Legislators are ineffective when it comes to reining in big business

Failures and scandals led to posturing about getting tough on governance, but resulting measures are toothless

A has had a steady stream of corporate governance failures in recent years, with each new scandal further exposing the fiction that corporate leaders can be trusted to “selfregulate”. In the wake of these events, there was much posturing by regulators about plans to get tough on adherence to corporate governance rules. But three recent sets of regulatory amendments reveal how toothless these threats were, and how ineffective our legislators are at reining in big business.

In 2018, the following pieces of proposed regulatory and legislative amendments were released for public comment:

Draft directive on sustainability reporting and disclosure requirements (Financial Services Board, now the Financial Sector Conduct Authority or FSCA, March 2018);

Consultation paper on possible regulatory responses to recent events surrounding listed issuers and trading in their shares (JSE, September 2018);

Companies Amendment Bill, 2018 (department of trade & industry, September 2018).

These documents appeared to indicate regulators were willing to strengthen some weaker areas of corporate governance and responsible investment oversight. The draft directive and consultation paper processes are now complete, but the outcomes backtrack from any attempt at bold regulatory reform.

The long-awaited draft directive aimed at clarifying the obligation on pension fund trustees to incorporate environmental, social and governance (ESG) factors into their investment decision-making, which they are required to do by regulation 28 of the Pension Funds Act. The need for clarification arose because, despite the promulgation of regulation 28 in 2011, pension fund trustees did not appear to be acting robustly or transparently on ESG integration. There was also little oversight or transparency as required.

The draft directive set out matters to be covered by a pension fund’s investment policy statement, including an explanation of “how its investment approach ensures the sustainable long-term performance of its assets”, as well as transparency and reporting requirements. Had the directive been finalised, pension funds would

Shave had to implement these requirements no later than 12 months after its effective date.

In June 2019, more than a year since the draft directive was published, the FSCA issued not a final directive but only a “guidance notice on the sustainability of investments and assets”. So there are no legal obligations on funds to improve their implementation of regulation 28 or be more transparent. The FSCA merely “encourages and advises” the industry, “in the interest of transparency, accountability and the fair treatment of its members, to apply the principles set out in [the] guidance notice dealing with disclosures and reporting”. This means little will change: funds already implementing regulation 28 robustly will continue to do so, and the vast majority that do not are no more incentivised to improve than they were before the draft directive was issued.

In response to queries from UK publication Responsible Investor, an FSCA spokesperson said the FSCA “is no longer ‘empowered’ to issue [directives] following changes to the Pension Funds Act”. But the FSCA could have issued a conduct standard in terms of section 106 of the Financial Sector Regulation Act with an effect similar to that of a Pension Funds Act directive.

The JSE’s consultation paper was developed to get “public input on possible improvements to its regulatory approach to new and existing listings on the JSE”. It proposed, inter alia, the following changes to the JSE listings requirements:

That a prelisting statement should disclose the particular laws relevant to an applicant issuer’s

main industry of operation (for example, mining), and that the board of directors make a “positive statement regarding compliance with the above legislation” in the prelisting statement.

Mandatory training for audit committee members and company secretaries on their responsibilities pursuant to the Companies Act and the JSE listings requirements.

A nonbinding advisory vote on corporate governance to address the “need for enhanced focus and accountability in respect of corporate governance”.

Amended listings requirements do not require a positive statement on compliance with laws relevant to an issuer’s main industry of operation. Despite many civil-society and academic reports in recent years detailing corporate legal noncompliance, particularly with mining and environmental laws, the JSE was persuaded by industry that “it may not be practical to address compliance with each and every law”.

The amended listings requirements do not require mandatory training for audit committee and company secretaries; the JSE was persuaded that it would be too burdensome. The JSE decided not to proceed with the proposal for a nonbinding advisory vote on corporate governance.

None of the proposed amendments was ground-breaking to begin with. That most of those with potential to improve the system have been abandoned or weakened is disappointing. But there are also many other golden opportunities regulators would be expected to take up if they were really serious about improving accountability in the private sector. Three of the most obvious missed opportunities are:

Binding vote on executive remuneration: SA listed companies are currently required to table only a nonbinding advisory shareholder vote on executive remuneration. If more than 25% of shareholders vote against remuneration, the company is required simply to “engage” with those shareholders. SA is one of the world s most unequal countries, but relative pay for JSE-listed company executives is among the highest in the world. Amending the Companies Act to require a binding vote on executive remuneration would have been a clear signal from the DTI that the government is serious about tackling wage inequality. Such a requirement could be tailored to suit local conditions, as it was in the UK, France and Australia. But the 2018 Companies Amendment Bill merely proposes inserting a section requiring preparation of a three-part “directors’ remuneration report”, which must be presented to shareholders only at the AGM.

Disclosure of remuneration gaps: disclosure on the remuneration gap between men and women and information on wages of the lowest-paid workers at listed companies is recommended by King IV, and was supported by business at the October 2018 jobs summit, but neither the JSE nor the DTI or the department of labour proposed any regulatory changes to implement this disclosure.

Climate crisis: climate disruption manifests itself daily, and financial and corporate regulators globally are clear on the role business must play in tackling this crisis. It would be a simple yet profound step for the FSCA to require, or even recommend, that pension funds incorporate a climate-change position statement in investment policy statements, and for the JSE to recommend that all its members report in terms of the recommendations of the task force on climaterelated financial disclosures. Just Share and others have called repeatedly for regulators to take these simple steps, but received no response.

It is impossible to tell whether this regulatory timidity is the result of corporate lobbying, political compromise, capacity constraints or all of the above. But it is hugely disappointing that even in the light of all that transpired in the past few years, the people in charge of holding big business to account in SA seem unwilling to take the bold steps that might result in meaningful change.

● Davies is executive director of Just Share.