By John Botha
In a bold move to enhance corporate governance and address growing concerns about income inequality, the South African government has recently amended the Companies Act.
These changes, focusing on remuneration policies and social and ethics committees, are set to significantly impact public, state-owned and certain private companies.
Spotlight on executive pay: Increased transparency and accountability
The new amendments introduce stringent requirements for remuneration policies and reporting, particularly for public and state-owned companies.
1. Remuneration policy approval:
Companies must now present their remuneration policies for shareholder approval at the Annual General Meeting (AGM). If not approved, the policy must be re-presented at the next AGM or a special shareholders meeting. Once approved, the policy remains in force for three years, with material amendments requiring shareholder approval before implementation.
2. Detailed annual reporting:
Companies are required to prepare a comprehensive annual remuneration report, which includes: A background statement and the remuneration policy
An implementation report detailing total remuneration for each director and prescribed officer, highest and lowest employee remuneration, average and median employee remuneration, and the remuneration gap between the top 5% and bottom 5% of employees
3. Consequences of non-approval:
If shareholders don’t approve the report at the AGM, the remuneration committee must address their concerns at the next AGM. Non-executive directors on the committee must stand for re-election. If the report is not approved for two consecutive years, these directors may continue as board members if re-elected but cannot serve on the remuneration committee for two years.
These measures aim to foster a culture of transparency and accountability in executive compensation, potentially narrowing the wage gap and promoting fair pay practices.
Strengthening corporate ethics: Revamped social and ethics committees
The amendments also bring significant changes to the requirements for Social and Ethics Committees (SECs). Here are the key points:
1 Expanded Scope: Public and state-owned companies, as well as private companies with a Public Interest Score (PIS) over 500, must establish SECs.
2. Composition requirements: SECs must have at least three members. For public and state-owned companies, the majority must be non-executive directors. Other companies need at least one non-executive director.
3. Reporting obligations: SECs must prepare reports for shareholders detailing their functions and performance, to be presented at AGMs or shareholder meetings.
4. Exemption Process: Companies can apply for exemption from having an SEC if they have an alternative mechanism performing similar functions or if it’s not reasonably necessary given the company’s nature and activities.
5. Implementation timelines: Existing companies have 12 months from the effective date to appoint committee members, while new companies have 12 months from incorporation for meeting the criteria.
These changes aim to enhance corporate social responsibility and ethical business practices across South African companies.
Implications for SA businesses
The amendments to the Companies Act represent a significant shift in South Africa’s corporate governance landscape. By increasing transparency in executive compensation and strengthening the role of social and ethics committees, these changes aim to address public concerns about income inequality and corporate accountability.
Companies will need to adapt quickly to these new requirements, potentially reshaping their governance structures and reporting processes. While the changes may present challenges in the short term, they have the potential to foster a more equitable and responsible business environment in the long run.
As South Africa continues to evolve its corporate regulatory framework, businesses must stay ahead of the curve, ensuring compliance and embracing the principles of transparency, accountability and ethical conduct. These amendments are not just legal obligations but opportunities for companies to build trust, enhance their reputations and contribute positively to the broader society.
John Botha is the Joint CEO of Global Business Solutions
BUSINESS REPORT