Sanlam and AECI are just two of the companies that in recent weeks have registered ‘no-shows’ in response to requests to shareholders for feedback on their remuneration policies.
In most instances less than a handful of shareholders attend the meetings that companies are obliged to hold in the event that more than 25% of shareholders vote against the remuneration policy and/or the accompanying implementation report.
This seeming indifference to what is acknowledged as a potential threat to social harmony has prompted the Institute of Directors in Southern Africa (IoDSA) to issue a guidance paper dealing with “effective stakeholder engagement within the context of remuneration”.
The paper notes that the King Subcommittee on Remuneration, which operates within the IoDSA, has identified a few concerns relating to Principle 14 of the King IV code.
That principle states that the governing body (the board) “should ensure that the organisation remunerates fairly, responsibly and transparently so as to promote the achievement of strategic objectives and positive outcomes in the short, medium and long term”.
It is the principle to which listed companies claim to adhere when drawing up their remuneration policies.
But now, five years since implementation of King IV in 2016, the IoDSA acknowledges a “perceived lack of effective stakeholder engagement between stakeholders and organisations on the matter of remuneration”.
It suggests this could be because of stakeholder apathy or because organisations have not created appropriate platforms for effective interventions with stakeholders.
Mike Martin of Active Shareholder, a not-for-profit company that helps socially responsible investors to exercise their company rights, welcomed the guidance paper, noting: “Active has for some time been frustrated at what we perceive as a failure by some companies to engage effectively with shareholders, let alone other stakeholders.”
Martin says that on many occasions he has been the lone attendee at the meetings companies are obliged to have in the event that more than 25% of shareholders have voted against the remuneration policy and/or the implementation report.
That obligation is in terms of the JSE’s Listings Requirements and is the only regulatory response to growing concerns about out-of-control executive pay.
The South African Companies Act is silent on the issue of shareholders’ response to the remuneration policy.
But that could change. The apparent shareholder apathy has prompted speculation that government might step in with changes to the Companies Act that would bring South Africa’s oversight into line with the UK or Australia. In those jurisdictions consecutive votes against the remuneration policy can result in board members being forced to step down.
‘Acknowledgement’ is not enough
While Martin welcomed the IoDSA’s acknowledgement of the problem he is disappointed by the lack of robust response.
Although the IoDSA paper recognises that “executive pay has never been more of a dilemma than in 2021” and that remuneration has become a complicated and controversial topic “resulting in the potential for multiple reputational risks” its recommendations for improving shareholder involvement are, says Martin, unpersuasive.
For instance, included in IoDSA’s list of “practical considerations” is that companies “read the proxy voting guidelines of the asset managers and proxy advisers”.
And that “when dealing with asset managers, know that it is possible that one party deals with the proxy voting aspects and another with the engagement aspects”. The party dealing with the engagement may not always be aware of how the votes are cast, says the IoDSA.
Martin says that the general approach of the paper is in keeping with King IV. “It assumes that all companies will comply and that all aspire to the highest standards. Unfortunately, this is often not the case and where this paper and indeed much of King IV falls short is that there are no hard rules or consequences.”.
Martin says there are no consequences for companies that fail to get the necessary 75% backing; all they have to do is “consult” with the dissenting shareholders.
There is not even clarity on what “consult” actually involves.
“Increasingly companies are adopting the approach that shareholders can raise their concerns at shareholder presentations, however only institutional and large shareholders are invited to such presentations,” says Martin.
Typical of the problematic situation is Mr Price, whose remuneration report is among the best issued by a JSE-listed company.
After failing to get the necessary 75% backing at its AGM in August 2020 the board invited shareholders to advise the reasons for their dissenting votes. The board received no responses. Remuneration committee chair Mark Bowman says in the 2021 report that the group “followed a comprehensive shareholder consultation process” with its top 25 shareholders during 2021. This might help secure the targeted 75% at this week’s AGM.
Martin, who does not follow Mr Price, says given the limited resources, it is reasonable for remuneration committees to focus on the large shareholders. His concern however is that whenever he has tried to engage with remuneration committees he has struggled to even get a response.
“Committees should be open to input from all shareholders, no matter how small, if for no other reason but to hear diverse views.”
On this he is in agreement with the IoDSA, which urges boards “to engage with shareholders and be willing to hear their views”.