“Business friendly” Companies Amendment Act is anything but

The promulgation of the Companies Amendment Act 16 of 2024 (the Act) introduces, among others, sections 30A and 30B to the Companies Act 71 of 2008. The Act was published in the Government Gazette on 30 July 2024, but a promulgation date is still awaited.

“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).

While media outlets to date have focussed on and praised a few of the amendments, a raft of similar comments on specific amendments which are very concerning to the implementers thereof, were ignored - companies need to be aware of these as they will 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 to be based on principle versus being forced by law, so all stakeholders have a say in reaching an ideal outcome, not just shareholders.  We do, however, not live in an ideal world.” says Nicol Mullins, President of SARA.

The sections in summary
S30A 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 3 years.

“This means that unless shareholders in future approve material changes to the remuneration policy, these cannot be implemented. Although we believe that shareholder consultation is necessary and should be in place, we are concerned with 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,” says Mullins.

S30B provides for shareholders, again by ordinary resolution, to approve or reject a company’s remuneration report. However, as the remuneration report (which includes the Chairman’s background statement, policy and implementation report) will now be voted on every year, it means that if the remuneration report fails by virtue of dissatisfaction with decisions that were taken by the Committee and were disclosed in the implementation report; our view is however 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.

If the vote on the policy fails, then 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, in respect of the year under review. The outcomes of the Committee’s decisions which are 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, then the committee needs to 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. However, if the remuneration report in the second consecutive year does not pass the ordinary resolution, then 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 however remain on the board if they have been re-elected in terms of the board’s rotation schedule under the MoI. The execution of this requirement needs regulations to the Act, which are awaited. However, in the meantime, boards need to 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.

Pay gap reporting
Section 30B also requires that companies report the pay gap between the top five percent of their earners and the bottom five percent, which is different from the Labour Relations Act 1995 (LRA) requirements.

The South African media has positioned this amendment as a sure way to lower the country’s terrible Gini coefficient. However, the Gini coefficient factors in unemployment and by halving unemployment our Gini coefficient drops to the average of the Global figure.

“Reporting the pay gap won’t improve the Gini coefficient; that can only be achieved by reducing unemployment,” says Grubb.
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Employee definition
The Act draws the definition of “employee” from the Labour Relations Act, which includes amongst others, learners and part-time workers without determining that the earnings of these part time employees be annualised. In addition, albeit that learners and graduate trainees are considered employees, they typically don’t receive a salary but a stipend whilst they learn and develop which improve 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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Remuneration committee integrity and continuity
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, so their loss may impact remuneration governance within an organisation and threatens its continuity while new directors are being sourced,” says Grubb. Boards may need to have more independent non-executive directors to provide for such a situation, making Boards more expensive.

Shareholder pressure
Increased shareholder engagement with companies on remuneration policies and practices offers companies a valuable opportunity to refine their approaches. The Act is designed to enhance transparency and requires greater company disclosure. However, the success of its implementation depends on collaborative stakeholder engagement, ongoing dialogue, and creating a shared understanding of the remuneration report. While critique can highlight areas for improvement, it is through collective participative effort and cooperation that the Act's objectives can be realised, fostering transparency and trust in the process.

ENDS

MEDIA CONTACT: Idele Prinsloo, [email protected], 082 573 9219, www.atthatpoint.co.za 
 
For more information on SARA please visit:
Website: www.sara.co.za 
X: @SA_reward
LinkedIn: South African Reward Association
Facebook: SARA – South African Reward Association

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