Financial Mail - Investors Monthly
Shareholders shunted
Ann Cro y on the Companies Act
“For listed companies the effect is evident in the growing number of boards and CEOs who have ’gone feral’
The Companies Act 2008, which only became effective in 2011, represented a setback for shareholder rights.
Under the old act the board had powers delegated by the shareholders; the new act transferred the authority to run a company from the shareholders to the board. In an era of increasing shareholder activism the drafters of SA’s 2008 Companies Act decided to push back against the global trend of increasing shareholder power vis-à-vis the board.
An article by Irene-Marie Esser of Unisa and Piet Delport of Pretoria University describes how the 2008 act places management of the business and affairs of a company under the board, which has the authority to exercise all of the powers and perform any of the functions of the company subject to the company’s memorandum of incorporation or the act.
“The 2008 Companies Act introduced a shift in the ultimate power in the company from the shareholders to the board. The board of directors now have the ultimate power.”
For listed companies the effect is perhaps evident in the growing number of boards and CEOs who have “gone feral”, behaving as though they were unaccountable to, and unrestrained by, shareholders.
Last year the DTI published a draft amendment bill to the
Companies Act, the first substantive amendment since 2011. The amendments, which are making their way through Nedlac, contain nothing that would diminish the power given to directors. Indeed where they don’t add to the bureaucratic burden, the amendments chip away further at shareholders’ authority. It is as though the authors have decided, for whatever reasons, not only to ignore recent global developments in corporate governance but also to ignore widespread calls for government to lighten the near-crippling bureaucratic load on small businesses.
From now on it won’t just be comparatively wellresourced listed companies, state-owned entities and companies with a public interest score above 500 who are required to have a social and ethics committee. All public companies will have to have one. This means the board of every public company will have to pay a few directors to focus not on actually creating something but on managing more bureaucratic red tape.
It gets worse. The social and ethics report, dull chunks of which are read out at AGMs of listed companies, will have to be externally assured. And so the DTI is poised to create more rent-seeking opportunities for the middle-men clogging up SA’s potential.
It’s not that a social and ethics committee wasn’t an enlightened idea at the time of the drafting of the 2008 act. Legend has it that it was the result of pressure from Cosatu, which was generally outmaneuvered in the discussions around the first post-1994 Companies Act. It presented an opportunity for the board to get input, on social and ethical matters, from a range of parties with labour being the most obvious. It quickly became just another board committee providing opportunities for directors to bump up their already generous fees. In the listed environment it has been a damp squib; used as a training ground for new directors who provide flowery accounts of the company’s social investment projects at every AGM. Why is the DTI not looking to the social and ethics committee as the ideal opportunity for companies to appoint labour representatives to the board?
And then there’s the issue of executive remuneration. Here the DTI has missed another opportunity; it comes up with nothing new, nothing creative, just more red tape. The amendments will require all public companies to prepare a remuneration policy and implementation report. At present JSE listed companies are required to prepare these reports and put them to the shareholders for a vote at the AGM. The DTI proposal will require the reports, which have to be approved by the board, to be presented to shareholders at the AGM. This proposal aligns the act with the recommendations of the King 4 code but does not require even a nonbinding vote by shareholders. What is the point of it?
Rather like the social and ethics committee, there was optimism that detailed disclosure on executive pay would encourage some restraint. But a powerful industry quickly grew up around executive remuneration; it ensured reports became incomprehensibly detailed. And then there’s the nonbinding shareholder vote, which renders the whole exercise pointless and places SA’s listed community behind most of its global peers.
It’s difficult to imagine on what possible basis could the DTI believe extending the reporting obligation to all public companies would be a good thing? Again why did it not nudge companies towards labour representatives on remuneration committees?
Talking of matters controversial, the DTI’s proposed amendments include a wonderful “get-even-richer-quicker” amendment for directors and executives of listed companies. The drafting is confusing but it seems the require
ment for a special resolution when a company buys back shares from directors and prescribed officers of a listed company will be scrapped.
So SA’s already lax reporting requirements on this issue will become looser. Again, on what basis does the DTI believe allowing the board to have sole discretion over the repurchase of shares from board members and senior executives, might be in the interests of the company? Every year listed companies in SA spend hundreds of billions on share repurchases and every year listed companies allocate shares to their directors and senior executives. Do the DTI drafters not see the potential for a conflict of interest?
The only reason Shoprite is not part of Steinhoff is Shoprite had to get shareholders to back a special resolution enabling it to repurchase former CEO Whitey Basson’s shares. The repurchase was part of a plan to sell control of Shoprite to Steinhoff. The shareholders did eventually give the necessary approval but the delay was sufficient to keep Shoprite out of Steinhoff.
The requirement for all companies to file their annual financial statements and securities registers with the Companies & Intellectual Property Commission (CIPC) looks like another ill-considered attempt to lumber small businesses with red tape. Ahead of these proposals becoming effective, only companies that were required to be audited had to file their annual financial statements. So, again, what is the DTI thinking? Why burden small and/or new private companies with more red tape? They tend not to have the resources to make the submissions in the format demanded by the CIPC.
Apart from the proposal to exclude the provision of financial assistance to a subsidiary from section 45 requirements there’s little in the Amendment Bill that looks like progress. Given that so much of corporate SA is collapsing under the weight of unrestrained feral boards, the DTI appears to have ignored a great opportunity to tighten up on corporate governance. Only by encouraging activism among shareholders can there be any hope of reining in executive excess and ineptitude. Instead the DTI has released a slew of proposed amendments that will restrict shareholders’ ability to hold their boards to account.
It is made even grimmer by a recent Cape high court decision that restricts the ability of shareholders, no matter if it’s 100% of them, to remove a director. Following that court’s ruling that shareholders had to provide a rational reason for removing a director, section 71(i) of the Companies Act makes it a requirement.
Precisely what will be deemed “rational” will no doubt ensure litigious directors can hold onto their generous board fees for months, if not years.
Given the DTI’s pro-board, and anti-shareholder, stance it’s difficult to imagine the recent tentative signs of activism in the form of shareholder resolutions will be allowed to thrive. Standard Bank’s willingness to present an environment-related resolution, from a small group of shareholders, for a vote at its AGM looked the beginning of a new era of activism.
A year earlier activist Chris Logan had been rebuffed by the Trencor board when he attempted to put a resolution to shareholders that would challenge the existence of company bylaws that protected the directors and management.
Perhaps instead of amending the Companies Act it is time to consider scrapping it and reverting to an earlier plan that involved rolling out SA’s Close Corporation Act. ●