The recent coming into effect of new sections 30A and 30B of the Companies Act, No. 71 of 2008 (Companies Act), together with the concurrent amendments to section 30(4), marks a significant shift in the regulation of executive remuneration.
The amendments are aimed at achieving greater transparency on executive pay and bringing this increasingly important public and policy consideration more in line with international developments. The main rationale appears to be, firstly, to highlight the pay gap between executives and the rest of the workforce and, secondly, to introduce measures that allow this gap to be scrutinised more closely.
This note is not intended to deal with the application of these changes in general. Rather, it highlights one specific consequence arising from them. Executive directors of public companies in the non-listed environment will no longer be able to pull a veil over their ‘real remuneration’ by only asking shareholders to approve their nominal directors’ fees when the company’s annual general meeting (AGM) comes around, without disclosing their actual aggregate earnings received, or to be received, as executive employees or officers of the company.
It should be noted that, even before the coming into effect of the amendments, public companies whose shares have been listed on the securities exchange operated by JSE Limited (JSE) were already subject to a stricter regime when it comes to executive remuneration, as provided for under King IV (and now King V) and the JSE Listing Requirements. In fact, when it comes to the 25% non-binding shareholder advisory vote regime applicable to a listed company’s remuneration policy and implementation report per the JSE Listing Requirements, these new amendments to the Companies Act will in effect usurp such regime – albeit now on a binding shareholder vote basis at a higher threshold of 50% +1 (ordinary resolution).
The more notable shift is therefore likely to be felt in the non-listed public company environment, where there has historically been far less direct regulation of executive remuneration.
The new statutory requirements
In summary, these legislative changes now prescribe the following statutory requirements:
- New section 30A provides that each public and state-owned company must prepare a prospective remuneration policy for approval by shareholders, by ordinary resolution requiring 50% + 1 of the votes exercised at an AGM, and thereafter every three years or upon any material change to the already approved policy. It is still unclear what the consequences will be if such approval is not obtained, other than that the policy must be resubmitted for approval at the next AGM. To the extent that a prior remuneration policy was approved, it will most likely continue to apply until such time as shareholder approval has been obtained for a new policy.
- New section 30B provides that each such public and state-owned company must also prepare an annual remuneration report in respect of the previous financial year for approval by shareholders at each AGM. This must include a report on the implementation of the then-approved remuneration policy, although the specifics of what is required for this report still need to be fleshed out in terms of regulations yet to be published. If shareholders do not approve the remuneration report at the AGM, the remuneration committee must explain at the next year’s AGM how shareholder concerns have been addressed, and the non-executive directors then serving on the remuneration committee for 12 months or more must stand for re-election as committee members. If the remuneration report is again not approved, the further consequences include that the non-executive directors must stand down from the committee for a period of two years.
- Amended section 30(4)(a) provides that each company, whether private, public or state-owned, which is required to prepare audited annual financial statements under the Companies Act, must include in the remuneration disclosures forming part of such audited annual financial statements the aggregate remuneration and benefits received by each individual director and each prescribed officer, both of whom must be named. Prior to these amendments, the section referred to ‘each director or individual holding any prescribed office’, which gave rise to uncertainty as to the exact application of this disclosure obligation.
The previous position on directors’ fees
In terms of section 66(8) of the Companies Act, and barring anything contained in a company’s MOI to the contrary, a company may pay remuneration to its directors for their services as directors. Section 66(9) then provides that such remuneration may be paid only in accordance with a special resolution approved by shareholders (usually requiring a 75% vote) within the previous two years.
Prevailing practice is for companies to include a standard special resolution in their AGM notices to shareholders, setting out the remuneration to be earned by the company’s directors for their services as such. This usually takes the form of a payment to be received by each director from the company per board and board sub-committee meeting attended.
When it comes to executive directors, such directors’ total remuneration often comprises (i) fees earned for their services as directors, if any, and (ii) remuneration and benefits received in their capacity as executive employees or officers of the company.
It is only the former that falls within the ambit of the shareholder approval contemplated in section 66(9). The latter is usually provided for in the executive employment agreement between the company and the executive, which is mostly kept confidential and not disclosed to shareholders. Nor does it require any form of shareholder approval.
More often than not, the special resolution proposed in the AGM notice will record that the executive directors do not receive any remuneration for their services as directors, and that the approval sought will only apply in respect of non-executive directors on the company’s board.
Shareholders therefore used to have no real say when it came to remuneration earned by executive directors in their capacity as employees and/or officers of the company, which may include profit share arrangements, incentive payments, benefit payments and the like, ultimately affecting shareholder returns.
The broader remuneration disclosure now required
The implementation report to be included in the annual remuneration report must include details such as:
- The total remuneration received by each director and prescribed officer of the company;
- The total remuneration in respect of the employee with the highest total remuneration;
- The total remuneration in respect of the employee with the lowest total remuneration;
- The median remuneration of all employees; and
- The remuneration gap reflecting the ratio between the total remuneration of the top 5% of the highest-paid employees and the total remuneration of the bottom 5% of the lowest-paid employees of the company.
The definition of an “employee” is as set out in section 213 of the Labour Relations Act, 1995 (LRA), being:
- Any person, excluding an independent contractor, who works for another person or for the state and receives, or is entitled to receive, remuneration; and
- Any other person who, in any capacity, contributes to the operation or conduct of an employer’s business.
“Total remuneration”, to be used for purposes of each remuneration calculation contained in the remuneration report, entails all salary and benefits received, including employer contributions to benefit funds, as well as short-term and long-term incentives such as share options, profit shares and incentive awards.
The practical effect for executive directors of non-listed public companies
Accordingly, full disclosure of the aggregate remuneration received by executive directors of public companies will now be required by law and be subject to shareholder approval.
Although remuneration to be received by directors for their services as directors will continue to require shareholder approval by special resolution in terms of section 66(9) on a two-year rolling basis, the total remuneration to be received by executive directors, being their aggregate employment remuneration, which includes benefit payments, profit share arrangements, incentive payments and the like, or any material change thereto, will now also require shareholder approval, albeit in terms of the lower threshold of an ordinary resolution.
Although the main rationale behind the introduction of sections 30A and 30B, and the other amendments to section 30, appears to be to achieve greater transparency on executive pay and open the pay gap to closer scrutiny and participation by stakeholders, this new accountability regime will also go a long way in making it difficult for directors to ‘circumvent’ shareholder approval when it comes to the real remuneration they receive from the company.
This represents a significant shift in accountability and governance for public companies, especially in the non-listed environment where there was previously no real regulation.
