Allan Gray warns South African investors

The proposed Companies Amendment Bill will harm shareholder rights, weaken shareholder influence and diminish the quality of executive remuneration schemes. 

According to Allan Gray governance analyst Nicole Hamman, the proposed 2023 Companies Amendment Bill (CAB) seeks to integrate shareholder approval on executive remuneration into the Companies Act.

Hamman said that while there is room for improvement in the current process outlined in the JSE Listings Requirements, the CAB amendments do not improve the process for listed companies. 

Currently, JSE-listed companies present their remuneration policies and implementation reports annually. If more than 25% of shareholders oppose either resolution, the company must invite these dissenting shareholders to engage. 

This process allows shareholders to discuss their concerns with remuneration committees when opposition to remuneration resolutions is between 25% and 49%.

The traditional executive performance-pay structure includes a short-term incentive (STI) assessed annually and a long-term incentive (LTI) assessed over three years. 

In South Africa, the remuneration policy outlines the performance conditions and financial targets for the LTIs over the next three years.

Hamman said that these annual engagements on remuneration policies have been effective.  

“We have been able to encourage companies to include suitable performance conditions and set robust financial targets, as it is particularly difficult for remuneration committees (remcos) to amend these incentives once they have been awarded,” she said.

This means that annual policy engagement allows remcos to hear shareholders’ concerns and make improvements while still possible.

Under the CAB amendments, this process would look a lot different.

“Remuneration policies would only be tabled every three years, provided no material changes are made, and the resolution would be an ordinary one, which requires 50% shareholder approval to pass.”

She explained that, in practice, only 2% of the JSE’s top 100 companies’ remuneration policies obtained below 50% shareholder approval over the five-year period from 2019 to 2023. 

“In our view, this is not a reflection of the high quality of remuneration policies, but rather the predominance of average policies that are not poor enough to get voted down, largely due to the nature of shareholder makeup.”

“Given concentrated ownership structures in South Africa, an ordinary resolution threshold of 50% fails to accommodate scenarios where minority shareholders are strongly in opposition.”

Even if the JSE Listings Requirements stay the same, and issuers must invite dissenting shareholders to engage when there is more than 25% opposition, it is questionable how effective that engagement would be, since issuers have already received the 50% support required by the Companies Act.

“In the United Kingdom, remuneration policies are tabled every three years. As a result, companies tend to update policies once every three years.”

While the implementation report is proposed to be tabled annually locally, the policy dictates the limits of implementation. 

That means that if the remuneration policy is weak, shareholders won’t have much power or influence over the yearly implementation report, making it less impactful.

“We are concerned that the loss of meaningful shareholder engagement and the reduced resolution frequency will slow the pace at which policy improvements can be made, ultimately affecting the quality of remuneration schemes,” Hamman said.

Remuneration committees

Hamman explained that the consequences the CAB will have for remco members are also concerning. 

Currently, one-third of non-executive directors are re-elected each year. This means the chair of remco is typically up for re-election every three years. 

The CAB suggests that if the implementation report resolution repeatedly fails, there should be direct consequences for the remco members.

“Initially, it was very hostile towards issuers, requiring all remco members to step down following one failed implementation report.” 

The latest version is less harsh and includes a safeguard: consequences only apply to remco members who have served for more than 12 months and follow two successive failed implementation reports. 

If this happens, remco members will be barred from serving on the remco for two years.

“The main concern is that these stringent consequences will have the unintended effect of diminishing the value proposition of serving on remcos,” she said,

“Remco members have a specialised skillset. Our key concern is that it is unlikely that remco members will continue to serve on the board should they be declared ineligible to serve on the remco.”

“To ensure a balance of views, it is important that remco members are experienced and can provide an independent voice that challenges management and remuneration consultants, especially as remuneration consultants employed by management become more prevalent.”

High director turnover due to this amendment might reduce the quality of candidates for director positions and affect the quality of executive remuneration schemes, Hamman said.

“In our experience, positive shareholder activism requires time, and remcos require time to build relationships with management and shareholders in order to get improvements over the line.”

While there is a need for director accountability, the consequences should be more balanced so that non-executive directors are not deterred from participating on boards. 

“Our suggestion throughout has been that the remco chair should be the ultimate accountable party who stands for re-election following two successive failed votes, instead of all remco members.”

“Overall, we advocate for a balanced outcome, where shareholder rights are preserved while the quality of boards and executive remuneration schemes are not compromised.”