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The Institute of Directors in South Africa (IoDSA) and the King Committee have warned that new laws around executive pay and the permissions needed by shareholders to implement it could see businesses held to ransom by shareholders – and drive another nail into the coffin for South Africa as an attractive destination to do business.
In a note this week, the IoDSA and King Committee said that they remain supportive of reform efforts in what is a highly contested area of business operations – ie, executive pay and remuneration – but stressed that some of the proposals contained in the Companies Act Amendment Bills 2023 relating to remuneration are “problematic”.
Proposals in the amendments would see it become compulsory to disclose the pay gaps between top executives and lowest-paid workers, and interrogate the reasonableness of remuneration.
As part of this process, remuneration policy would have to be tabled for approval at a company’s annual general meeting (AGM). As it stands, this would only have to take place every three years – something which is in line with international practice and supported by IoDSA and King.
However, the groups do not support the proposal that the voting on the remuneration implementation report and the consequences of the report need to be approved at the AGM.
“The issue here is that, in terms of the proposed Bill, the remuneration committee has to present its implementation report (giving effect to the remuneration policy) for approval at every AGM.
“If the ordinary resolution on the implementation report is not passed by at least 50% of the votes in favour of the report, committee members are obliged to step down for a period of at least three years, although they would be able to remain on as board directors,” IoDSA said.
Professor Parmi Natesan, CEO of the IoDSA, said that the consequences of this would be undesirable and impractical on many levels.
“It would mean that those board members with specialist remuneration skills (already in short supply) would be no longer available to serve on the remuneration committee—this at a time when boards are under pressure to reduce in size.
“The former committee members could suffer considerable reputational damage…One could also foresee that shareholders could hold boards hostage by threatening to vote down the implementation report if their demands are not met.”
Ansie Ramalho, Chair of the King Committee, argued that a vote on the implementation report is neither constructive nor instructive.
“The intention behind King IV in providing for a non-binding advisory vote on remuneration implementation was to furnish the opportunity for engagement between the board and shareholders as a constructive avenue for airing views and resolving differences.
“A binding vote makes sense for the remuneration policy because it is forward-looking, but it does not make sense when it comes to the implementation report, which is why no other jurisdiction in the world has implemented it.”
Ramalhi said the implementation report is like the financial statements: it presents historical information and similarly should simply be presented to the AGM, but not voted on.
“We have no objection against consequences, but they are in the hands of shareholders who have the right to vote against the appointment of directors involved in remuneration decisions. We should also not lose sight of the fact that the numbers in the remuneration report are an outcome of the implementation of a policy supposedly previously approved by shareholders.”
The groups added that there are other important details that need to be carefully considered if the amendment is passed.
For example, if the remuneration committee’s implementation report is not passed, would the members have to step down immediately?
This would potentially mean that the new members of the committee would find themselves having to engage with the shareholders to understand their concerns without any insight into the rationale for the previous committee’s decisions.
Questions also surround whether there would be any other consequences beyond the committee members having to stand down, such as an additional action calling for a clawback of monies already paid.
Overall, the organisations warned that the new laws in their current format raise the issue of South Africa’s attractiveness as a place to do business, which has already been compromised.
“If we become the first country to introduce a binding vote on the remuneration committee’s implementation report, we risk being seen to be unfriendly to business and not consistent with well-established principles,” they said.
Read: Businesses still under immense pressure in South Africa
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