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What King 4 sees on fat-cat payslip is no small change

17 May 2016   (0 Comments)
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Chris Barron, Sunday Times

Many executives are paid too much and it's not a sustainable situation, says the main author of the King 4 code of corporate governance, Ansie Ramalho. But the code, which has been released in draft form for public comment, has been criticised for being soft on executive remuneration and falling short of international best practice.

Ramalho says she rejects the assumption that what is best practice overseas is best for South Africa. "I don't think that simply because it's happening internationally it's necessarily best practice. Even if it is, I don't think one can equate what's happening internationally with our situation in South Africa."

The biggest difference in so far as corporate governance and excessive remuneration are concerned lies in shareholder activism. There is very little of it in South Africa, she says.

Institutional investors are too passive
"There is more institutional activism overseas. They're quite a bit down the road from where we are here." One of the reasons South Africa doesn't have the same culture of institutional shareholder activism is because its market is much smaller, she says. It's not so easy for major shareholders to sell their shareholdings.

There has been pressure from stakeholders and civil society for shareholders to be given a binding vote on the matter of executive remuneration. King 3 failed to oblige and there were hopes that King 4 would rise to the challenge. But it has again fudged the issue, say its critics. So what's the point? "It is not appreciated how far we've advanced from King 3," says Ramalho, a Unisa law graduate and executive of forensic auditors KPMG.

Shareholders still don't have a binding vote?
"But we are attaching a percentage to that vote now," says Ramalho, who stepped down as CEO of the Institute of Directors to lead the King 4 project. Companies can no longer think that because 50% plus one of shareholders approve their remuneration policy they can ignore those who do not.

According to King 4, at least three quarters of voting shareholders need to be happy about it otherwise it is an issue that must be addressed. Boards are unlikely to be shaking in their boots, however, because the fact is that nobody is obliged to obey the King codes. They really are just recommendations. President Jacob Zuma would love them.

"The King committee is not a regulatory body, so we don't have regulatory powers," says Ramalho. She says her committee considered making remuneration policies subject to a binding vote but then decided it "wasn't the right thing to do", mainly for this reason.

"It is nonsense to call something a binding vote without a sanction attached to it."

In Australia, the sanction attached to the so called three strike rule is that remuneration committee members have to step down if their decisions get the thumbs down from shareholders three times. In the UK, the sanction attached to not adopting the remuneration policy is that payments cannot be made in terms of that policy.

These sanctions only work in those countries because they're backed by legislative provision. It's the law. "If you're trying to address that in a voluntary code it simply would not work," says Ramalho. The committee, which included the National Treasury, felt that "engagement" between remuneration committees, boards and shareholders rather than a "punitive" approach was the best way to go in South Africa.

And she believes King 4 facilitates such engagement.

"What we implemented in King 4 is a true advisory vote. In other words, shareholders giving a signal that they're unhappy about the policy or its implementation. "Then it's up to the remuneration committee to engage." She says King 4 also goes further than King 3 in moving away from the narrow definition of company performance and wealth creation upon which remuneration decisions are supposedly based. "In King 4 we see performance not only in terms of shareholder value created," says Ramalho. "We're saying that is only one aspect of it."

What should also be taken into account now are sustainability considerations and the impact of the organisation on its external environment and society.

As things stand these aspects are not adequately reflected in remuneration policies, Ramalho says. "Definitely not. The emphasis is still very much on shareholder value." She hopes this will cause remuneration committees to take a longer view on the performance of executives and make it more difficult for them to manipulate short term results to justify absurdly high increases.

Interestingly, in view of her comments about the lack of shareholder activism, she is against giving more responsibility to shareholders, which is what a binding vote would do. "Who's to say they won't only look after their interests?" Shareholders, unlike directors, don't have fiduciary duties to wards the company, she says. "So if we have to rely on one or the other, I'd say your safer bet is with the directors who have that responsibility. Shareholders are no more likely to be good people than boards and directors."

She concedes that "many directors" ignore their fiduciary duties, happy to rake in hand some fees without doing their job properly or even bothering to attend the required number of board meetings.

She also concedes that there are too few consequences, but blames this on shareholder and stakeholder "passivism" rather than the King commission. "Corporate governance cannot work unless shareholders, especially institutional investors, play their role."

Increasingly, stakeholders are doing this, she says, "which is great, it's what you want".

She cites the example of stake holders, including banks and auditors, who acted with such apparently devastating effect against the Gupta family's Oak bay company.

She says those calling for more drastic action by the King 4 committee assume it would bring down executive remuneration, "but we're not seeing the evidence of that internationally at all". The committee considered making disclosure of pay ratios between executives and employees, as in the US, a recommended practice.

"But as we consulted on it we were advised it is very subject to manipulation," says Ramalho. "For example, you just outsource your support services and suddenly your ratio looks fantastic."

It is also difficult to compare ratios across different industries. How can you usefully compare ratios in mining with those in the services sector, where there are not such vast disparities in skills? "We decided it would probably attract a whole lot of attention but not achieve what we want."

What King 4 has addressed are "totally inadequate" levels of corporate disclosure. "King 4 is very much more definitive about disclosure requirements so that the market and social forces can kick in and hold companies accountable," she says. "Disclosure is the key to that. It is the mechanism that makes checks and balances work." Ramalho says the King commission can be as "draconian" and "aggressive" as would warm the hearts of its sternest critics, but it would lead to an adversarial situation and make the issue even harder to resolve.

Voluntary recommendations can only work with voluntary buying, she says. "What needs to change is the mind-set, otherwise you're fighting a losing battle." Without buy-in from the remuneration committees, boards and the executives themselves, little will change. "If shareholders take it upon themselves to change executive remuneration, I'm telling you now it is not going to happen."

She says they don't have access to enough information, but con cedes this is the fault of companies and their remuneration committees. "Where they are going very wrong is the fact that they don't share sufficient information with their shareholders." Information that is released about executive remuneration is often opaque and confusing, sometimes deliberately so.

Has the time come to abolish) share options?
"Maybe we should. Things would be much more simple. “But unless this were applied internationally, a possibility she doesn't entirely discount given the growing wave of public op position to the wage gap and fat cat executives, South Africa would lose much of its executive talent.

And this is already in short supply, she says.

Note: This article appeared in the Sunday Times on 17 April 2016. To view the online edition, visit

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