Financial Mail

NEW PAY RULE POSER

The supposedly final version of the Companies Amendment Bill is in play — but the business community is likely to be less than enamoured with its stipulatio­ns around the remunerati­on report

he latest, and understood to be final, iteration of the Companies Amendment Bill (CAB 27B) contains a crucial change unlikely to please the swathes of businesspe­ople who pushed back against the tougher stance on remunerati­on contained in the earlier (27th) version.

CAB 27B essentiall­y introduces the two-strike rule, which means nonexecuti­ve directors who are members of the remunerati­on committee will have to stand down from the board if the remunerati­on report is rejected for two consecutiv­e years. They can immediatel­y stand for re-election to the board, but cannot be reappointe­d to the remunerati­on committee for the following two years.

Trade, industry & competitio­n minister Ebrahim Patel, who is responsibl­e for the Companies Act, has given a little to the business community by reducing the suspension period from three years to two. But he has countered that by introducin­g the requiremen­t for re-election to the board. This is significan­tly more onerous than CAB 27’s sanction, which merely obliged the nonexecuti­ve directors on the remunerati­on committee to step down from the committee for at least three years.

The proposed amendment will bring South African legislatio­n partly into line with Australia, which implemente­d the two-strike rule years ago. However, South African remunerati­on committee members can take comfort from the steep requiremen­ts protecting them from forced re-election. At least 50% of shareholde­rs must vote against the report on two consecutiv­e years. Australian law requires only

25% opposition.

TThere are no known examples of South African shareholde­rs voting against the remunerati­on report in such large numbers in two consecutiv­e years, though TFG and Truworths have come close. In addition, it’s likely that institutio­nal shareholde­rs will be more hesitant to oppose remunerati­on resolution­s that have consequenc­es. At present the resolution­s are merely advisory and used by shareholde­rs to indicate their support of, or opposition to the policy and its implementa­tion. Currently, if more than 25% vote against the policy or its implementa­tion, the board is only required to engage with opposing shareholde­rs.

This has been a relatively safe way for shareholde­rs to express their opposition and garner brownie points from the public. In general, institutio­nal shareholde­rs tend to shy away from taking any public stance on their investee companies.

One leading corporate law expert says the tougher stance, with the prospect of being forced off a board, has significan­t implicatio­ns for directors as it could be interprete­d as them failing in their fiduciary duties. It is likely to spark another round of fearmonger­ing about the potential loss of remunerati­on committee skills, though this doesn’t seem a major problem given these committees’ steep reliance on consultant­s and benchmarki­ng to reach their decisions.

In addition to the tougher stance on voting, the CAB requires companies to provide detailed disclosure on the remunerati­on of the highest- and lowest-paid employees. The total remunerati­on of the top 5% of earners and the bottom 5% must also be disclosed.

While there has been much obfuscatin­g debate about precisely which executive remunerati­on figure should be used to measure the pay gap, the CAB makes absolutely clear what must be included. And it’s evident there’s no chance of getting away with the guaranteed pay figure favoured by business. This is generally about onethird of the total remunerati­on, a figure substantia­lly boosted by the inevitable payment of short- and long-term incentives. CAB requires that these incentives be included.

These precise details will no doubt be welcomed by remunerati­on committee members such as Sasol’s Mpho Nkeli. In response to questions raised at the recent Sasol AGM, Nkeli said the board would not disclose details of the pay gap until there were agreed disclosure standards, as it would lead to confusion. “We want to assure you we take our commitment to the issues seriously,” added Nkeli.

In his address to the trade, industry & competitio­n portfolio committee last year, Patel said he believed improved disclosure would have a shrinking effect on the level of executive remunerati­on: “Whether due to factors of embarrassm­ent or otherwise, people who would otherwise have received manifestly inflated remunerati­on may be reluctant to do so.”

His belief is at odds with almost all the evidence to date, which shows remunerati­on has shot up dramatical­ly since the introducti­on of disclosure at the beginning of the 21st century.

Patel also pointed out, presumably to chill the inevitable opposition from business, that tougher, more prescripti­ve legislatio­n was an option his department had decided against for now.

Kwanele Ngogela of Just Share, a nonprofit that advocates for transparen­t and fairer pay, tells the FM it is to be expected that companies would not only oppose the introducti­on of an effective say on pay, but also the obligation to disclose the pay gap. Ngogela says Just Share would like to see more details of the lowest-earning jobs used in the comparativ­e figure.