The Institute of Directors in South Africa (IoDSA) and the King Committee say that, although they remain supportive of reform efforts in what is a highly contested area, some of the proposals contained in the Companies Act Amendment Bills 2023 relating to remuneration are problematic.
Both bodies agree that the proposal to have the remuneration policy tabled for approval at the AGM only every three years or when material amendments are made is constructive in that it gives shareholders a real voice. It is also in line with international leading practice.
However, they are ringing alarm bells over proposals relating to firstly the voting on the remuneration implementation report and secondly, the consequences of the report not being approved at the AGM.
The issue here is that in terms of the proposed Bill, the Remuneration Committee (RemCo) 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, RemCo members are obliged to step down from the committee, for a period of at least three years, although they would be able to remain on as board directors.
Professor Parmi Natesan, CEO of the IoDSA, says 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 RemCo–this at a time when boards are under pressure to reduce in size.
“The former RemCo members could suffer considerable reputational damage anyway,” she says. “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, argues 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. 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.”
Dr Ronel Nienaber, chair of the IoDSA remuneration committee forum, adds that there are important details that need to be carefully considered if this amendment is passed. For example, if the RemCo’s implementation report is not passed, would the members have to step down immediately? This would potentially mean that the new members of the RemCo would find themselves having to engage with the shareholders to understand their concerns without any insight into the rationale for the previous RemCo’s decisions.
Nienaber also asks whether there would be any other consequences beyond the RemCo members having to stand down, such as an additional action calling for a clawback of monies already paid.
Dr Mark Bussin, member of the King Committee and the IoDSA remuneration committee forum, raises the issue of South Africa’s attractiveness as a place to do business, already being compromised. “If we become the first country to introduce a binding vote on the RemCo’s implementation report, we risk being seen to be unfriendly to business and not consistent with well-established principles,” he says.