Shareholders are making their voices heard

During the global economic crisis two years ago, corporate largesse and executive pay became focal points for public anger and vengeance.

South Africa's recent strike action was partly grounded in resentment at the accelerating wage disparity between executives and the average worker.

Forensic accountant Phillip Theunissen says it takes the average South African CEO 75 days to earn R1-million, but the average South African worker has to work more than eight years to earn that.

Theunissen also found that average basic CEO remuneration has increased by an annual average of 19.9% since 2006 versus 15.4% for the average worker.

A survey by PwC found executives of JSE-listed companies earn up to 300 times more than the lowest-paid workers.

So what is the value of a director? PwC SA's Gerald Seegers, a director in HR services, said there is a legitimate requirement for companies to justify executive pay, and the new requirements will help to reveal exactly how remuneration committees determine the monetary value of directors' work.

"We are seeing (remuneration committees) take rising levels of shareholder dissent as a measure of the performance of non-executive directors. We would like to see a situation where shareholders have a binding vote. The JSE has now put in place a requirement for a 75% approval vote, so the JSE plays its own role as a regulatory body," he said.

"Did King III go far enough? I don't know, but activism will increase reporting clarity (including the performance conditions for bonuses). SA is now only in the first reporting phase since its publication. When it comes to shareholder noise on remuneration, the votes of the institutional shareholders before the AGM certainly gives an indication of sentiment.

"A committee would not want to propose anything that would be shot down at the AGM - it would reflect poorly on the committee. In the UK, if a proposal is denied, the chairman of the remco is obliged to stand for re-election. In this way, personal reputations are at stake," said Seegers.

"I think we'll see regulations in SA move further towards consequences for a vote-down. Currently, a 'no' vote leads to further consultation with shareholders, assessing the reasons behind the vote and ways to improve - although it must be noted that this seldom happens.

"In SA, the JSE functions well - we don't need more legislation; we need a body that functions well. The Institute of Directors Southern Africa (IoDSA) and the JSE are sufficient, in my view. We don't need to institute caps on earnings like in Germany. King III will evolve to include consequences, which will be fine."

Sean O'Hare, a partner at PwC's HR services division in the UK, said pressure from institutional shareholders as a feedback loop had whittled away bad practices.

"With the non-binding vote shareholder activism has influenced change - there is a say before the AGM. The chairs of (the committees) could historically be pressured by management, so having shareholders provide feedback can help them to push against director greed. The (committee) has more discretionary power to set targets now, which is helping to build trust among shareholders," he said.

There is reputational risk to a vote-down - it's a key part of corporate governance to get shareholder support. Another trend is that non-executive directors tend to stay for shorter terms now - there's more regular refreshment of the board, which is a positive move."

O'Hare said the acceptable percentage for approval votes was a moot point. "Ultimately I think it should be in the territory of 80%. Anything less should mean a rethink. Institutional investors are still dominant, which means that if they're happy, you'd be likely to see a 90% approval vote anyway."

Ansie Ramalho, CEO of the IoDSA, said the organisation convened a committee to draft a code for responsible investing. "The role of the institutional shareholder is to influence the companies they invest in to follow sound governance principles and practices. The code will be to provide institutional shareholders with guidelines and recommendations on how they should perform this role," she said.

"We anticipate that the code, together with King III, will go a long way towards making the overall governance system more effective.

"Standard Bank earlier this year had to put a R7.5-million bonus it wanted to pay its outgoing chairman to shareholder vote.

There is no requirement in our Companies Act to subject directors' remuneration to shareholder vote, but I suspect Standard Bank's articles required it, which is quite common. The new Companies Act will include that provision.

Only 57.5% of shareholders voted for the bonus while 40% were against it. The rest abstained. Never before, as far as I am aware, has there been in SA such a close margin on voting on directors' remuneration. This is a very clear indication that shareholders are no longer going to treat remuneration as a routine matter. They are going to make their voices heard.

"Shareholders should make more effective use of their voting, which is not always easy for the individual shareholder. It is possible, though. One only has to look at what Theo Botha has achieved in galvanising shareholder activism."