Issued on behalf of SARA and the IoDSA Remco Forum
The public consultation processes on the amendments to the South African Companies Act 71 of 2008 (the Act) appears to have been concluded, with the following main changes to the Act that affect remuneration governance and reporting likely to soon be signed into law:
S26: All companies with public interest scores above 100 if they are not subject to independent audit, and above a public interest score of 350 if they are subject to independent audit, including private companies, will have to provide details of the remuneration of their directors and prescribed officers on an individual, named basis, to any person on request and the payment of a prescribed fee of R100. This includes subsidiaries of larger companies which meet the public interest score cut off point(s).
S30A: All public companies and state-owned companies must prepare and present a remuneration policy for approval by ordinary resolution (threshold is 50% + 1 of all shareholders voting) at least every three years or when material changes to the policy are to be made.
S30B: These companies must also prepare a remuneration report including a background statement (letter from the remuneration committee chairperson), the above remuneration policy, and an implementation report including details for the most recently completed financial year of the:
– total remuneration for each of the directors and prescribed officers, on a named basis;
– total remuneration of the lowest and highest paid employees;
– average total remuneration of all employees;
– median total remuneration of all employees; and
– the ratio between the total remuneration of the top five per cent highest paid employees and the total remuneration of the bottom five per cent lowest paid employees of the company.
Employees included for purposes of the reporting of the pay gap, will be as per the definition of “employee” under S213 of the Labour Relations Act 66 of 1995.
The remuneration report (consisting of the three parts stated earlier) will be subject to annual approval by shareholders by ordinary resolution (50%+1 of shareholders voting), and if it is not approved, then, at the next AGM:
– the committee responsible for executive remuneration must present an explanation on the manner in which the shareholders’ concerns have been taken into account; and
– the non-executive directors on the remuneration (or equivalent) committee that have served for at least 12 months must stand for re-election to the committee.
In the event of a second consecutive failed vote of the remuneration report, ie at the second AGM, the affected remuneration committee members will need to step down from that committee at that second AGM, for at least two years but may continue to serve as directors on the board, provided they successfully stand for re-election at that second AGM.
SARA and the IoDSA Remco Forum participated in several rounds of consultations on the proposed changes, and raised several issues for consideration, including the privacy, competition, and security risks of providing remuneration details of a large number of private companies to any person, regardless of reason, as well as the degree of sanction on remuneration committee members which is disproportional to that of other roles. Further practical suggestions were made including:
– the definition of remuneration to be used for this purpose;
– the scope of employees to be included in the remuneration gap reporting, with the current definition including temporary and part-time employees, which would distort the reported values; and
– the unjust and discriminatory treatment of remuneration committee members in the case of a failed vote on the remuneration report.
It appears that no changes were made to the current version of the CAB following the most recent consultations. There were however significant changes following previous consultations, with the previously proposed “one strike” rule for the committee being ameliorated to the current “two strike” version. This means that the step-down sanction is now only required after two consecutive failures on the remuneration report. Furthermore, the previous period of ineligibility to serve on the committee was three years which has been reduced to two years.
Reward governance professionals will now need to apply their minds to the practical details of effective compliance with this impending legislation and sensible interpretation and disclosure practices that clarify remaining areas of uncertainty. Consideration will need to be given to implementation of the intended rules with integrity, mitigation of any unintended consequences in the final version of the legislation, and retention of the best of the King IV principles that have been the basis of good practice in the past as well as the JSE listing requirements.
SARA and the IoDSA Remco Forum have formed a working group that will draft further guidance notes and recommended practices to support the Reward profession as part of the next steps of this journey. These guidance notes will aim to achieve consistent interpretation of the legislation, and reduce confusion created through the current drafting. Be on the look-out for more details as this work unfolds and/or participate in the various SARA and/or IODSA events for more information.