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The effects of shareholders now having a voice

The inclusion of the Yes/No votes on policy and implementation has given rise to shareholder activism on executive remuneration.
Principle 14 of the King IV code on corporate governance has made for some lively AGMs, and a not inconsiderable amount of introspection on the part of companies. Image: Shutterstock

The King IV corporate governance guidelines were published in 2016 as a successor to the King III corporate governance guidelines. In comparison to King III, there were several fundamental changes that have led to more transparency being available to the public when viewing a company’s annual reports.

A full examination of the changes between King IV and King III is not recorded here. However, some of the key changes include:

  • King IV is outcomes-oriented and has led to a change in reporting standards from “Apply or explain” (King III) to “Apply and explain”.
  • In remuneration terms the annual report is required to not only explain the remuneration policy but also how the policy was implemented.
  • This has led to two non-binding votes – on the remuneration policy and on its implementation within the organisation – that have provided shareholders with a platform to voice any concerns they may have.
  • Where a company has received more than 25% ‘No’ votes, it is required to engage with the shareholders who voted against either the policy or its implementation and address any issues these shareholders may have.

King IV’s layout is rather simplified in comparison to King III and has been written as 17 principles. Principle 14 specifically deals with matters related to remuneration and remuneration reporting.

Principle 14 states:

“The governing body should ensure that the organisation remunerates fairly, responsibly and transparently so as to promote the achievement of strategic objectives and positive outcomes in short, medium and long term.”

The inclusion of the Yes/No votes on policy and implementation has given rise to shareholder activism as shareholders now have a mechanism that allows them to express their approval or disapproval of the company’s plans.

The graph below illustrates the results of these votes and allows the reader to make an interpretation about the company’s remuneration policy and practice based on these votes.

It indicates that shareholders tend to vote similarly on both the remuneration policy and implementation thereof (the trend line is at an almost 45 degree angle). This is not unexpected as companies that have approved policies probably implement them well, whereas a company that has an unapproved policy will probably have the implementation of the policy unapproved as well.

Remuneration policy and implementation (percentage of ‘Yes’ votes)

Source: 21st Century

The graph has been divided into four quadrants that can be explained as follows:

Quadrant A: This quadrant currently does not contain any data points. It indicates where shareholders have voted below 50% on the policy and in excess of 50% on the implementation. The absence of data points here indicates that a poor remuneration policy is not endorsed in any manner, even if implementation follows the policy correctly.

Read: Naspers directors approve their own pay

Quadrant B: This quadrant indicates where both the remuneration policy and implementation have received a vote below 50%. If a company is within this quadrant, it has serious cause for concern as its remuneration policy and implementation have received a majority ‘No’ vote. These companies will require a significant intervention into their policy first followed by the implementation if they are to rectify this outcome.

Quadrant C: This quadrant indicates in excess of 50% ‘Yes’ votes for both the remuneration policy and implementation. This is where an organisation wants to be. However, it does not guarantee that their shareholders have accepted their policy and implementation. The standard to be exceeded is 75% ‘Yes’ votes on both matters, which means the closer an organisation is to the top right hand corner of the graph, the better their result is.

Read: FirstRand also overhauls remuneration after criticism

Quadrant D: This quadrant indicates where the policy vote received in excess of 50% ‘Yes’ votes and the implementation received less than 50% ‘Yes’ votes. There are very few organisations within quadrant D, indicating that organisations tend to implement the policies consistently.

Interpreting the graph leads one to believe that shareholders are rational in the manner in which they vote. Quadrant A is empty as shareholders do not vote positively for implementation if they do not agree with the policy. This makes sense as the policy is the guide for the implementation and correctly implementing a ‘bad’ decision results in a negative outcome.

The almost perfect 45 degree trend line 1 provides further evidence that the policy and implementation votes tend to yield a similar outcome compared to each other. Quadrant C is the most highly populated quadrant which indicates that although not all organisations have received in excess of 75% for both the remuneration policy and implementation, the overall trend is that organisations are not producing policies and outcomes that are unanimously viewed in a negative light.

Read: Shareholders reject MultiChoice executive pay

The rise of the Yes/No vote on remuneration policy and implementation has provided shareholders with a voice with which they can communicate their views on remuneration within the organisation. It appears that these votes are being used in a responsible manner, and it would be interesting to see if King V makes provision for a binding vote on these issues in the future.

Bryden Morton is executive director and Chris Blair CEO of 21st Century.

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