COMPANIES ACT

Pay in a pickle

Now, before a director can be paid, shareholders such as pension funds will have to give their approval. Financial institutions, representing millions of indirect shareowners, have plenty to think about. So too do funds’ trustees and companies themselves.

Effective from the beginning of May, the new SA Companies Act is a jump ahead of US and
UK regulation on directors’ remuneration. Unlike these overseas jurisdictions, which provide
for shareholder votes that aren’t binding on company boards, the SA legislation requires not only that directors’ emoluments be disclosed (as previously) but now also that they be approved in advance (not retrospectively) by special resolution at each company’s annual general meeting.
This is a big swing in the long-standing tension between shareholder ownership and management
control, tipping the balance decidedly in favour of the former. Unless at least 75% of shareholders – voting at the meeting or by electronic poll – support a board’s resolution for its company directors’ pay, they can’t be paid. The shareholders’ vote is binding on the company. At first blush, it’s a quantum leap in the advent of shareholder democracy and a spur to shareholder
activism. While the US and UK have updated their requirements mainly in response to public outrage over the bonuses to bankers held responsible for taxpayerfunded bailouts, SA appears to be responding to social concerns over the ever-widening pay disparities between those few at the top and the many towards the middle and bottom of corporate ladders. The best to be hoped is that, prior to general meetings, shareholder and company representatives will sit down with one another to reach an amiable consensus. In practice it might not be quite so simple. For starters, most of the larger JSE-listed companies are significantly owned by pension funds. Where they’re
managed by financial institutions, in whose names the shares are often held, these institutions are entitled to vote on their behalf.

If they have an explicit mandate from a pension fund, they’d need to vote in accordance with that mandate. It implies that a single institution can vote one client’s shares for a resolution and another’s against it. A fund of predominantly white-collared members, for instance, might take a fundamentally different view from a bluecollared. Where there is no mandate, the institution would
still be accountable to the client for how it’s voted. Presumably, then, it would need to have an upfront voting policy on directors’ remuneration so that it has defensible and consistent guidelines on what it considers acceptable as opposed to excessive. Not only is such an exercise highly subjective, eluding one-size-fits-all quantification, but judgments will vary from year to year, company to company and shareholder to shareholder. How’s it to be determined whether R20m for the managing director of one company is too much and R5m for another too little?
Power has passed from companies’ remuneration committees to institutional shareholders, no longer relegated to rubber stamps. In formulating approaches that will satisfy trade-union constituencies and middleincome clients, often outraged by pay awards to which they cannot relate, best of luck to these representative institutions.

Making it more difficult are their internal dynamics. They’d be hard-pressed to vote against remuneration schemes which, other things being equal, are less generous than that of their own employer’s directors or which compare unfavourably with their own bonusincentivised packages. More than this, what’s the poor asset manager to do if his vote offends a company that’s a client in the corporate-finance division of his institutional employer?

Beyond pension funds, insurance policies and unit trusts are also managed by institutions and are also invested heavily in listed companies. Without mandates, the institutions can vote at their discretion. It gives them an awesome influence to wield on companies’ pay policies, should they wish. If anticipated controversies and conflicts are too much to stomach, the alternative is for them simply to duck out from general meetings and to absent themselves from electronic or proxy voting. But this would fly in the face of the Code for Responsible Investing by Institutional Investors in SA (CRISA) that they’re about to sign. It would also not assist them to evade explanations from stakeholders, such as trade unions to whom the Act’s drafters are clearly
sympathetic, on why they didn’t vote.

That said, the pay provisions in the new Act open a Beyond pension funds, insurance policies and unit trusts are also managed by institutions and are also invested heavily in listed companies. Without mandates, the institutions can vote at their discretion. It gives them an awesome influence to wield on companies’ pay policies, should they wish. If anticipated controversies and conflicts are too much to stomach, the alternative is for them simply
to duck out from general meetings and to absent themselves from electronic or proxy voting. But this would fly in the face of the Code for Responsible Investing by Institutional Investors in SA (CRISA) that they’re about to sign. It would also not assist them to evade explanations from stakeholders, such as trade unions to whom the Act’s drafters are clearly sympathetic, on why they didn’t vote.

That said, the pay provisions in the new Act open a series of additional complications. One is that it doesn’t distinguish between long and short-term shareholders. Arbitrageurs would have a time horizon of minutes or days, hedge funds of weeks or months, and pension funds of years.

Their voting intentions would be quite different, with the longer-term shareholders necessarily
concerned with a company’s longer term viability. To this end, the focus of CRISA is to ensure adherence to environmental, social and governance factors. A proposal mooted abroad is that only those who’ve held shares in a company for a minimum of three years be entitled to vote. It’s worth consideration in SA, to constrain short-term holders from using their vote to push short-term corporate actions that can quickly stimulate the share price but negatively impact on
the long term. However, this would undermine the principle of all votes being equal. Then there’s the wording of the Act itself. Having given “remuneration” the widest imaginable definition
(see box), it goes on to say that “the company must pay remuneration to its directors for their service as directors . . . in accordance with a special resolution approved by the shareholders within the previous two years”.

Amidst the long list of what comprises “remuneration”, there’s ambiguity in what’s meant
by “their service as directors”. Does it mean that only the fees that they earn for sitting on the board require approval, bearing in mind that boards comprise both executive and non-executive directors? Or does it include the remuneration packages of executive directors, bearing in mind that chief and senior executives commonly sit on boards (sometimes not paid separately as directors because being on the board is part of their management job and covered by their management remuneration)?

If the former, it’s neither here nor there because payments for “service as directors” rarely set the world alight. If the latter, which the definition seems strongly to suggest –for instance, by identifying both fees (usually for non-executive directors) and salaries (for executive directors) – it creates a new ballgame. First, shareholders get a foot in to traverse operational management. Second, conceivably inviting governance ructions, senior executives (including the chief executive) might become loathe to serve as directors. In seeking to bridge the Rubicon between
shareholder ownership and management control, this might well be a bridge too far.

Company law is not supposed to fall under the law of unintended consequences.