Tuesday, January 18

Institute of Directors discusses the executive compensation ‘dilemma’


Sanlam and AECI are just two of the companies that have registered ‘no-shows’ in recent weeks in response to requests for comment from shareholders on their remuneration policies.

In most cases, less than a handful of shareholders attend the meetings that companies are required to hold in the event that more than 25% of shareholders vote against the remuneration policy and / or the performance report. attached.

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This apparent disregard for what is recognized as a potential threat to social harmony has led the Institute of Directors of Southern Africa (IoDSA) to publish a guidance document on “effective stakeholder engagement in the context of remuneration” .

The document notes that King’s Compensation Subcommittee, which operates within IoDSA, has identified some concerns related to Principle 14 of the King IV code.

This principle establishes that the governing body (the board of directors) “must ensure that the organization rewards in a fair, responsible and transparent manner to promote the achievement of strategic objectives and positive results in the short, medium and long term.”

It is the principle that listed companies claim to adhere to when drawing up their remuneration policies.

But now, five years since the implementation of King IV in 2016, IoDSA recognizes a “perceived lack of effective stakeholder engagement among stakeholders and organizations on compensation.”

He suggests that this could be due to stakeholder apathy or because organizations have not created adequate platforms for effective stakeholder interventions.

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Mike Martin of Active Shareholder, a non-profit company that helps socially responsible investors exercise their company rights, welcomed the guidance document, noting: “Active has been frustrated for some time by what we perceive as a failure of some companies to interact effectively with shareholders, much less with other stakeholders. ”

Martin assures that on many occasions he has been the only one attending the meetings that companies are obliged to have in the event that more than 25% of the shareholders have voted against the remuneration policy and / or the performance report.

That obligation is in terms of the JSE Listing Requirements and is the only regulatory response to growing concerns about runaway 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 apathy of shareholders has sparked speculation that the government could intervene with changes to the Companies Act that would align the supervision of South Africa with that of the United Kingdom or Australia. In those jurisdictions, consecutive votes against the compensation policy may result in board members being forced to resign.

‘Recognition’ is not enough

While Martin appreciated IoDSA’s acknowledgment of the problem, he is disappointed in the lack of a robust answer.

Although the IoDSA document acknowledges that “executive compensation has never been a bigger dilemma than in 2021” and that compensation has become a complicated and controversial topic “resulting in the potential for multiple reputational risks “His recommendations for improving shareholder engagement are, says Martin. , unconvincing.

Read: One for the people and tens of millions for the executives

For example, IoDSA’s list of “practical considerations” includes that companies “read proxy voting guidelines from asset managers and proxy advisers.”

And that “when it comes to asset managers, know that it is possible that one part deals with the aspects of the delegation of vote and another with the commitment aspects”. The party dealing with the pledge may not always know how votes are cast, says IoDSA.

Assumptions

Martin says the general focus of the article agrees with King IV. “It is assumed that all companies will comply and that all aspire to the highest standards. Unfortunately this is rarely the case and where this document and indeed much of King IV falls short is that there are no hard and fast rules or consequences. ”

Martin says there are no consequences for companies that don’t get the necessary 75% support; all they have to do is “consult” with dissenting shareholders.

There is not even clarity on what “consulting” actually entails.

“Increasingly, companies are taking the approach that shareholders can raise concerns in shareholder presentations, however only large institutional shareholders are invited to such presentations,” says Martin.

Mr price

A typical example of the problematic situation is Mr. Price, whose compensation report is among the best issued by a company listed on the JSE.

After failing to obtain the necessary 75% endorsement in its AGM in August 2020, the board invited shareholders to report the reasons for their votes against. The board received no responses. Compensation committee chairman Mark Bowman says in the 2021 report that the group “followed a comprehensive shareholder consultation process” with its top 25 shareholders during 2021. This could help secure the 75% envisaged at the Board. General Shareholders this week.

Martin, who doesn’t follow Price, says that given limited resources, it’s reasonable for compensation committees to focus on large shareholders. However, your concern is that every time you have tried to interact with the compensation committees, you have had a difficult time getting a response.

“Committees must be open to input from all shareholders, no matter how small, if for no other reason than to hear diverse opinions.”

In this he agrees with the IoDSA, which urges boards to “engage with shareholders and be willing to listen to their views.”


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