South Africa’s Companies Amendment Bill (B27-2023) (Bill) (most recently amended on 1 March 2024) seeks to address this issue of income inequality by introducing measures aimed at fostering enhanced accountability and transparency in remuneration practices by amending the Companies Act 71 of 2008 (Companies Act).

The Bill proposes amendments which aim to address the vast differentials in pay, by improving disclosure of senior executive remuneration and suggesting reforms to increase policy transparency and corporate governance. The new provisions, particularly sections 30A and 30B, aim to facilitate transparency and provide shareholders with the necessary mechanisms to express their concerns and exercise oversight over the remuneration process.

Proposed Amendments

Under section 30A, public and state-owned companies are required prepare and present a remuneration policy for shareholder approval. This remuneration policy must be approved by ordinary resolution at the annual general meeting (AGM) and presented to the shareholders every three years thereafter, or whenever material changes are made. Material changes to the policy may only be implemented once the shareholders approve such changes. Should a remuneration policy not be approved, it must be presented at the next AGM, or a general meeting called for such purposes, until approval is obtained.

Section 30B introduces the remuneration report and mandates the preparation of a remuneration report by all public and state-owned companies in respect of the previous financial year. This remuneration report must be presented and approved at the AGM and consist of three key components including a background statement, a copy of the company’s remuneration policy, and an implementation report. The implementation report must set out detail on the total remuneration received by each director and prescribed officer, the total remuneration for the employee with the highest and lowest total remuneration, the average and median total remuneration of all employees, and the remuneration gap 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.

Furthermore, the Bill introduces amendments to section 30 of the Companies Act, requiring that directors or prescribed officers receiving remuneration and benefits must be named in the company’s annual financial statements.

When approval is not received

If the remuneration report fails to receive approval by ordinary resolution of the shareholders at an AGM, the remuneration committee is obliged, at the subsequent year’s AGM, or a general meeting called for such purposes, (second AGM) to present an explanation of how the shareholders’ concerns have been taken into account. Additionally, the directors who are not involved in the day-to-day management of the business of the company and who serve on the remuneration committee must stand for re-election as members of the remuneration committee at the second AGM.

If, at the second AGM, the remuneration report for the previous financial year fails once again to receive the required approval, the directors who are not involved in the day-to-day management of the business of the company and who serve on the remuneration committee may continue to serve as directors, provided that they successfully stand for re-election at the second AGM. However, they will not be eligible to serve on the remuneration committee for a period of two years thereafter. This two-year disqualification does not apply to members of the remuneration committee who, at the time of the second AGM, have served as members for a period of less than 12 months.

One of the apparent shortfalls in the drafting is that the Bill does not address what happens if the remuneration policy is not approved and what impact this has on executive pay. While the remuneration policy is approved in advance and is contemplated to be forward looking, what remains unclear, is the company’s course of action when a vote on the remuneration policy fails.

International approach

South Africa is not the only country to legislate for increased transparency and shareholder oversight over remuneration. In response to concerns about excessive executive pay and the need for shareholder oversight, jurisdictions worldwide have adopted various approaches. The UK, for example, introduced ‘say on pay’ regulations, requiring shareholders to vote on executive remuneration every three years. In Australia, if the remuneration report is voted down twice, a ‘spill’ resolution is triggered in terms of a shareholders’ vote on whether all persons, who were directors at the relevant annual general meetings (excluding directors who serve an indefinite term), should cease holding such office immediately.

King IV

Closer to home, the King IV Report on Corporate Governance for South Africa 2016 (King IV), has also played a significant role in fostering transparency and accountability in remuneration practices. One of its key recommendations is the submission of the remuneration policy for a non-binding advisory vote by shareholders at every AGM. The Johannesburg Stock Exchange, as a regulatory body, has already incorporated King IV’s ‘say on pay’ recommendations into its Listing Requirements, making non-binding advisory shareholder votes on remuneration mandatory for listed companies.

Future consequences

While the Bill aims to address issues of inequality and enhance transparency, there are several challenges and unintended consequences to consider. For instance, the Bill’s requirement to disclose the gap between the highest and lowest paid employees may inadvertently encourage executives to seek opportunities in foreign jurisdictions with more favorable remuneration policies.

On the other hand, as companies aim to address the pay gap between their highest and lowest paid employees, they may seek to reduce the gap by workforce reduction or outsourcing, resulting in an unintended negative consequence for employment in South Africa. Lower-level employees, who are already struggling with comparatively low wages, may face job losses or reduced opportunities.

Additionally, the Bill has been criticized on the basis that comparing the top 5% of and bottom 5% of earners appears to be an arbitrary selection. Commentators have suggested using the Palma ratio instead, which compares the bottom 40% of earners with the top-paid 10% on the basis that it is a more effective method of describing pay inequality in developing economies.

The Bill represents a significant step towards enhancing accountability and transparency of executive remuneration. However, as with any significant legislative change, there may well be unintended consequences and challenges that arise from its implementation. At this stage the implementation date is unclear, and while it seems unlikely that there will be another opportunity for public comment on the Bill, the draft regulations may provide further clarity on the implementation of these principles in due course.