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Shareholder say on pay should be revisited

Head of Eskom Pension Fund says the issue should be debated in light of excessive executive remuneration.

At some point South Africa has to move towards introducing a shareholder vote that could sway remuneration issues if shareholders were unhappy, the chief executive and principal officer of the Eskom Pension and Provident Fund has said.

“[This issue] needs to be debated to say: should this just be a sentimental vote or should this be a vote that carries weight? If shareholders and stakeholders say no to the remuneration committee, they shouldn’t be able to proceed. Currently they can still proceed and we are seeing it at every AGM that we are attending,” Sbu Luthuli said during a debate on executive remuneration hosted by Deloitte and the JSE.

Terry Moore, business advisor and chairperson of Hans Merensky, said boards are increasingly becoming attuned to shareholder concerns, without necessarily having to introduce a binding shareholder vote.

Group Five’s non-executive directors were recently replaced after shareholder Allan Gray intervened, although not specifically on executive remuneration.

The debate comes amid growing criticism at excessive executive remuneration at some listed firms and in the wake of the introduction of King IV. While King IV requires companies to vote on their remuneration policies and implementation reports, it is a non-binding advisory vote. Where 25% or more of the voting rights exercised by shareholders are against the remuneration policy or implementation report (or both) the board has to engage parties to address their concerns.

A recent Moneyweb analysis of the Top 100 JSE-listed firms showed 14 occasions where more than 25% of shareholders who voted at the AGM were not in favour of the firm’s remuneration policy.

King IV’s argument against a “say on pay” by shareholders is informed by the fact that shareholders are often transient, aren’t liable for the company’s debts and because it does not believe that shareholders should be substituted for the remuneration committee.

The code requires boards to ensure fair and responsible executive remuneration practices in light of overall employee remuneration.

Determining what is fair and responsible is difficult as answers could be approached from various perspectives, Luthuli said.

One perspective is the disparity between the highest and the lowest paid employee in companies.

“The gap is too wide and this is not sustainable going forward,” he said.

If an executive received an incentive of R50 million or R60 million, it would amount to more than R200 000 a day, depending on the number of annual workdays. The lowest paid employee probably didn’t earn R200 000 in a year, Luthuli said.

“You then have to ask yourself: is there equity and fairness in this?”

Luthuli said fair remuneration practices are transparent and simple to understand. There also had to be alignment in terms of value creation.

“More often than not, you may find that the wrong things are being incentivised.”

An executive must not be rewarded for performance that is outside his control, whilst disclosure had to be clearly articulated at the outset to show how the board would measure and track performance and how value-add would be determined, Luthuli added.

Although he didn’t refer to Naspers by name, he said there was a company that dominated the local index, while most of its value was generated in China through a subsidiary (Tencent).

While the local management had made a very good investment by identifying the firm, one had to ask whether it was adding any active value. The issue of performance had to be dissected and there had to be an understanding that the right measures were in place to reward the right behaviour, while ensuring fairness and an alignment of long-term objectives, Luthuli said.

Being a proactive shareholder required upfront engagement, but sometimes boards and executives didn’t really want to allocate time to discuss issues and the pension fund had to use the annual general meeting (AGM) as a platform to raise its views. The AGM had become a “platform for grandstanding”, which shouldn’t be the case, he argued.

Nick Icely, head of Deloitte’s executive compensation practice, said to ensure better alignment of the interests of shareholders, company boards and executives, there had to be a recognition that there was no simple solution that would be appropriate for every situation.

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The biggest issue with executive pay is that it is unrelated to company performance. Any company showing a loss should not pay any executive bonuses. Long term incentives should not be paid annually, rather on employment or promotion only.

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