Issue: April 2005


The excellent series on executive remuneration, put together by Business Report, exposes a raw nerve in the mired debate over South Africa’s corporate governance. There’ll be those who consider that the remuneration levels, detailed in the series, are deserved; there’ll be others who believe they aren’t. So what?

The relevant remuneration committees don’t need to justify them. Neither do the recipients. Stakeholders who might recoil in shock and horror are impotent to resist. Of course, the boards of the companies that approved the remuneration awards are "accountable" to shareholders. Again, so what?

For all its high-minded objectives, the King Code is pretty limp on the means to contain executive excess. So, too, is the Companies Act. In the face of their fine intentions is the cold reality that, to all intents, company boards perpetuate themselves.What shareholders don’t like, they can lump.

Self-perpetuation is a practice unlikely to be eternally tolerated. Brian Molefe, head of the Public Investment Commissioners, came up against it last year when the PIC sought nomination of a director to the Sasol board. To be sure, after the PIC’s eventual success, there’ll be more of the same. Last month, Cosatu retirement-funds coordinator Jan Mahlangu stated that he’d move for the appointment of directors and remuneration-committee chairpersons onto boards of companies in which Cosatu funds are invested.

Equally certain, there’ll be resistance. It will be over the drawing of lines between shareholders acting as owners (for example, by appointing directors) and boards asserting their responsibility to run the company (for example, by appointing executive management).

It will also be over distinctions between ownership and control, between shareholder intervention and management prerogative. At present, shareholders have the rights only to attend general meetings and to receive dividends. Boards can see and hear shareholders, but are not obliged to listen. The exception is where a shareholder has control, in which case it would effectively control the board – although a board is supposed to act in the interests of the company, not its shareholders or even its controlling shareholder.

Where there’s an inner circle of executive and non-executive directors, beholden for their appointments to one another and impenetrable to outsiders, back scratching is an inevitable temptation

Exorbitant remuneration, by whatever standard, is sometimes a consequence. The King Code seemed to believe that disclosure of directors’ pay would dampen it. Instead, peer pressure has been upward. Not surprising that the PIC and Cosatu have signalled their intentions to lead the charge on board appointments; without the right of shareholders to elect directors, in practice and not only theory, corporate governance fails the test of democracy.

They have at least two things going for them. One is the Comparex precedent.

In December 2003, the Securities Regulation Panel ruled that three asset managers, which between them owned more than 35% of Comparex on behalf of beneficial shareholders, could reconstitute the company’s board. Allan Gray, Investec Asset Management and Sanlam Investment Management then proceeded to do so. Essentially, they assumed control of the company via the board – without making an offer to minorities – because their right to vote at the general meeting for the appointment of new directors was recognised.

The second is the Department of Trade & Industries guidelines for corporate law reform, published last year for consultation. The document states: "Shareholders also have the right to elect directors."

So there.

Allan Greenblo
Editorial Director