New votes on remuneration and social issues, required disclosure of an executive pay ratio, and increased transparency on shareholdings are all included in a South African draft bill that’s currently out for public comment. The Department of Trade, Industry and Competition (DTIC) released the Draft Companies Amendment Bill on October 1, 2021 seeking public comment on the proposed changes by November 1, 2021. The Bill was first published for public comment in 2018, but has been significantly revised since then.

In May 2021, the Trade, Industry and Competition Minister, Ebrahim Patel, announced the necessity and urgency of the new legislation, placing special emphasis on a stronger governance of executive remuneration, tackling excessive pay, and a need for transparency around ownership structures. Our summary of the proposed changes in these, and other, areas, along with certain outstanding questions highlighted by the consultation, are below.

Remuneration Disclosure
The DTIC notes “that disclosure as a regulatory mechanism in the context of executive remuneration is indeed powerful”. To that end, the Amendment Bill formalises existing reporting requirements and builds on them, both to provide shareholders with additional context and to support a new voting regime.

Remuneration Policy & Implementation Report
The Amendment Bill introduces the requirement to prepare a directors remuneration report that sets out the company’s pay policy and how it has been implemented, and prescribes the format and content of the report. This is in line with reporting requirements in the UK and Europe, and supports the updated remuneration voting regime, which will give shareholders separate votes on the remuneration policy and its implementation (see Voting on Executive Remuneration below).

Pay Gap
The new Bill will require companies to provide details of their highest paid employee’s total remuneration (including all salary, benefits, short-term incentives and long-term incentives, such as share options and any other type of long-term incentive awards settled in the year under review), lowest paid employee (including salary, benefits and bonuses), their lowest average remuneration, their median remuneration, and the gap between the top 5% highest paid and the bottom 5 lowest paid employees.
In requiring disclosure on wage differentials, the regulator “does not seek to propose what the ratios between executive and worker pay should be; instead it proposes transparency and empowers shareholder voting to be more effective than is currently the case.”

However, the DTIC notes that there “is as yet no consensus between the business and labour constituencies on the definition of ‘remuneration’”, with business favoring the use of on-target remuneration “to take away peaks and valleys caused by the payment of certain bonuses and allow for better yearly comparison”, while labour favors the use of the actual annual remuneration received by executives. Public comments are welcomed.

In addition, the DTIC notes concerns that the pay ratio could be artificially adjusted by outsourcing low paid employees, and is seeking comment on the suggestion that sub-contracted employees should also be included in the calculation. Further, the regulator is still considering whether ratios should reflect pre-tax or post-tax pay.

Voting on Executive Remuneration
South Africa’s remuneration voting regime is being amended to align with international regulations and best practices. Instead of one annual advisory vote, going forward shareholders will have two votes, both held by ordinary resolution:

  •  A vote on the remuneration policy once every three years, or whenever the policy is changed. If the policy is not approved by a majority of shareholders, “it must be presented at the next AGM, until approval is obtained.”
  • A vote on the implementation of the policy every year. If the implementation report is not approved by a majority of shareholders, “the remuneration committee must explain at the next AGM how the concerns of shareholders have been addressed and the non-executive directors that serve on the remuneration committee shall be required to be ineligible for reelection.”

This follows the two-vote structure used in the UK for nearly a decade, and recently adopted throughout the EU under SRD II. Moreover, the stiff consequences of the implementation vote are similar to Australian practice, where 25% opposition to a remuneration report constitutes a “strike”, and boards with two consecutive strikes must hold an additional vote and potentially stand for re-election themselves. The DTIC notes on the one hand that “the proposed amendment is stronger than Australia as it does not require dissenting votes for two consecutive years”, but on the other hand that only targeting remuneration committee members (rather the whole board) and requiring 50% opposition to trigger the provisions (rather than 25%) “does not go as far as the legal provisions in Australia.”

The changes are intended to promote accountability and give investors more say on pay. The DTIC notes that despite growing opposition to remuneration proposals, under the current regime “shareholders do not have sufficient mechanisms to address their grievances.”

Social and Ethics Committee Composition and Reports
South African boards are generally required to form a social and ethics committee. The new Bill introduces a requirement for these committees to produce a report annually, which would be subject to shareholder approval through an ordinary resolution.

If approval is not obtained, (i) the social and ethics committee will have to engage with shareholders who voted down the report and who are willing to engage on the vote, and (ii) within four months, the company will have to publish a statement including the steps taken to engage with the dissenting shareholders, the outcome of such an engagement and the actions to be taken by the company to address the issues raised.

The new Bill also includes other amendments related to social and ethics committees, such as overall composition and minimum qualification requirements for membership, and outlining a procedure to exempt certain companies from forming this committee.

Cooling-Off Period for Independent Aauditor
The Amendment Bill would also reduce the cooling-off period for former external auditors from 5 years to 2 years. The DTIC states that “the introduction of mandatory audit firm rotation which commences in 2023, makes this an important amendment”, but does not provide further explanation. We are broadly supportive of regular rotation as a means of promoting auditor independence and the integrity of the financial statements, but believe shareholders should be mindful of the reduction to the cooling-off period.

Transparency of Ownership Structures
To align with a growing international focus on transparency, the Amendment Bill proposes new provisions on beneficial ownership, placing an obligation on companies to both request and disclose the identity of any shareholders who hold a beneficial interest amounting to 5% or more of the total shares in a company. The provisions also require that companies establish and maintain a register of owners of beneficial interests in its shares.

The Bill would also introduce new provisions requiring companies to request (but not disclose) the “true owners” or ultimate beneficial-interest holders, i.e. “the juristic persons or nominees for whose benefit the shares are held”. These rules reflect the Group of Twenty’s (G20) Global Framework for Tracing Beneficial Ownership, along the same lines as the EU’s Anti-Money Laundering Directives. However, the DTIC notes that “there are different approaches proposed as to when the requirement on companies to request true ownership should apply. Two options were identified for the scope of application of the provisions.

  • 4.19.1 the first option is that companies should only have to request information relating to true ownership from those shareholders with 5% or more shareholding of a company. The motivation given for this threshold is to avoid an undue burden on shareholders and firms, by only requiring meaningful levels of shareholdings to be subject to the provision of requiring the identity of the ultimate owners of the beneficial interests in those shares;
  • 4.19.2 a second option is to make such provision applicable to all shareholding. The motivation given is to avoid shareholders fragmenting their economic interest through multiple smaller shareholdings held through nominee companies.”

Comments are welcomed on this choice, as well as the Bill’s overall approach to beneficial ownership.

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