Companies Amendment Act slammed for not being business friendly

The Companies Amendment Act has been criticised for being anything but business friendly, especially since the president has repeatedly promised to ensure that government makes it easier to do business in South Africa.

“Some of the amendments are understandable, but there are a few which are not clearly drafted and others where the implications could pose risks to remuneration governance and ultimately the performance of companies,” says Laurence Grubb, exco member at the South African Reward Association (SARA).

Grubb says companies must be aware of specific amendments to the Companies Act which are very concerning as they require important changes to remuneration policies and practices as well as the reporting on remuneration in the Annual Integrated Report.

“In an ideal world, decisions and disclosures are based on principle as opposed to being forced by law, so that all stakeholders have a say in reaching an ideal outcome, not just shareholders. However, we do not live in an ideal world,” says Nicol Mullins, president of SARA.

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Voting for remuneration policy every 3 years

Section 30A, of the Companies Amendment Act, that provides for shareholders, by ordinary resolution (50% +1), to approve or reject a company’s proposed remuneration policy or any amendments every three years, unless there is a “material” change that warrants shareholder approval within the three years.

“This means that unless shareholders in future approve material changes to the remuneration policy, it cannot be implemented. Although we believe that shareholder consultation is necessary and should be in place, we are concerned about the fact that the inability to make required changes to the policy could restrict the ability of the remuneration committee to introduce changes which are appropriate in a certain set of circumstances or context,” Mullins says.

Shareholders can reject a remuneration report

Section 30B, that provides for shareholders, again by ordinary resolution, to approve or reject a company’s remuneration report. But what happens if the remuneration report fails by virtue of dissatisfaction with decisions taken by the committee disclosed in the implementation report?

“Our view is that the emphasis in the remuneration report should be on the implementation report and that the policy will only be deemed as a background document as shareholders have a separate opportunity to cast a vote on the policy.”

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Mullins says if the vote on the policy fails, the fall back is to the last approved policy which may be the same one which was approved in the most recent AGM. The implementation report presents what was implemented in the prior year. The outcomes of the committee’s decisions disclosed in the implementation report cannot be undone even if the remuneration report fails to receive adequate support in the ordinary resolution.

“If the remuneration report is not approved at the first AGM after the implementation date of the Act, the committee must engage with shareholders and present feedback on how these concerns were addressed in the remuneration report tabled for an ordinary resolution at the next AGM and they must be re-elected onto the Remuneration Committee.

Problems if report does not pass second time

“However, if the remuneration report in the second consecutive year does not pass the ordinary resolution, the incumbent non-executive members of the remuneration committee, who served a full 12 months during the report’s financial year must step down from the committee and may not serve on the committee again for the next two years.”

They may remain on the board if they have been re-elected in terms of the board’s rotation schedule under the Memorandum of Incorporation. The execution of this requirement needs regulations to the Act, which are not available yet.

In the meantime, Mullins says boards must consider how they will go about structuring their remuneration committees to be prepared for situations where they are faced with two consecutive failed votes on the remuneration report. The board will then need to appoint a new remuneration committee from the remaining independent non-executive directors.

Integrity and continuity of the remuneration committee

Grubb says deposed committee members take with them vital institutional knowledge, organisational insights, scarce technical knowledge and years of experience. Independent directors of this calibre are rare.

“There is no B-team standing by to take over and therefore, their loss may impact remuneration governance in an organisation and threatens its continuity while new directors are sourced. Boards may need to have more independent non-executive directors to provide for such a situation, making boards more expensive.”

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Pay gap reporting

Section 30B also requires that companies report the pay gap between the top 5% of their earners and the bottom 5%, which is different from the Labour Relations Act’s requirements.

Grubb says the South African media has positioned this amendment as a sure way to lower the country’s terrible Gini coefficient. However, he points out, the Gini coefficient factors in unemployment. By halving unemployment our Gini coefficient drops to the average of the global figure.

“Reporting the pay gap will not improve the Gini coefficient. It can only be achieved by reducing unemployment.”

Definition of an employee

According to Grubb, the Companies Amendment Act draws the definition of “employee” from the Labour Relations Act, which includes learners and part-time workers without determining that the earnings of these part time employees be annualised.

“In addition, although learners and graduate trainees are considered employees, they typically do not receive a salary but a stipend while they learn and develop which improves their ability for future full-time employment and commensurate earnings.

“This ratio will increase a company’s real pay gap, for which it may be chastised by its shareholders. A more informative reporting framework needs to be adopted to factor out data points which will lead to spurious results which are not a true reflection of the remuneration practices implemented.”

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