Material amendments

The following is a summary of material amendments that are, from the perspective of a board of directors, important to be aware of:

• • Enhanced transparency: Section 26 of the Act will be amended to provide for access to the annual financial statements (AFS) of any company that by law is required to audit (i.e. a profit or non-profit company with a public interest score that meets the thresholds set in the regulations to the Act). Similar to the securities register of a company, any party may request access to the AFS, and the company will be required to provide such access to the AFS within 10 business days. While it can be argued that the AFS of these companies are already in the ’public domain’ as a result of it being filed with CIPC together with the annual return, there is still some level of uncertainty as to the right of access to the AFS by a third party. In a recent matter involving CIPC and G.U.D. Holdings (Pty) Limited, the high court reaffirmed the need for transparency and compliance with the law, ruling against G.U.D. in its attempt to keep the information on the remuneration of its directors confidential. Regardless of the present situation, the implementation of the CAB 2023 will offer clarity regarding the access rights to the AFS of a significantly larger pool of companies compared to the current scenario. Considering the G.U.D. judgement, this could have significant implications for companies that until now have kept their financial affairs fairly ‘close to their chest’.

• • Say on pay: The concept of giving shareholders a ‘voice’ when it comes to executive remuneration is not new and has found its way into a number of countries in different formats, loosely referred to as ‘say on pay’. In South Africa, the King Committee followed suit by recommending two ‘non-binding advisory votes’, one on the remuneration policy and the other on the report on actual remuneration earned during the period under review. The JSE made this ‘listing law’ for listed entities and these resolutions have become a standard feature of the notices of annual general meetings (AGMs) of these companies. Now, section 30 of the Act will be amended by the introduction of two new sub-sections, section 30A and section 30B.

• • Section 30A – Remuneration policy: A public company and a state-owned company will be required to prepare a remuneration policy for approval by shareholders by way of ordinary resolution. The approved remuneration policy will remain in place for a three-year period or until a ‘material’ amendment is being made, whatever comes first, when it has to be resubmitted to shareholders for approval.

• • Section 30B – Remuneration report: In addition to the remuneration policy, a public company and state-owned company will be required to annually prepare a remuneration report for approval by shareholders by way of ordinary resolution. In addition to a background statement and the remuneration policy, the remuneration report will also contain the ‘implementation report’. Section 30B provides a list of items to be disclosed in the implementation report which includes, among other things:

     

    • • the total remuneration received by each director and prescribed officer in the company;
    • • the total remuneration in respect of the employee with the highest total remuneration;
    • • the total remuneration in respect of the employee with the lowest total remuneration in the company; and
    • • the average total remuneration of all employees, median remuneration of all employees and the remuneration gap reflecting the ratio between the total remuneration of the top five per cent highest paid employees and the total remuneration of the bottom five per cent lowest paid employees of the company.

• In the event of the remuneration report not being approved by shareholders, the remuneration committee (Remco) is expected to present an explanation at the next AGM as to how shareholders’ concerns have been addressed. In addition, the non-executive members of the Remco are required to offer themselves for re-election as members of the Remco at the same time. Up to this point, the wording of the CAB 2023 is fairly clear. However, the following sub-section (s30B(5)) is less so and the reader is left to try and figure out what the intention of the legislature is. It seems to imply that in the event of the remuneration report again not being approved at the ‘third’ AGM, in other words the AGM following the one where the explanation was given and Remco members stood down for re-election as Remco members, then the non-executive members of Remco must offer themselves for re-election as directors (as opposed to members of Remco) and are barred from serving on Remco for a 2 year term.

  The intended ‘sanctions’ will not be applicable to members of the Remco that had served for less than twelve months in the financial year under review.

 

• • Financial assistance: In addition to the heading of section 45 being shortened to ‘financial assistance’ with the removal of the misleading reference to ‘directors’, there will probably be a few cheers for the intent to relieve holding companies from the obligation of complying with section 45 when providing financial assistance to its subsidiaries. No special resolution of shareholders and no solvency and liquidity test undertaken by the board of the holding company will thus be required in these instances.

• • Social and ethics committee: In addition to now requiring a formal ‘report’ from the social and ethical committee to shareholders to be added to the agenda of the AGM, the members of the social and ethics committee of a public company and a state-owned company must annually be elected by shareholders at the AGM (similar to members of the audit committee). In line with what has up to now been regarded as a governance recommendation, the majority of the members of the social and ethics committee of a public company and a state-owned company must be non-executive directors. For other companies required by law to have a social and ethics committee, the board is required to annually appoint the members of the committee and the composition remains as per the current legislation. The formal report of the committee will have to be in the ‘prescribed manner and form’, implying that there may be new regulations following the CAB 2023 that will provide additional requirements for this and other sections of the CAB 2023.

So what?

Depending on the type of company, the following potential implications need to be considered by the leadership of companies:

 

• • For companies where only consolidated AFS have been in the public domain up to now, the implications of having to provide the AFS, of material operating subsidiaries to any third party who requests access thereto, have to be assessed and well understood. The same holds true for private companies that have to date been able to maintain a high level of confidentiality as far as their financial affairs are concerned.

• • For public companies in particular, the implications of the remuneration policy and/or report not being approved by shareholders can be significant. As a starting point, it is critical to consider the content of a remuneration policy and to ensure that while it meets shareholder expectations, it allows sufficient flexibility for the company to remunerate in a manner that is both responsible and in the long-term, best interests of the business.

• • Also for public companies, the implications of the remuneration report not being approved by shareholders can be equally severe and disruptive and may even lead to directors not being willing to serve on the Remco considering the potential reputational impact of having to stand down for re-election as a member of the Remco and thereafter as a director while potentially being barred from serving on the committee. In addition, the extensive information that now has to be included in the implementation report, with the objective of highlighting the wage gap, will also require careful consideration by all concerned to limit the risk of misinterpretation and potential reputational harm to the business.

• • It will be interesting to see how the JSE, currently expecting listed companies to apply the King IV recommendation of the non-binding advisory votes while at the same time requiring support by at least 75% of the votes exercised on these resolutions, may have to forego of the current governance-driven practice and replace same with the statutory-driven practice as set out herein.

• • For a number of social and ethics committees of public companies, being annually appointed by shareholders will be a new experience. The AGM notices of these companies will have to be prepared in alignment with the new requirements, not only to provide for the appointment of members of the social and ethics committee but also to ensure that the report of the committee forms part of the formal business on the agenda.

Conclusion

As with most pieces of legislation, the wording of the CAB 2023 is in some instances ambiguous and open to different interpretations. Hopefully, over time, the ultimate intention of these sections will be clarified in a manner that provides certainty to the market. Until then, we can only speculate.

As indicated, the effective date of the CAB 2023 remains unsure, but it is nevertheless important to start considering the potential implications of some of these amendments and getting your ‘house in order’ in preparation. Do not hesitate to reach out to the experienced team at the FluidRock Governance Group to assist where necessary.

Author: Advocate Annamarie van der Merwe