On 1 October 2021, the Minister of Trade, Industry and Competition published the Companies Act Amendment Bill, 2021 (the Bill). The Bill seeks to amend the Companies Act, 71 of 2008 (Companies Act) which commenced more than a decade ago. Since its commencement, certain loopholes and deficiencies have been identified in the implementation of the Companies Act and certain other amendments have become necessary in order to keep up with current trends. The Bill seeks to address these issues and was gazetted following engagements between Government and a number of interested stakeholders since September 2018 when the first draft of the Bill (2018 Draft) was published for public comment.

In a series of five alerts over the coming weeks, we will provide an overview of the proposed amendments to the Companies Act as set out in the Bill and, where noteworthy, give our views as to the potential implications thereof.

To a large extent this version of the Bill does not differ significantly from what was proposed under the 2018 Draft. However, there have been significant amendments made in some areas that have been the subject of extensive discussions between business and labour constituencies and government representatives in the past. We discuss one of these amendments in today's alert, being to the reporting of remuneration of directors, public officers and employees of companies and the requirement to have a remuneration policy in relation to directors' and public officers' remuneration.

Section 30A has been introduced by the Bill to implement a culture of transparency and accountability in relation to executive remuneration but is seen by some as a controversial addition that may have unintended consequences.

Background

The Bill provides for significant augmentation in the levels of disclosure of executive remuneration via the addition of section 30A to the Companies Act. Section 30A is intended to address what the Department of Trade, Industry and Competition (DTIC) describes as the inequalities and injustices of excessive remuneration (particularly at the highest levels of a company) and significant remuneration gaps between the top and bottom levels of a company. The DTIC explains that section 30A provides for:

  • additional shareholder control over excessive remuneration and the perceived injustices associated with that;
  • curtailing a board’s desire to award excessive remuneration for fear of reputational harm; and
  • entrenching good corporate governance principles as contemplated under the King IV Report on Corporate Governance (King IV) and international best practice.

Section 30A makes reference to three different documents: a remuneration report; a remuneration policy; and an implementation report.

Remuneration report

The remuneration report is the overarching document, which contains both the remuneration policy and the implementation report. Section 30A(3) lists the information that must be contained in the remuneration report, being:

  • a background statement;
  • the remuneration policy (forward-looking);
  • the implementation report containing details of remuneration and benefits received by each director or prescribed officer (backward-looking);
  • total remuneration of the employee of the company with the highest total remuneration (including salary, benefits and all incentives);
  • total remuneration of the employee of the company with the lowest remuneration; and
  • average remuneration of all employees, median remuneration of all employees and the remuneration gap reflecting the ratio between the total remuneration of the top 5% highest paid employees and the bottom 5% lowest paid employees of the company.

We note that the Bill does not yet have a definition for "remuneration" and the DTIC has invited public comment on this issue. The Bill also does not have explicit definitions for "remuneration report", "remuneration policy" and "implementation report", which would be useful when interpreting section 30A and its relatively convoluted drafting.

In terms of section 30A(4), the remuneration report must be approved by the board of the company and presented to the shareholders at the annual general meeting (AGM). Section 30A(4) further states that the remuneration report must be voted on by the shareholders for approval as contemplated in subsection (6) which states that the implementation report and the remuneration policy shall be construed as separate documents with separate voting requirements, which shall be approved by ordinary resolution. Our inference from this is that the Bill's intention is that only the remuneration policy and the implementation report will require shareholder approval (by ordinary resolution) and not the remuneration report itself. However, this is not entirely clear, and the next draft of the Bill should, hopefully, remove any ambiguity in this regard.

Remuneration policy

The remuneration policy is a forward-looking document. In terms of section 30A(1) and (2), a public company or state-owned company must prepare and present the remuneration policy (to be contained in the remuneration report) for directors and prescribed officers at the AGM to be approved by ordinary resolution at the AGM. Once approved, the remuneration policy does not require further approval until either three years have passsed from the date of the previous approval, or a material change is to be made to the remuneration policy.

Strangely, section 30 does not specify what needs to be included in the remuneration policy. However, it is assumed that remuneration policies will state general principles and guidelines for remuneration (mirroring King IV requirements for remuneration policies) but not dictate actual future remuneration of directors and prescribed officers. The requirement for binding shareholder approval of executive remuneration policy is a deviation from King IV, which provides shareholders of listed companies with opportunities to pass non-binding advisory votes on companies' remuneration policies and implementation reports.

Therefore, the Bill has taken a step further than King IV in instating influence and control by shareholders over executive remuneration, and there are, indeed, dangers in doing so (as discussed in detail below).

Section 30(7) stipulates that, where the remuneration policy is not approved by ordinary resolution, it must be presented at the next AGM or at the shareholders' meeting called for such purpose, until the approval of the remuneration policy is obtained. Only once the changes to the remuneration policy are approved by the shareholders by ordinary resolution, may the changes be implemented (section 30(8)).

Implementation report

Contrary to the remuneration policy, which is forward-looking, the implementation report must contain details of remuneration and benefits received by each director or prescribed officer of the company in terms of sections 30(4), (5) and (6) of the Companies Act and, is consequently backward-looking in nature. Ultimately, it is apparent, albeit not explicit, that the Bill imposes shareholder approval requirements for both historical and future remuneration.

The implementation report must be approved by ordinary resolution of the shareholders and if not approved:

  • at the next AGM, the board committee responsible for remuneration matters must present an explanation on the way in which the concerns raised by shareholders when previously voting against the implementation report have been addressed (which is not dissimilar to the principles of King IV); and
  • the non-executive directors serving on such committee must stand down for re-election each year that the implementation report is voted down by the shareholders (it is not clear whether such directors should stand down at the same meeting or at the following meeting).

As with the remuneration policy, it is not clear how directors and prescribed officers should be remunerated during the interim period, until approval is obtained, however we expect that, from the implementation date of the Bill, no changes (whether an improvement or a reduction) in executive remuneration may be possible without shareholder approval.

Conclusions

The goal of greater transparency and accountability in companies has been pursued in countries around the world, including the United Kingdom and Australia. However, the right balance between transparency, accountability and free economy needs to be met and the particular idiosyncrasies of the South African economy need to be taken into account. South African companies need the scope and autonomy to be able to incentivise executives - particularly given that overseas opportunities are lucrative and attractive to local talent.

There is also a greater risk that companies may be incentivised to retain fewer employees on their payrolls, in order to reduce the publicised remuneration gap and avoid reputational harm. Outsourcing of lower level employees may become the norm and there may be increased reliance on labour broking, which itself has been a hotly debated topic in recent years, given that the practice of labour broking is seen by many as an exploitative business designed to circumvent labour laws and regulations.

Furthermore, the risk of embarrassment that may result from a non-executive director being required to retire and stand for re-election if their implementation report is voted down by the shareholders, may further dis-incentivise people from taking on these kinds of roles, which would have a particularly negative impact on the governance and maintenance of a good balance between executive and non-executive representation on boards.

Ultimately, it is hoped that greater transparency will neither stifle companies' abilities to properly attract and retain people who are key to management and the strategy of their businesses, nor indirectly adversely affect employment at lower pay-grade levels. In the interim, it is clear that section 30A of the Bill needs further elaboration and edification in order to eventually become effectual as, in our view, its provisions are currently too vague and convoluted.