for example, the company’s strategy, the alignment between executive remuneration and shareholder interests, or other factors within the board’s control.

“If that is the case the share price performance may be expected to improve after a strike which could present an opportunity for investors to earn excess returns.’’

Major companies which received a first strike vote at their annual meetings late last year include Myer, Downer EDI and ASX.

Originally published as First strike votes against remuneration reports can deliver short term investing gains