President Cyril Ramaphosa signed the long-awaited First and Second Companies Amendment bills into law on 26 July. Once gazetted, the effective date, including any possible transitionary periods, will become clear.
Among several amendments, some of the most material relate to remuneration and have been the topic of heated debates and several comments over the past few years.
In addition to these amendments being critical considerations for boards of directors and remuneration committees (Remcos), boards of trustees should concern themselves with these company law changes.
As stewards of capital and in accordance with Regulation 28, trustees are required to take environmental, social, and governance (ESG) factors into consideration in their decision-making. Several of the amendments deal with ESG elements, such as remuneration and social and ethics committees (SECs).
In terms of the amendments, public and private companies that are required to be audited under the Companies Act will now need to list each individual director and prescribed officer’s remuneration by name in their annual financial statements, rather than grouping these together as many companies have done since the Act became effective in 2011. This is one of several meaningful disclosure enhancements for companies that may form part of private market portfolios.
The requirement to have shareholders vote on a company’s remuneration policy and remuneration reports (previously only applicable to listed companies through advisory or non-binding votes) has been made mandatory for all public and state-owned companies.
The remuneration policy will now require approval by ordinary resolution at the company’s annual general meeting and thereafter every three years or upon making any material amendments. A failed vote will require the policy to be resubmitted to the next AGM or special meeting, and changes to the policy may not be implemented until approved.
Similarly, the remuneration report will require an ordinary shareholder resolution for approval. In addition to individual remuneration disclosures, the remuneration report will need to include:
- The total remuneration of the highest and lowest earner in the company.
- The average and median remuneration of all employees in the company.
- The pay gap between the highest-paid 5% and the lowest-paid 5%.
If the report is not approved, the Remco must explain at the next AGM how shareholder concerns have been considered.
Additionally, Remco members are required to stand for re-election at the AGM where the report is presented. If the prior year’s implementation report is not approved at the second AGM, the Remco members may continue to serve as directors, if re-elected, but may not serve on the Remco for the following two years. Remco members who have served for less than 12 months are excluded from this requirement.
To consider ESG in decision-making effectively, trustees must be able to assess the quality of a remuneration policy and report, particularly how they link to and enable or detract from company performance and sustained value creation. These amendments place significant power in the hands of shareholders, requiring them to be increasingly informed and responsible in utilising this power.
Amendments have also been made to the requirements for SECs. Some of which trustees should be aware are:
- Public and state-owned company SECs will be required to consist of a majority of independent (as defined in the Act) non-executive directors.
- Public and state-owned company SEC appointments will require approval by an ordinary resolution of shareholders at the AGM, like the annual election of audit committee members at present.
Given the scope and breadth of ESG matters for which SECs are responsible, appointing appropriately skilled and experienced individuals on these committees should be of paramount importance for trustees.
Other amendments that active owners and stewards should note are:
- Relaxation of approval requirements for share buy-backs.
- Relaxation of intra-group financial assistance requirements.
- In response to the Zondo Commission recommendations, changes to director liability and delinquency prescription periods and delinquency and probation periods.
- Reduction of auditor appointment cooling-off periods.
Many retirement fund trustees rely on consultants, asset managers, and proxy advisers to vote on these matters. However, Circular PF 130 is clear: regardless of any delegation, the board of trustees is not relieved of their accountability for the delegated functions. Delegation is not abdication. Trustees should therefore gain a deep understanding of these matters in preparing to incorporate the amendments in their governance processes and arrangements with service providers.
Carina Wessels is Alexforbes’s executive for governance, legal, compliance, and sustainability.
Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies. The information in this article does not constitute legal advice that is appropriate for every individual’s needs and circumstances.
