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

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.