In Part 1 of this Three-Part Series, we focused on proposed amendments to the Companies Act, 2008, by the Companies Act Amendment Bill, 2021 (the “Amendment Bill”) that will impact all companies. Part 2 focused on private companies. This third and final part highlights some of the proposed amendments that will impact public companies.
Proposed amendments that impact public companies
Directors’ Remuneration Report
The Amendment Bill seeks to align the provisions of the Companies Act No. 71 of 2008 (the “Act”) with the recommendations of the King IV Report on Corporate Governance in South Africa (“King IV”) in relation to remuneration governance.
Section 30A of the Amendment Bill introduces the recommendations of King IV with a new requirement for public companies and state-owned companies to prepare a remuneration report, which must include (i) a remuneration policy and (ii) an implementation report.
As recommended by King IV, the Amendment Bill requires the remuneration report, remuneration policy, and implementation report to be approved by shareholders at an annual general meeting (“AGM”). However, the remuneration policy and implementation report must each be approved separately by an ordinary resolution of the shareholders. The Amendment Bill does not, however, provide for the fact that a shareholder vote is necessary for a remuneration report to be approved, merely that such a report be presented to the shareholders of a public or state-owned company at the AGM.
The remuneration report consolidates the remuneration policy and implementation report into a single document. Section 30A (3) provides that the following information shall be contained in a remuneration report:
- a background statement;
- a remuneration policy;
- an implementation report that sets out the details of remuneration received by directors and prescribed officers in terms of sections 30(4), (5), and (6) of the Amendment Bill;
- the total remuneration and benefits, which include bonuses, incentives, fund contributions, share options, and awards of the highest remunerated employee(s);
- the total remuneration of the employee with the lowest remuneration in the company; and
- the average remuneration of all employees, the 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 remuneration of the bottom lowest paid employees of the company.
In terms of section 30A (1) and (2), the directors of a public company or state-owned company must prepare and present a remuneration policy and a remuneration report at the AGM to be approved by ordinary resolution by the shareholders at such an AGM. Once the remuneration policy has been approved, it does not require further approval until three years have passed from the date of the previous approval, unless a material change is made to the remuneration policy.
Should the remuneration report not be approved by the shareholders at the applicable AGM, the remuneration committee must, at the next AGM, explain how previous concerns have been addressed, and the non-executive directors on the committee must stand down for re-election each year that the remuneration report is voted down by the shareholders.
Social and Ethics Committee
Clause 14 of the Amendment Bill proposes amendments to Section 72 of the Act by providing for the requirement for a company to establish a Social and Ethics Committee (“SEC”). The SEC will be appointed by shareholders at the AGM in the case of public and state-owned companies and by the board of directors in the case of private companies.
Notably, the SEC is required to present a report at the AGM or other meetings of shareholders where a company does not hold an AGM. The report must outline how the SEC performed its functions and must be approved by an ordinary shareholder resolution.
Currently, the regulations set out the types of companies required to appoint a SEC. These include state-owned companies, listed companies, and any other company that has, in two of the previous five years, scored above 500 points as its public interest score.
The Amendment Bill proposes that the SEC must consist of at least three directors and may, in addition to the three directors, include prescribed officers, provided that, in public and state-owned companies, the majority of directors must be non-executive directors (i.e., not involved in the day-to-day management of the company), and for other companies, at least one director must be non-executive.
Currently, the regulations only require one member of the SEC to report to shareholders at the AGM. If the report is not approved by the shareholders, the SEC must engage with the shareholders who voted against the report and, within four months following the shareholders meeting, publish a statement explaining the process and outcome of the engagement. The outcome and actions to be taken to address the issues raised by dissenting shareholders and the statement must be presented to the shareholders at the next AGM.
Application for Exemption of a SEC
The Amendment Bill, however, provides that companies that are required to appoint an SEC may apply to the Companies Tribunal for exemption from establishing A SEC. This may be done by publishing their intention to lodge an application for exemption with the Companies Tribunal in the Government Gazette and then applying for such an exemption thereafter. The Companies Tribunal will consider the exemption application and, accordingly, make an appropriate decision.
It is important to note that subsidiaries of companies that have SECs will not be required to establish an SEC themselves. The SEC of the holding company may perform the functions of the SEC for the group.
The proposed amendments will pave the way for more effective governance and transparency in doing business in South Africa, specifically for public companies.
It’s a positive development that the remuneration policy must now be approved by shareholders of a company and that information on the pay gap between directors and workers in its annual financial statements and annual reports must be disclosed. Furthermore, the requirement for the establishment of a social ethics committees in alignment with the current regulations will have the effect of obliging companies to develop a social conscience and behave in a more ethical manner, having regard for the impact that such companies have on the public interest.