Carina Wessels, Executive: Governance, Legal, Compliance and Sustainability at Alexforbes

It’s been a busy time for the Presidential pen. Shortly after signing the Climate Change Bill on 18 July 2024 and the Climate Change Act being published on 23 July 2024, an announcement was made on 26 July 2024 that the President has also signed the long-awaited First and Second Companies Amendment Bills into law. Once gazetted, the effective date, including any possible transitionary periods, will become clear. Among several amendments, some of the most material ones relate to remuneration and have been the topic of heated debates and several comments over the past few years.

In addition to these amendments being critical considerations for boards of directors and remuneration committees (Remco’s) alike, boards of trustees should also concern themselves with these company law changes. As stewards of capital and in accordance with Regulation 28, trustees are required to take environmental, social and governance (ESG) factors into consideration in their decision making. Several of the amendments deal with ESG elements, like remuneration and Social and Ethics Committees.

In terms of the amendments, public and private companies that are required to be audited under the Companies Act 71 of 2006, as amended (the Act), will now need to list each individual director and prescribed officer’s remuneration by name in their annual financial statements, rather than grouping these together as many companies have done since the Act became effective in 2011. This is one of several meaningful disclosure enhancements for companies that may form part of private market portfolios.

The requirement to have shareholders vote on a company’s remuneration policy and remuneration reports (previously only applicable to listed companies through advisory or non-binding votes) has been made mandatory for all public and state-owned companies. The remuneration policy will now require approval by ordinary resolution at the company’s annual general meeting (AGM) and thereafter every three years or upon making any material amendments. A failed vote will require the policy to be resubmitted to the next AGM or special meeting and changes to the policy may not be implemented until approved.

Similarly, the remuneration report will require an ordinary shareholder resolution for approval. In addition to individual remuneration disclosures, the remuneration report will also need to include:

• The total remuneration of the highest and lowest earner in the company.
• The average and median remuneration of all employees in the company.
• The pay gap between the highest paid 5% and the lowest paid 5%.

If the report is not approved, the Remco must explain at the next AGM how shareholder concerns have been considered. Additionally, Remco members are required to stand for re-election at the AGM where the report is presented. If the prior year’s implementation report is not approved at the second AGM,  the Remco members may continue to serve as directors, if re-elected, but may not serve on the Remco for the following two years. Remco members who have served for less than 12 months are excluded from this requirement.

To effectively consider ESG in decision-making, trustees must be able to assess the quality of a remuneration policy and report, particularly how they link to and enable or detract from company performance and sustained value creation. These amendments place significant power in the hands of shareholders, requiring them to be increasingly informed and responsible in utilising this power.

Amendments have also been made to the requirements for Social and Ethics Committees (SECs), highlighting some which trustees should be aware of:

• Public and state-owned company SECs will be required to consist of a majority of independent (as defined in the Act) non-executive directors.
• Public and state-owned company SEC appointments will require approval by an ordinary resolution of shareholders at the AGM, like the annual election of Audit Committee members at present.

Given the scope and breadth of ESG matters that SECs are responsible for, appointing appropriately skilled and experienced individuals on these committees should be of paramount importance for trustees.

Other amendments that active owners and stewards should note, include:

• Relaxation of approval requirements for share buy-backs.
• Relaxation of intra-group financial assistance requirements.
• In response to the Zondo Commission recommendations, changes to director liability and delinquency prescription periods and delinquency and probation periods.
• Reduction of auditor appointment cooling-off periods.

Many retirement fund trustees rely on consultants, asset managers and proxy advisers to vote on these matters. However, Circular PF130 is clear: regardless of any delegation, the board of trustees is not relieved of their accountability for the delegated functions. Delegation is not abdication. Trustees should therefore gain a deep understanding of these matters in preparing to incorporate the amendments in their governance processes and arrangements with service providers.

ENDS