MARTIN HOPKINS: Companies brace for greater public scrutiny of remuneration and director conduct

Just when company directors and executives were preparing to wind down for the weekend on Friday July 26, the president made the significant announcement that he had signed the first and second companies amendment bills into law, signalling an unprecedented shake-up of remuneration and financial disclosure practices in SA.

While the timing of the announcement might have been unexpected, the content of the two bills is not. The Companies First Amendment Bill on remuneration and financial disclosure was initially tabled in 2018, and the second bill responds to state capture inquiry recommendations on director delinquency and liability from 2022.

The signing of both bills follows long-running and escalating public demands for greater transparency on executive remuneration, calls to narrow the pay gap between the highest- and lowest-paid workers, and a push for the government to take action on the Zondo commission’s recommendations.

The coming changes are far-reaching and important for public, state-owned enterprises and certain private companies. There are some practical steps companies will need to consider making urgently to comply with the new remuneration disclosure requirements.

More say for shareholders

Shareholders in both public and state-owned companies are being given a bigger say in the remuneration of directors and prescribed officers. These companies are now duty-bound to prepare binding remuneration policies, as well as to meet the new pay gap reporting requirements on the highest, lowest, average, median, highest 5% and lowest 5% ratio of total remuneration in the company.

All of this has major implications for companies, both in terms of the content of their remuneration policies and implementation reports, and on how these are approved by shareholders. When it comes to content, companies will need to include additional elements to their remuneration policies to cover matters that are usually within the discretion of the remuneration committee/board.

In their implementation reports, it will be crucial to include the principles the company applies in governing annual increases, executive director and prescribed officer remuneration on appointment and termination payments, and changes to performance conditions attached to short-term and long-term incentives.

In the longer term, the style and structure of remuneration policies will need to become more principle-based, shifting as many details as possible to the implementation report, such as specific performance targets for short-term incentives and long-term incentives. This is because the remuneration policy needs to be approved only every three years, so regular changes within the policy need to be managed within the implementation report, which is approved annually.

The UK has had binding remuneration policies for company directors for many years, so consideration of UK company director remuneration reports will be very useful.

Pay-gap reporting

The new pay-gap reporting requirements raise some complex reporting decisions for companies on the scope of “employees”, such as whether to report on the company’s employees globally or only in SA; whether to include temporary employees, contractors and students; and whether to report on employees of group entities such as subsidiaries, associates and joint ventures. It will also be important to consider what constitutes “total remuneration”, such as on-target, total single-figure or payroll pay (cash flow).

AGM resolutions

The new remuneration disclosure requirements have important implications for shareholder approval of remuneration policies and reports. Remuneration reports must be approved by boards, presented to shareholders at the AGM, and voted on by ordinary resolution. The remuneration policy needs to be approved by shareholders at least every three years. These are binding ordinary resolutions instead of non-binding advisory resolutions, which means companies need to update the AGM resolutions to reflect the new approval requirements.

The requirements actively discourage failure to obtain shareholder approval. When approval is triggered by one or two consecutive failures of the remuneration report resolution, sanctions must be imposed on members of the board committee responsible. Such sanctions may include having to stand for re-election to the committee, stepping down from the committee for at least two years, and, potentially, continuing to serve as a director only if re-elected to the board.

Time to act against delinquents

There has been widespread public dissatisfaction over former directors or officers instrumental in state capture being let off the hook simply because time has run out for claims to be made against them or for them to be declared delinquents. The current time bar to declare a person delinquent or under probation is two years after the person ceases being a director, while the time bar for a claim for director liability for fiduciary duties is three years.

Reflecting changes proposed by the Zondo commission, both time bars are being extended through the Companies Second Amendment Bill. Both of these provisions apply retrospectively. When it comes to director and officer liability, on good cause a court may extend the period to make a claim beyond the existing three-year prescription period. Similarly, concerning director delinquency and probation, a court may extend the period to declare a person delinquent or under probation to five years after that person ceases to be a director, or a longer period determined by a court on good cause.

The various changes contained in the companies bills have been a long time coming. The time is nigh for companies affected to ready themselves for the big changes that are coming.

• Hopkins is head of reward advisory services at Bowmans.