Issue: December 2011 / February 2012


Resolution needed

Does the new Companies Act go far enough? The answer depends as much on interpretation as on where one sits. Pension funds, being institutional investors, mustn’t sit on the fence.

Politically and socially, the hottest of hot potatoes in corporate life is executive remuneration. Across the world, afflicted by rapid-fire financial crises, boardroom excess is targeted in public outrage.

No less in SA. Trade unions hardly lack ammunition in pointing to widened pay disparities. Presenting his New Growth Plan earlier this year, Economic Development Minister Ebrahim Patel pleaded for moderate wage settlements.

But if company directors and senior executives are seen to receive guaranteed salaries and incentive bonuses out of kilter with inflation or value-added performance, wage restraint and job losses at the lower employee levels become the more difficult to justify.

There’s a heavy responsibility on company boards’ remuneration committees to promote perceptions of fairness. It goes to the heart of the governance aspect in corporate “sustainability”. Fairness isn’t entirely in the eye of the beholder. There are demonstrable rewards for failure as there are for stimulating long-term value.

Case by case, the new Companies Act empowers shareholders to make their own calls (TT June-Aug). But to pass judgment on remuneration policies obviously requires that shareholders make the effort to understand them; if not by direct engagement with companies then at least to satisfy themselves on the explanations in remuneration reports.

King III says that these reports, “to explain the remuneration policies followed throughout the company”, should focus particularly on “executive management and the strategic objectives it seeks to achieve” while providing “clear disclosure of the implementation of those policies”.

One size doesn’t fit all. There’s no overriding principle of what’s too much for one or too little for another. The attraction of shareholders being able to vote their approval or otherwise at companies’ annual general meetings is that they, whose investments are at risk, are the arbiters of fairness. And shareholders are as broad a church as pension funds themselves.

With all this transparency and accountability practised to the full, what if the majority of shareholders vote not to approve the remuneration policy? Precious little, it can be argued, apart from moral suasion that might or might not weigh with the board. In theory if nothing else, a dissatisfied shareholder can launch a derivative action (a lawsuit to protect all shareholders from improper management).

Otherwise, they can like it or lump it. For the new Act requires that shareholders approve in advance by special resolution – a 75% majority – the remuneration of directors “for their service as directors”. On one interpretation of the Act, it would include executive directors but only for “their service as directors”.

On this interpretation, the Act merely puts its toe into the approvals water. A vote on the remuneration policy is non-binding and, although the special resolution on directors’ remuneration is binding, it’s limited. It doesn’t embrace executive management which is where the most heated controversy over fairness usually focuses.

At s66 the Act “clearly differentiates between fees paid to directors for services as directors and other payments including salaries, bonuses, performance-based payments, expense allowances, pension contributions, share options, financial assistance and soft loans,” says a statement by the SA Institute of Chartered Accountants. “(These) do not need to be approved and can be paid.”

A corporate lawyer observes that there is no consensus as to whether payments to executive directors, for their jobs as managers, are governed by s66. He strongly believes that it isn’t: “The phrase ‘for their services as directors’ qualifies the word ‘remuneration’. If not, it would be tautologous.”

However, the section also defines remuneration to include “salary, bonuses and performance-related payments”. These are normally received by executive directors, in their management capacities, beyond the fees they earn as directors.

The final word might yet have to be uttered, either by the courts or by amendment to the Act, should ambiguity be contended. Parliament has taken half a step to bridge the divide between shareholder ownership and management control, a bridge that could lead it into a minefield.
It will take assertive shareholders (of the long-term variety, like pension funds) to set off the explosions when executive pay runs away from company performance. In practice, there needn’t be confrontation. Whether votes are binding or non-binding opens the door to pre-vote dialogue from which agreements can be reached.

Shareholders aren’t there to micro-manage companies. Their responsibility to ultimate beneficiaries (like members of pension funds) is that the directors accountable to them appoint managers capable of doing it for them at pay levels acceptable to them.

In the UK, government has put out a consultation paper on whether a binding vote for shareholders on deciding executive pay should be introduced – as in the Netherlands, Norway and Sweden – and at having employee representation on remuneration committees. It’s a debate that SA should follow keenly.


Another issue arising, in SA and elsewhere in the world, is that of executive remuneration and pay disparities. In the context of your discussions and work being done promoting CRISA, the opportunity should be taken to reflect on this matter.

What is the benefit to the few versus the cost to many? What is the cost of huge pay disparities within a society and, if we are concerned with long-term sustainability, what is the sustainability cost of these disparities?

This is becoming an increasing focus in the international community too. It will be useful if, in the same way that proactive steps were taken to develop CRISA, a proactive approach was taken to developing a different framework within which executive remuneration and pay disparities are dealt with.

-- Finance Minister Pravin Gordhan, launching the
Code for Responsible Investing in SA, July 19.

Greg Mankiw had noticed for some years that the students taking his economics class at Harvard University seemed overly concerned about preparing for their careers. This week, things appeared to change.

About 70 students walked out of Economics 10, the introductory course Prof Mankiw teaches, to protest at what they called a destructive brand of free-market economics...(that) “we believe, perpetuates problematic and inefficient systems of economic inequality in our society today”.

-- Financial Times, Nov 5.