Australia’s leading corporate figures continued their full-court press against the draft report released by the Productivity Commission regarding executive remuneration last week. The Director’s Club trade rag, also known as the Australian Financial Review, screamed this morning, “Boards Slam Executive Pay Reform”, decrying the “two-strikes” rule suggested by the Productivity Commission. Under the proposed new law if 25% of shareholders vote against a company’s remuneration report in consecutive years, the entire board would be “spilled” and face re-election.

The major criticism of the proposal by the Director’s Club (and it was the “two-strike” rule that garnered most criticism, the remainder of the draft was mostly accepted) was that the rule would give a minority of shareholders the ability to use the remuneration report as a Trojan horse to wreak havoc. Former well-respected Wesfarmers CEO Michael Chaney, now chairman of NAB and Woodside, told the Financial Review that the two-strikes rules “would fly in the face of shareholder democracy if, when 75 percent supported the report, and by inference, the directors staying in place, and they were defeated by 25 percent of the vote.”

That argument is a fraud.

Most critically, as RiskMetrics research chief Martin Lawrence noted, shareholders already have the power to spill the board. In fact, it only takes 5% of shareholders to demand an extraordinary general meeting upon which the disaffected shareholders can seek to remove the entire board. That is a lot easier than obtaining two 25% “against” votes for a remuneration report.

There is also the practical reality that if a so-called minority shareholder is able to easily garner 25% of the votes for a resolution, they will already have an enormous influence at the company, if not control. Witness the power of the Fairfax family at Fairfax Media or Rupert Murdoch at News Corporation — both own less than 10% of their respective companies.

Most critically, even if the board was spilled, it would still take a 50% vote to actually remove the existing directors. Given that the likes of former ABC chairman David Ryan or departed Allco director Barbara Ward managed to get elected last year, the chances of shareholders removing a director is about as likely as Sol Trujillo returning a performance bonus.

The “two-strike” rule should be rejected not because it is too hard on directors, but rather, because it is too soft, and targets the wrong people. Instead of requiring consecutive “against” votes, if a company receives a majority rejection of its remuneration report, the chairman and members of the remuneration committee should be “spilled” at the company’s next annual general meeting. Those directors should also forgo their fees for the year. That would avoid the alleged danger that a recalcitrant shareholder could use the two-strike rule to de-stabilise the company, but ensure that the directors who were at fault were held personally liable for their actions.

Independent non-executive directors are supposed to effectively be fiduciaries of minority shareholders, acting in the best interests of the company. Sadly, in recent years, that responsibility appears to be largely abdicated, especially in the realms of executive remuneration. Case in point — Telstra. In 2007, Telstra shareholders roundly rejected the company’s remuneration practices.

The following year, the company gave its American CEO a 14% pay increase while its share price slumped. Telstra is not alone — directors at Qantas, Oxiana, Crane Group, Village Roadshow and Asciano also gave very short shrift to shareholders’ views while paying senior managements millions.

That a Productivity Commission report on remuneration is needed at all represents an indictment on the likes of directors such as Chaney, or out-going Telstra Remuneration boss Charles Macek or Wesfarmers’ Bob Every — leading critics of the draft report. The commission didn’t get it right, but wasn’t too far off, just not in the way suggested by our leading corporate figures.