Given the limited changes between the 2018 version of the Companies Amendment Bill and the 2023 version, it’s difficult to know what caused the five-year delay. A second version of the bill was released in 2021 but that, like the 2018 version, disappeared back into the bowels of the government before ever being considered by parliament.
Presumably Covid played a role, but most likely it was down to what a commentator describes as the “government’s normal bureaucratic procrastination”.
Anyway, having moved at a snail’s pace for the past several years, the process looks set to be rushed through now, with the plan for the bill to be enacted by May, along with a slew of others, ahead of the general election.
Of course, it’s also possible — given what’s at stake — that the process was slowed down by protracted negotiations between competing interests at the National Economic Development & Labour Council (Nedlac).
Overall, the bill reads as though it has been written for the department of trade, industry & competition (DTIC) by one of the country’s corporate law firms. The proposed relaxation of safeguards for dealing with potential conflicts of interest in the event of share repurchases certainly represents a significant victory for boards and a huge loss for shareholders. As for the preferential treatment to be allotted to landlords in the event of business rescue proceedings, that is a remarkable boon for property owners.
However, the bill also contains some potentially significant victories for labour, principally related to improved disclosure of remuneration of both executives and workers. In addition, the bizarre advisory vote on remuneration is being scrapped and replaced by a significantly tougher voting process, one that actually has consequences.
This may be why, despite the major victories for organised business, trade union federation Cosatu has welcomed the bill, describing it as progressive and long overdue.
It seems Cosatu and organised business had already reached agreement on the proposed amendments back in 2021 after extensive engagements. “While what is contained in the [just-released] bill is not always Cosatu’s preferred position, we recognise it is part of a negotiated outcome and respect the agreements reached at Nedlac,” it said in a statement immediately after the bill’s release.
Unsurprisingly, Cosatu is particularly encouraged by the proposed amendments to section 30A dealing with remuneration disclosure. This is where the most hotly contested proposed amendments are to be found.
The one that looked most likely to grind Nedlac negotiations to a halt related to provision of details of the wage gap. The controversial proposal would require the disclosure of “the average remuneration of all employees, median remuneration of all employees and the remuneration gap reflecting the ratio between the total remuneration of the top 5% highest-paid employees and the total remuneration of the bottom 5% lowest-paid employees of the company”.
This will be new to South Africa, but it’s years old in leading global economies.
However, back in 2021, initial news of this proposed amendment sparked a flurry of outraged warnings from business. Business Leadership South Africa CEO Busisiwe Mavuso said the proposed legislation appeared designed to attract controversy, and that lack of “quality information would limit the quality of discourse”.
She added that disclosure would do little to address inequality in South Africa, which is driven by unemployment rather than income disparity. “The surest way of addressing South Africa’s triple challenges of inequality, poverty and unemployment is to develop business-friendly policies that promote economic growth and employment,” said Mavuso.
That view was echoed by most commentators from the business community. Sakeliga CEO Piet le Roux warned implementation of the proposed amendments would push even more skilled people to emigrate. The steady emigration of skilled people as well as the high supply of labour at middle and lower levels were all a result of government policy decisions and would be aggravated by the proposed legislation, said Le Roux.
Regarding the just-released amendments, Dean McPherson, the DA’s spokesperson on trade and industry, is firmly on the side of business, with his warning that the bid to reduce the pay gap and the disclosure of pay “will act as a disincentive to the acquisition of high-performing executives in South Africa whose pay is benchmarked internationally”.
However, Cosatu’s Matthew Parks tells the FM that without the proposed amendments South Africa will continue sleepwalking towards a hugely destructive socioeconomic crisis.
Just Share’s Tracey Davies, who is encouraged that “this important bill has finally been tabled in parliament”, warns that though there is no suggestion in the bill or by the DTIC of any intention to cap executive pay, there will be much scaremongering during parliamentary sessions aimed at preserving vested interests.
“The public hearing process will likely be a battleground of lobbying against pay gap disclosure,” she says.
Unlike Mavuso and Le Roux, Davies refers to the heap of research that demonstrates that labour market inequality is a significant contributor to high levels of inequality. She argues that paying better wages to those at the bottom will enable more people to participate productively in the economy. “But without disclosure of what current wage gaps are, we cannot determine what needs to change,” Davies says.
From all of this, one thing is certain: in the months ahead, there will be heated exchanges accompanied by dire warnings from the two main camps — organised business and labour.
The public hearing process will likely be a battleground of lobbying against pay gap disclosure
— Tracey Davies
Organised business has wasted no time preparing for the battle Davies alludes to. In 2021, as soon as word got out about the wage gap disclosure, it launched a campaign designed to water down the impact with some interesting points — along with some truly flat-footed obfuscation.
First PwC, an audit firm that has a highly profitable sideline in remuneration consulting, warned about the dangers of making comparisons. To keep those dangers to a minimum, PwC suggested the “target remuneration” figure to be compared should be the guaranteed remuneration of all groups. That means excluding all the generous bonuses paid to executives every year.
The Institute of Directors South Africa (IoDSA) thought this was such a great idea that it made it the key recommendation of its 2022 “Pay Gap Analysis and Reporting Recommendations”. “Executive remuneration is by and large determined by organisational or share price performance, which could make a comparison of actual remuneration on a year-on-year basis fairly meaningless in the context of pay gap analysis,” wrote the institute, perhaps unaware that by highlighting the importance of exogenous factors in value creation, it was undermining senior executives’ claims to playing the central role in that process.
Seeking to make comparison even murkier, the IoDSA points out that some lower-level employees receive benefits such as meals on site, transportation, medical facilities, bursaries and subsidised schooling that “significantly contribute to the[ir] quality of life” but because of their variability, should not form part of target remuneration. “It is therefore considered more appropriate that ‘target remuneration’, on a gross basis, is [a] more appropriate basis for conducting pay gap analysis.”
Is the IoDSA seriously comparing variable benefits that may add a few thousand rand of value to lower-level employees with long- and short-term incentives awarded to executives that run to tens of millions a year? This is an appalling and insensitive comparison.
The reality, as every report on executive remuneration reminds us, is that only in utterly exceptional circumstances (think Covid) do executives not receive short- and long-term bonuses every year. Bonuses that are worth substantially more to executives (as a rule of thumb, boosting their guaranteed pay threefold) than on-site meals or subsidised schooling for lower-level employees.
The proposed amendments to the voting process essentially change a pointless advisory, non-binding vote into something with consequences
While the disclosure of the wage gap has drawn most of the fire from the business community so far, it’s likely the proposed amendments to the actual voting process will also face some tough opposition from business. They essentially change a pointless advisory, nonbinding vote into something with consequences.
If the amendments are implemented, the vote on the remuneration policy will require an ordinary resolution, which means at least 50% of shareholders must support the policy; if they don’t, it must be presented again at the following year’s AGM for another vote. The new policy cannot be implemented until the 50%-plus vote is secured.
If the vote on implementation of the remuneration policy fails to get at least 50% support, the relevant board members must explain the way they have addressed shareholders’ concerns at the following AGM.
But perhaps the real sting is that if there’s not sufficient approval, the members of the remuneration committee must resign from the committee for three years; they may remain on the board as directors.
This is a significant advance on the current situation, which involves no consequences for the board or remuneration committee if shareholders vote repeatedly against the implementation report. But it’s still way off the consequences faced by directors of Australian boards, who must all be re-elected if 25% of shareholders vote against the remuneration report in two consecutive years.
A remuneration consultant describes the proposed change to the implementation vote as draconian, given its retrospective nature and the ability of share-based long-term incentives to boost the value of the remuneration package.
“Looking at voting patterns it’s evident that most remuneration policies receive sufficient support, but when it becomes evident the following year that implementing that policy has generated unexpectedly large gains for executives, shareholders vote against it,” the consultant says.
These unexpectedly large gains are generally due to stronger than expected (by the remuneration committee) increases in share prices, which are frequently due to factors beyond the company’s or executives’ control.
In 2022 Sibanye-Stillwater CEO Neal Froneman looked to have scored a R300m bonus when his share-based awards were valued, for disclosure purposes, at what proved to be a market high. Within weeks, Froneman’s shares were worth considerably less.
So all in all, as Davies suggests, we’re in for some aggressive lobbying and heated discussion over the coming months, which is probably a good indication that the amendments are on the right track.
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