Companies Amendment Bills: DTIC briefing; with Minister & Deputy present

Meeting report

The Chairperson indicated that the Committee would be briefed by the DTIC on the two Companies Amendment Bills.

Thereafter, she handed over to the Minister for his open remarks.

Opening remarks by the Minister

Mr Ebrahim Patel, Minister of Trade, Industry, and Competition, told Members that South African company law is the body of rules that regulates corporations formed under the Companies Act. Company law in the country can be traced back to the Cape Colony’s Joint Stock Companies Limited Liabilities Act No 23 in 1861. It evolved further and culminated in the Union Companies Act 41 of 1926, which was replaced in 1976 by the Companies Act 61. Despite the changes, this legislation remained in the mould of English law.

In 2004 a review was conducted of the country’s company law and was approved by Parliament in 2008, with the enactment occurring in 2011. The 2008 Act introduced significant changes to, among others, corporate governance, financial accountability, and provisions relating to shareholder activism. The Act also gave rise to key institutions such as the Companies and Intellectual Property Commission (CIPC), the Companies Tribunal, the Takeover Regulation Panel, and the Financial Reporting Standards Council, he continued.

The 2008 Act was subject to review within five years of implementation. This was done by the DTIC to keep up with current transactions and to eliminate anomalies and inefficiencies in the Act.

The first of the two Bills was published in 2018 for public comment, with the draft being tabled to the National Economic Development and Labour Council (NEDLAC) in 2019 for consultation. This took two years to complete partly because of the hard lockdowns implemented during the COVID-19 pandemic. Thereafter, the draft Bill was revised in October 2021. The DTIC received 78 submissions from various stakeholders, and more than 900 email submissions were received indicating whether an individual supported the Bill or not, he mentioned.

The Bill, he explained, relates to the ease of doing business in the country, as well as implementing measures to counter money laundering and terrorism. A number of the amendments seek to advance the former, through providing legal certainty where these do not apply, providing greater flexibility to companies in certain circumstances, or removing unnecessary provisions in the Act.

Research presented by Business Unity South Africa (BUSA) during the NEDLAC process showed that it is common practice in a number of countries to require disclosure of remuneration for specified senior positions. In line with this, the Bill proposes a new section, Section 30 (A), obliging public companies and state-owned companies to prepare and present a director’s approval of remuneration report to the shareholders of the company. This is believed to address cases where, both in the public and private sector, the level of disclosure and the information provided to the shareholder representative did not meet the required standards, he continued. Moreover, it seeks to ensure good and efficient governance.

Section 30 (A) also proposes that the remuneration policy should be presented at an annual general meeting (AGM) for approval by ordinary resolution. Once approved, the policy would only have to be presented every three years, unless a material change is recommended. If the remuneration policy is not approved, the Bill requires that it be presented at the next AGM until such approval is obtained – and changes to the policy can only be obtained once the shareholders approve it.

Referring back to BUSA’s presentation at NEDLAC, he said that the research showed that in many countries a distinction is made between the requirement of shareholders voting on the remuneration policy and voting on the implementation report. The Bill followed the examples of many countries where a remuneration policy is tabled for shareholder approval on a less-than-annual basis.

The proposal for greater transparency and the publication of the pay gap is also in line with a number of private and other initiatives across the world, in line with the King Report on Governance in South Africa which states that the remuneration of executive staff should be fair and responsible in the context of overall employee remuneration, and that it should be disclosed as to how the gap between the executive and lower staff will be addressed.

Recent years have also seen shareholder dissatisfaction with pay and in a large number of instances they have voted against remuneration reports. Under current practices, except for boards committing to discuss matters with disgruntled shareholders, shareholders do not have sufficient mechanisms to address their grievances.

After some consideration, the department decided to lower the threshold required for shareholders to approve a remuneration report from 75% to an ordinary resolution of 50 +1, and to introduce a list of consequences should shareholders be dissatisfied. It decided to make this proposal because it believed it would assist in transparency and inform public discussion, which may have an impact on the functioning of boards.

If requested, the department would make available information from Statistics South Africa and Price Water Coopers (PWC’s) Regular Survey of remuneration, which shows the median pre-tax package of Chief Executive Officers (CEOs) in listed companies against the national minimum wage.

He stressed to Members that the Bill did not seek to propose what the ratios of executive remuneration and general workers should be – rather, it sought to give greater transparency and to empower the shareholders voting to be more effective than is currently the case. However, it noted the general public’s concern about the growing disparity between executives and general workers.

Referring to the Second Amendment Bill, he explained that it was initiated to fulfil some of the recommendations made by the Zondo Commission, which recommended that the Companies Act be amended to expand the Time Bar – contained in Section 162 (2) and (3). Section 162 of the Act makes provision for an application to a court for an order to declare a person as a delinquent or under probation when they fail to perform their duties as required by the Act, and if they are currently or were a director of the company twenty-four months preceding the application.

The implication of being declared a delinquent director is severe, with the law providing that it can either be unconditional or for a fixed period of time. Directors declared as delinquent are listed on the Companies and Intellectual Commission (CIPC) as such.

There were two key recommendations made by the Zondo Commission on this Section. One, that Section 162 be amended to ensure that the application for a declaration of delinquency be brought even after the two-year period, where there is good cause shown, he explained.

The government believed that any amendments to the Act on the Time Bar should be of wider application and apply generally, he said. Furthermore, it should be balanced towards both the defendants and applicants. Taking this into regard, the department proposed that the Time Bar period be set at five years and that courts be allowed to extend the time period in specific cases if good cause is shown by the defendant and this should be retrospective.

It also appeared that the Time Bar in Section 77 (7) of the Act requires an amendment, he said. This section deals with the liability of directors in prescribed offices for breaching their fiduciary duties and duties of care, skill, and diligence as well as certain statutory duties. While the three-year period contained in the Act conformed with international practice, it is considered appropriate that the court should be allowed to extend the Time Bar of three years, if good cause is shown, on the basis that such an extended period may also cover acts or omissions that occurred during the period before the extension.

In the document provided to the Committee, the department also highlighted the extensive engagements it had with stakeholders on the Companies Amendment Bill. Many of the concerns of the stakeholders’ inputs have been included in the Bill, and a level of consensus has been reached.

The Zondo Commission’s recommendations, however, were not included in the second Bill, as they were received late.

He extended his appreciation to the specialist committee on company law, and its chairperson, Prof Katz, for the work it had done; as well as officials from the department and NEDLAC.

Briefing on the two Companies Amendment Bills

The presentation was covered in the Minister’s opening remarks.

(See Presentation)

Due to connectivity issues, the Chairperson was unable to participate in the meeting. As such, Mr Mbuyane was made the acting Chairperson for the rest of the proceedings.

Mr Mbuyane opened the floor for discussion.

Discussion

Mr D Macpherson (DA) welcomed the Bill's overall objective of trying to ease the of doing business in the country; as well as attracting new businesses to the country. However, he remained concerned about how the department would carry out the implementation of the Bill.

He also commended the department for including certain recommendations made by the Zondo Commission in the second Bill.

Thereafter, he indicated that he would pose several questions to the department.

One, he felt that some of the provisions contained in the Bill might have the unintended effect of making it more difficult and expensive to conduct business in the country, and he asked for the DTIC to provide comment on that.

Two, he asked how businesses had responded to the provision for a reduction in the pay gap between senior executives and workers. Three, he asked if this provision did not incentivise companies to avoid disclosing the remuneration of senior executives or to try to remunerate them in different ways so as to avoid the legislation. 

Four, he asked if the department did not believe that it would be encouraging senior executives to seek employment outside of the country by making it a requirement for companies to disclose their remuneration to the shareholders, and the accompanying scrutiny they would face. especially as these companies are benchmarked against internationally-listed businesses that will not have to comply with the regulation.

Mr F Mulder (FF+) asked if the department had factored in the possible adverse effects that could ensue from the Bill’s objective to lower the significant disparity in remuneration of senior executives and general workers, particularly given the competitive packages offered by international companies.

Mr W Thring (ACDP) was also pleased that the Second Amendment Bill sought to give effect to some of the recommendations made by the Zondo Commission, all of which he supported.

He stressed the importance of improving the ease of doing business in unlocking further economic opportunities in the country, much like in Rwanda.

The ACDP, he indicated, supported the Bill’s provisions to implement more measures for countering money laundering and terrorism. These provisions should also be in line with best international practice.

Previously, the ACDP raised the concern of certain municipal managers working in distressed municipalities earning more than the President of the country, from the period 2000 to 2010.

He stressed the importance of implementing legislation that prevents the public from being harmed by the wrongful actions made by delinquent directors. While he acknowledged that the private sector could not be absolved from the high levels of unemployment and inequality in the country, he felt that the government needed to take greater initiative to tackle some of the structural problems preventing the country from resolving these two challenges. 

Thereafter, he expressed hope that the legislation would not overburden businesses and eventually lead to their demise; rather, it should only look to rein in the excesses of the private sector.

Mr C Malematja (ANC) thanked the Minister for the clear presentation, which he felt touched on some solutions that will go towards reducing the socio-economic issues faced by the country. However, he wondered how the reasonableness of the remuneration would be determined in terms of the Act. Further, he asked what remedies the Act provides under the circumstances where there is no correlation between the reasonableness of the remuneration of the senior executives and the lowest-paid employees.

Then, he asked what effect the requirement included in Section 30 (A) for private companies to present their remuneration report to the board would have on them.

Referring to slide 15 on the disclosure of beneficial interest governed by amendment Section 26, he asked what type of companies would be excluded and on what basis they would be.

Mr M Monakedi (ANC) also thanked the Minister for the clarity of the presentation. Thereafter, he posed two questions to the department.

One, he asked what consequences the Bill had proposed for the failure to obtain the required approvals for a remuneration report – the Bill proposes that public and state-owned companies produce their remuneration policy for directors and prescribed officers for approval.

Two, he asked how the requirement for companies to report on the remuneration gap between senior executives and general workers would address the issue, especially as South Africa is reported to be one of the most equal societies.

The Chairperson asked whether state-owned entities (SOEs) will be expected to prepare their own remuneration policy, or if the National Treasury (NT) would be expected to do so.

After that, he asked what consequences companies that did not disclose their remuneration policy would face.

Also, he asked how the reasonableness of the remuneration is determined or assessed by the current Act.

In his final question, he asked what remedies the Bill provided under circumstances where there is no correlation between the reasonableness of remuneration of senior executives and the lowest-paid employees.

Minister Patel indicated that the questions asked by Members touched on many of the issues within the Bill that the department has been deliberating on.

One of the things the department sought to advance in the Bill was the ease of doing business in the country. A number of the measures in the Bill will evidently improve the ease of doing business. The DTIC hoped that it had crafted the Bill in such a way that it removed any unnecessary administrative or red tape requirements, particularly where there is a necessary and specific objective.

In response to the question of whether some of the provisions contained in the Bill might have the unintended effect of making it more difficult and expensive for businesses to operate, he pointed out that the Bill required new provisions on the disclosure of the true owner of a company and remuneration. In fact, the bulk of the measures on true ownership have already been incorporated in the Act, and these proposed amendments were only minor refinements.

Regarding the question on businesses' response to the provision of pay equity in the Bill, he told the Committee that the matter of pay equity was contested during the discussions that took place in the NEDLAC. Despite that, there had been a considerable level of consensus on the substance of the provision.

Touching on the question related to whether the provision did not incentivise businesses to hide the remuneration of their senior executives, he said that the department had to consider several options because of the significant public concern about the large pay gap; either it could decide not to do anything in the hope that it will be dealt with by other role-players in society, or take an active role to resolve the issue through legislation.

There are a range of steps that can be taken in the statutory treatment of income gaps in a company, he continued. One can either require a disclosure to be made; the legislation can request for companies not to have a gap above a certain ratio; or the legislation can prescribe a specific ratio that companies must have. The department did not favour the latter option given the dynamism of the market, the difference in the skills mix of companies, the fact that the requirements of specialist skills may vary between companies, and the adverse effects that such a decision could have.

Consideration was made on whether there should be broad guidance, through a normative standard which is not prescriptive, that could assist companies. However, the challenge was what that norm would be as it will vary greatly between the sectors of the economy.

Due to these varied obstacles, the DTIC resolved to require companies to disclose the remuneration of senior executives and for the shareholders to approve. By ensuring that they understand the remuneration policy, he further outlined, shareholders would have an increased say over the direction of companies.

During the discussions in NEDALC, organised labour preferred that a remuneration policy be approved through a super majority, or 75%, of shareholders. However, the DTIC differed on this and advocated for a simple 50 +1 majority.

The department hoped that the requirement to present the company’s remuneration policy at an AGM would act as an important disciplinary measure for a board and force it to take into account several factors, like skills needs, pay differentials elsewhere in the same sector, global market and societal concerns because it will be aware of the scrutiny it will face from the shareholders, he said.

Continuing his response to the question, he said that generally, the guidance around remuneration was fairly strong and robust, with the current law already anticipated the potential for companies to hide their remuneration policy and has placed measures to address this. Nonetheless, tracking such information is the job of an auditor, who is permitted to ask probing questions about the flow of money and the utilisation of assets. Globally, the accounting profession has developed standards to ensure that remuneration is appropriately disclosed.

He felt that it was important for Parliament to consider the question posed on whether the publication of the level of remuneration would disincentivise the acquisition of highly talented individuals, and whether it had found an appropriate way to formulate the wording in the Bill, so as to give expression to the different considerations made on this matter.

At present, the Bill does not prescribe how companies should remunerate their highly talented staff members. This placed an onus on a company board to explain to shareholders why the specialist worker is earning what they are earning, he pointed out. If the responses provided are not acceptable to shareholders, they have the power to decline the remuneration report. Such a measure, he believed did not constrain payments on a high-performing talent but instead that only skilled workers are being remunerated at the high levels.

Further on that question, he outlined that boards of companies now had the opportunity and implicit obligation to engage with their shareholders. Several examples in the media have shown that despite certain companies performing poorly, the remuneration of the Chief Executive Officer (CEO) did not reflect that. In the cases where there is no correlation between the value that an individual brings to a firm and the remuneration he or she takes from the firm, the Bill will place a spotlight on that.

On whether the provision for equity in remuneration would incentivise individuals to seek employment outside of South Africa, he stated that there are varied reasons why an individual may decide to seek employment elsewhere. Nonetheless, the department hoped that it had crafted the provision sufficiently and carefully by not prescribing and placing a cap on the incomes, thus allowing talented individuals to continue working in the country and at the same time creating transparency for shareholders.

He stressed that the department had to balance the different views on how lenient it had to be or harsh on business in the legislation.

Touching on the question of the pay gap between the top 5% and the bottom 5%, he explained that evaluating the gap in remuneration between senior executives and the lower-paid workers may not always give a good reflection of the general pay gap and may, in fact, exaggerate it company because in certain instances companies that are not performing well may have to hire a highly talented CEO at a high remuneration rate. Instead, the department believed that comparing the top 5% of the income band and the bottom 5% would give a measured sense of whether the remuneration gap ratio was fair or not.

The department had taken note of the challenges that took place during the Financial Action Task Force process and was pleased that the majority of the concerns raised it raised were addressed in the amendments published in 2022, he mentioned.

Referring to the concern raised of certain municipal managers, working for distressed municipalities, and earning more than the President of the country from the period 2000 to 2010, he highlighted that certain municipalities have argued that they have had to pay above the usual rates for certain skills due to the high remuneration rates offered by the private sector. The department hoped that the proposed wider disclosure could assist in dealing with cases where officials are paid more than the President.

He informed Members that he had recently attended a meeting in KwaZulu-Natal to discuss the state of the sugar industry and the measures that can be taken to strengthen it. After the release of the Sugar Master Plan, the DTIC managed to make considerable progress in the sector up until Tongaat Hullet, which refines nearly half of the country’s sugar, was forced to go under business rescue in the previous year because of fraud committed by members of its executive; the effect of which nearly brought down the company. Lessons would have to be learned on this, he advised, to bring about adequate reforms that will improve corporate governance across businesses in the country.

In response to the question on what remedies the Act provides under the circumstance where there is no correlation between the reasonableness of the remuneration of the senior executives and the lowest paid employees, he said that executive pay often fuelled unhappiness amongst workers, with trade union leaders often reporting their difficulties in obtaining a mandate from their members for a settlement of a wage dispute, even when they are able to point out the state of the company’s financial performance.

The department’s mission is to bring about social cohesion within the country, in line with the Constitution’s objectives. Resolving income inequality in the country was more pivotal than ever, he underlined, given the extent to which it is affecting many citizens.

The current Act did not give a set of factors that boards must consider in determining the reasonableness of remuneration. Proposals were made on this and it was discussed in NEDLAC, and it was agreed that the bulk of the reform in the Bill would focus on the need for companies to disclose more information, rather than the prescription of the criteria that should apply to the test of reasonableness. As such, the department has left the determination of reasonableness to shareholders – who will have reference to the market rate, he said.

Regarding the question of what type of companies would be excluded and why that would be so, he indicated that the current Act makes a distinction between companies that have a high level of public interest, and those with less. Where a company has a greater level of public interest significance, the requirements for disclosure and conduct can be higher than ones that would apply to medium-sized businesses, whose impact on the economy has a lower public interest expectation.

The criteria that would apply, he continued, would be the level of employment, the turnover of the company, or the significance of the company as measured in line with the requirements of the Act and regulations. Presently, the Act has a public interest score.

On the question related to what consequences the Bill had proposed for the failure of a board to obtain the required approval for a remuneration report, he outlined that the Bill proposes that the members of the remuneration committee should not be eligible as members of the committee for a set period when a remuneration report is rejected.

Through this measure (which can lead to a reputational loss in the private sector), the DTIC sought to ensure that the committee members apply themselves diligently to their responsibility, which is to manage the affairs of the company regarding the payment of senior executives, in a manner that is consistent with the economic need of the company and societal expectations, as would be expressed by the shareholders.

Another measure is that the remuneration report will have to be presented in another meeting, where the board will be expected to engage with the shareholders, to ensure their views are taken into account, he added.

Referring to the question of how the requirement for companies to report on the remuneration gap between senior executives and general workers would lead to its reduction, he mentioned that the department’s proposed model of disclosure which gives clear powers to the shareholders holds the board accountable, requires both a remuneration report and an implementation report so that there is visibility – and that the remuneration report has to be brought to an annual general meeting for the shareholders to scrutinise – will go some way in reducing the gap.

While the department noted that it could have gone further in the provisions, it recognised that it had to balance many considerations, such as the need to respond to the concerns of citizens and also build business confidence in the country, and it believed that it struck the balance fairly. These provisions follow considerable discussions between business and organised labour in NEDLAC.

In response to the question of whether SOEs will be expected to prepare their own remuneration policy, or whether they would be prepared by the NT, he said that the NT set the guidelines for board fees paid to board members in certain types of public entities.

Discussions within the government have been ongoing as to whether there should be a strict remuneration for CEOs or whether guidelines should apply. At the moment, the Cabinet supports the visibility of the salaries received by CEOs of SOEs. However, the challenge of the small skills pool in the country remained, he added.

The Chairperson was pleased with the responses provided by the Minister. After that, she asked the Committee Secretary what steps the Committee would now have to take going forward.

The Committee Secretary explained that the Secretariat is currently in the process of finalising applications for the publication of the two Bills, calling for public comments, which should be concluded at the end of the current week. Public hearings will be scheduled for October, to provide citizens sufficient time to prepare comments on the Bill.

The Chairperson asked if the Members would be provided a document on the process outlined.

The Committee Secretary said that they would.

The meeting was adjourned.