Executives continue to get very well paid when companies do well, but also get very well paid when results are poor. Executive remuneration is lacking in symmetry with the performance of the enterprise. This gap between payment & performance and the short-term nature of these rewards incentivises an obsession with the short term, I think.
Shareholders of listed companies are increasingly pushing back on executive remuneration. The remuneration packages of some CEOs recently announced are simply obscene. It cannot be justified.
The votes dealing with executive remuneration at AGMs is a requirement of the King IV Code on Corporate Governance. These votes are not binding on the company because the Code is not law. It is however incorporated in the JSE Listings Requirements, forcing listed companies to table non-binding resolutions at each AGM.
Increasingly shareholders of JSE-listed companies are becoming tougher on executive remuneration amid the weak economy.
When more than 25% of votes are recorded against the resolutions dealing with policy and implementation, the board is forced to engage with shareholders on the matter.
Unfortunately, these follow-up meetings are often no more than a one-sided presentation by the board, with hardly any response from shareholders. Seldom more than a tickbox affair.
Compare this to the Australian “two-strikes” rule which has been in place since 2011. The so-called “two strike” rule means that if more than 25 per cent of investors vote against a company’s proposed remuneration report at consecutive AGMs, then the entire board faces a spill motion. Another shareholders’ meeting must be called within three months after the AGM. Key management personnel and parties related to them, are not permitted to vote in the original vote on executive pay but may vote concerning board elections. Therefore, it is possible that shareowners my “spill” a board with a second-strike vote.
Draft Companies Act Amendment Bill
The draft amendment bill to the Companies Act issued in 2018 proposes that shareholders be able to scrutinise the remuneration policy and implementation report at an AGM. This is no stronger than what listed companies have been doing, but at least bring all companies into the fold.
It is, however, a long way behind the more pragmatic approach being followed in Australia. Calls are already being made there for moving on from this rule. Unfortunately, we are not even considering this.
Our approach to executive remuneration is lacking in symmetry.