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Executive pay and undeserved wealth

The current process for dealing with remuneration-related shareholder dissension is ineffective. Also, thoughts on China’s battle of attrition, and Telkom’s departing CEO’s legacy.
The Companies Act has such a feeble approach to the issue of executive remuneration it’s led to the belief this part of the act was written by the business community. Image: Shutterstock

It may be time for the regulators, including the JSE, to reconsider how to deal with shareholder opposition to executive remuneration.

As things stand if, at an annual general meeting, more than 25% of shareholders vote against a company’s remuneration policy or its implementation report, the company has to extend an invitation to the dissenting shareholders to engage with it. That is a JSE requirement. There is no such requirement in the Companies Act. The act has taken an entirely feeble approach to the extremely contentious issue of executive remuneration, which has led to the belief that this section of the act was written by the business community.

All that this feeble approach does is require companies to present shareholders with two non-binding advisory votes – one on the remuneration policy, a second on how that policy is actually implemented. This means shareholders, or rather the institutions who manage shares on our behalf, get the opportunity for a bit of virtue signalling.

They can vote against both remuneration-related resolutions in the comfort of knowing absolutely nothing will happen. And nothing does happen.

The JSE sought to head off a possible bid to bring this flabby process into line with major international markets by introducing the requirement for an ‘engagement’ in the event of a 25%-plus negative vote. The problem is, nobody is pitching up to these ‘engagements’.

The vast majority of shareholders who vote against remuneration don’t bother to follow up. If they are following up privately, it makes the JSE’s requirement obsolete.

The latest no-show was at Sanlam. At the AGM on June 9, 26.08% of shareholders voted against the remuneration implementation report and were subsequently invited to submit their concerns in writing to the head of ‘Group Reward’; ‘engagements’ were planned for no later than July 14. Last week Sanlam announced it had received no written concerns and no one had accepted its invitation to engage.

This isn’t the first time this has happened to a JSE-listed company. And frequently when ‘engagements’ do actually happen they involve only a few percent of the dissenting shareholders.

Surely it is time for a change?

Mediclinic

On the fractious subject of executive remuneration, last week’s announcement by Mediclinic indicates that the practice of paying dividends on shares before they have vested is a reasonably common one.

Mediclinic granted share option awards in respect of the deferred portion of a short-term incentive to the three executive directors for the financial year to March 2019. They vested on July 20 and will be settled in cash on July 27. According to Mediclinic’s announcement “the amount settled includes the value of dividends attributable to the vested shares during the period between the date of grant and the date of vesting …”

But surely the rights to those shares, including rights to dividends, is only triggered from the date of vesting?

Naspers, Prosus and Tencent

Continuing on the subject of executive pay and the generation of undeserved wealth, rewards at Naspers and Prosus could come under some pressure if China’s President Xi Jinping doesn’t call a halt to his battle of attrition with that country’s powerful tech companies.

Last week’s announcement that Tencent was ordered to give up exclusive music streaming rights and pay half a million yuan in fines saw the Tencent share price slumped to its lowest level this year.

It does seem as though Xi is not just concerned about remarkable wealth and power being held by apparently hostile players such as Alibaba’s Jack Ma but by anyone at all.

Compared with the outspoken Jack Ma, Tencent CEO Pony Ma (no relation) has always been supportive of the Communist Party of China.

This is evidently not enough for Xi who is prepared to whittle away the power (and wealth) of these massive independent companies in order to shore up his own authority.

Telkom

Meanwhile back on SA soil there’s the not-so-powerful Telkom.

In comparison with most other government-related entities the past eight years have been remarkably successful for Telkom, whose dominant shareholder is government, with a 40% stake.

Outgoing CEO Sipho Maseko must take much of the credit for this.

He led the company during a particularly challenging period and forced through a reduction in bloated employee numbers by almost 30% despite much opposition from the Communications Workers Union (CWU), which is understandably not unhappy to see him go.

Telkom’s staff count has been reduced from 21 209 in 2013 to about 15 000 currently.

It’s to be expected that the CWU is not as excited about Maseko’s achievements as some analysts are. It argues that he failed to use Telkom’s monopoly position to manage the transition from ADSL to fibre and lost many of its long-time customers to new players in the market. That it is able to report profits is largely thanks to these hefty staff cuts, says the union.

Sadly, in the post-Zuma era of state capture, the fact that it is able to report profits at all ranks as a major success.

Read: Sipho Maseko to step down as Telkom CEO

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The only legal way a share can attach dividend rights is if it exists. If the company is using treasury shares to settle option issues, those shares do pre-exist and did attract dividends all along, but to the company itself as it owned them since buying them back in the market. Giving those dividends to the hired help now would amount to a a cash bonus, not a dividend.

“the amount settled includes the value of dividends attributable to the vested shares during the period between the date of grant and the date of vesting”

The “value of [the] dividends”, not the dividends themselves, it seems. Presumably the full value is taxable as income.

Chinese authorities are trying to cool off the growth rate of their larger companies, while South Africans are struggling to kickstart growth and job creation. Rapidly-growing Chinese tech companies are expanding into shadow banking to satisfy the needs of consumers. The shrinking local economy, due to socialist deindustrialization, destroys collateral in the system. Rapid economic growth poses a threat to the stability of the Chinese banking system while economic decay poses a threat to ours.

If the Chinese authorities were determined to use their political power to retard the growth rate of private institutions they would simply enforce some BEE codes and a redistributive municipal rates and taxes regime. These measures have proven to be extremely successful to cool off and kill economic growth.

The Chinese have learned this lesson the hard way under Mao Zedong. The loss of 30 million lives due to starvation has thought them that socialism does not deliver positive results. Luthuli House repeats this failed experiment, expecting different results.

On the topic of “Executive pay and undeserved wealth”, the article is incomplete without the mentioning of a certain Cynthia Carroll, greatest female leader of all times of a major mining company. Scaw Metals sold, Oppenheimers gone, lots of good staff retrenched. Indeed another success story.

Executive pay – the big fund managers have not complied with their fiduciary duty to their clients – by voting against the exorbitant pay packages.

Management is grabbing money that belongs to shareholders.

“Underserved wealth”! See Ramaphosa.

The only successful capitalist in a communist society is the one who is a member of the Communist inner circle, or at least has some major influence in it.
The rest are tip-toeing around on eggshells not wanting to attract too much attention.
That is why the Rich-Poor gap is always vast in these countries and is always used as an empty promise to equalize it from those in power to keep the vast majority beholden to them.

End of comments.

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