HOW SWEET IS THE C-SUITE?

Some of the JSE’S blue chips have become adept at brushing off investors’ concerns over CEO pay. It’s time to toughen up the rules

Finally, the time has arrived to add muscle to SA’S flabby rules on executive pay, which have allowed companies like Shoprite, MTN and TFG to smugly brush off investor concerns. For years, our rules on pay were roughly in line with overseas markets as shareholders were only ever asked for an “advisory vote” on remuneration policy. So, even when investors voted “no”, CEOS could pat them on the head, cooing: “Don’t worry, we’ve heard you.” And turn their backs.

In tougher jurisdictions, this was never going to fly forever. This week, a draft rule was proposed in Britain’s parliament with great significance for some of the largest companies on the JSE — including Anglo American, British American Tobacco and Investec — that have a dual listing on London’s stock exchange.

This rule will force all London-listed companies to publish the ratio of their CEO’S pay to that of the average worker, as well as the justification for it. It is the culmination of UK prime minister Theresa May’s call in 2016 to curb runaway executive pay.

The Brits aren’t alone. The US has already had this rule in force for a year, and Australia has an even harsher “two strikes” rule that makes it possible for all directors to be voted off the board after two successive years in which more than 25% of shareholders vote against a company’s pay policy.

But the jury is still out on whether these rules will work. In the US, publication of this ratio has failed to produce the public shaming of CEOS that many thought would lead to lower pay levels.

At the least though, disclosure has helped us under- stand the pay dynamic better. Ethan Rouen, a professor at Harvard Business School, studied thousands of US annual reports and came to the intriguing conclusion that firms with an abnormally high ratio of CEO pay to that of their average staff member performed worse than their rivals. “When both occur — the CEO is overpaid and the employee is underpaid — you really see the firm’s performance suffer,” Rouen says.

This is useful evidence that lavishing high salaries on CEOS doesn’t improve performance — even if Rouen warns that it’s hard to properly interpret what the pay “gap” really means. It makes a big difference what industry you’re in. In the case of Shoprite, CEO Whitey Basson was being paid more than 700 times more than the average worker. But that ratio is a lot lower at Sasol, mainly because there are so many better-paid engineers at the petrochemical company.

Still, it seems inevitable that SA will follow the UK in demanding this ratio be disclosed — even if we don’t implement the harsher Australian “two strike” rule.

In Australia, it certainly seems to have worked. A Harvard Business Review report says the rule has “given shareholders muscle” and changed the thinking around CEO pay. “No-one is arguing that CEOS and entrepreneurs don’t deserve to be highly paid,” the report says. “The public’s concern is with professional managers who have risked little, but who think they have a right to earn Bill Gates money.”

In SA, however, we need to move on from the relatively archaic “advisory vote”. Consider that at Shoprite a “two-strike” rule would have already been triggered, as more than 28% of shareholders voted against its remuneration policy for the past three years. (Shoprite has largely dismissed the results, saying only that it is “engaging” with shareholders.)

Equally, fashion retailer TFG has smugly continued as if nothing has happened, even though 30.3% of shareholders voted against its pay policy last year and 47% against it in 2016. MTN has been equally slack.

Jon Duncan, head of responsible investment at the Old Mutual Investment Group, believes our rules are too weak. “The lack of accountability is especially troubling given that we live in one of the most unequal societies around. At the least, we need a binding say on pay policies. There have to be consequences for directors,” he says.

Of course, these rules will not by themselves address inequality. As one savvy business leader said this week: “The issue is not the gap between someone earning R10m and someone earning R100,000. The issue is the gap between people earning R100,000 and those earning zero, because they don’t have jobs.”

His point is SA’S inequality stems more from unemployment (which now sits at 26.7%) than is the case in the US (3.8%), the UK (4.2%), or Australia (5.6%).

Duncan admits that harsher remuneration rules won’t, by themselves, narrow inequality in SA. “But additional transparency and accountability are a good start,” he says.

The lack of accountability is especially troubling given that we live in one of the most unequal societies