The corporate gravy train: South African company directors regard their remuneration as nobody’s business but their own
South African companies are lagging behind international standards of boardroom transparency, reports Stefaans BrUmmer
SOUTH African business, still steeped in the secrecy of apartheid isolation, is lagging behind international trends of boardroom transparency — including disclosure of directors’ pay. Experts warn that this may put off foreign investors.
South Africa’s three big labour federations stirred controversy last week when they challenged 58 of South Africa’s top companies to “publicly agree to release information on the pay of their individual executive directors, particularly their chief executive officers”.
This week not one of 19 top locally registered companies listed on the Johannesburg Stock Exchange, including five large “black” companies, would disclose their CEO’s remuneration in an informal Mail & Guardian survey. In Britain and the United States, both leading trading partners of South Africa, full disclosure is now the standard.
Company responses varied from “we believe it to be a personal matter” to “we are not prepared to comment at all” (See story alongside). Even South Africa’s own King Committee’s November 1994 recommendations on corporate governance, which also call for better disclosure of directors’ remuneration, appears to be slow in the implementation.
Nick Large, director of Deloitte & Touche Corporate Governance Services, said this week: “I believe if South African companies want to attract global capital, they have to play by the global rules. If, on the other hand, they are only interested in the local market, they can keep playing by the local rules.”
He said a number of his corporate clients, especially those with extensive international interests, realised they would have to follow international practice. But that number appears to be low still. Martin Westcott of management consultancy PE Corporate Services said their polls show that only about 10 percent of JSE-listed companies support “going all the way” in detailing individual directors’ remuneration in annual reports.
Westcott said corporate government transparency was important because it augmented auditing controls in preventing dishonesty and fraud. “I think it is necessary, and that the international trend is there for a reason. Increasingly, pressure will be brought to bear on South African companies to follow suit. But it won’t necessarily come from the inside; it could come from multinationals which want to invest here.”
The profile of global investors is indeed changing; significant stakes in companies are now owned by institutional shareholders such as pension funds, and owner-executives are playing a much smaller role. Significant outside shareholders want to know how — and have the clout to demand to know how — their companies are run, and for that transparency is essential.
Said Mark Anderson of the labour-aligned Labour Research Service (LRS): “The shareholders should be able to measure their directors’ performance. The profile of shareholders is changing to become more institutionalised. Increasingly they are becoming people on the street, through their retirement funds. Directors should face the music, just like everybody else. If the company is not performing, workers get retrenched, but what about them?”
Stuart Bell, research director of London-based Pensions and Investment Research Consultants, agreed on the power of institutional investors. “There is a trend of convergence in corporate governance globally … Certainly, the expectation of institutional investors is that they will expect similar levels of transparency [as in Britain and the US]. Corporate governance structural and disclosure transparency is increasingly on the agenda among the factors which make them decide where to invest globally.”
The Congress of South African Trade Unions (Cosatu), the National Council of Trade Unions (Nactu) and the Federation of South African Labour Unions (Fedsal) made their call for transparency on April 1 in their growth policy document, Social Equity and Job Creation, the Key to a Stable Future.
The document asked that top companies publicly release individual executive directors’ remuneration details, so as to make comparisons with labour wages possible. It asked companies to commit themselves to a wage gap ratio of no more than 1:8 — the remuneration of the lowest earner compared to the highest earner in the company. “Even such a wage gap would be unacceptably high, but would constitute an important first step in our country, towards a shared future,” it said.
On the demand for transparency, the unions clearly have an international argument to back them. But asking for a 1:8 ratio, the experts agree, is “unreasonable” in the real world. LRS figures, although the organisation recognises they may be inaccurate due to the difficulty in getting full information, show a ratio of as much as 1:47 if surmised executive directors’ fees of South Africa’s top 60 companies are compared with average blue- collar wages.
An LRS study completed in December surmises that executive directors in those same companies were earning an average of R702 324 a year in 1994/5, 20% up on the previous year. Said the LRS’s Anderson: “R700 000 a year is not out of line. But what is stark is the difference compared to ordinary workers’ pay. For the ordinary person on the street, that figure is unbelievable … What I think is important to corporate governance is not so much what directors are paid, but whether they are worth it; are they growing the company. That, for me, is the only crucial factor, but how do you test it? By disclosure of their remuneration to the public and stakeholders.”
Westcott said CEOs’ pay varied widely according to organisational size, the extent of decision-making responsibility, and the consequences of error, but could range anywhere from R150 000 a year in smaller companies to R1,2-million or more in companies the size of Anglo American or Gencor.
Witwatersrand University Business School senior lecturer John Ford said South African executive pay was often low by foreign standards. “I get this clamour from the media: ‘These bastards are ripping us off and we have to expose that.’ But we have to temper that with an understanding of the experiential level and risk-taking [that we expect of our executives]. That is why when our boys go overseas, to Britain for example, they are good value for money … One’s got to look at the market level.”
In the past, the only onus on South African companies to report directors’ remuneration has been the Companies Act requirement that the total expenditure on directors as a group be disclosed in the annual report. But a well- placed chartered accountant, who asked not to be named, pointed out that different companies reported this in different guises, and that the inclusion or exclusion of hidden aspects of directors’ emoluments meant figures were neither comparable nor useful. “It is one of the nonsense figures on a financial statement.”
The King Committee on Corporate Governance, appointed in 1993 at the behest of the Institute of Directors, tried to remedy that, but so far with limited effect. Its recommendations of November 1994 said executive and non-executive directors’ total earnings should be disclosed separately — although still only a group aggregate as opposed to the figures for individual directors. It also tried to make more sense of the way reporting is done by asking that the information be split into salary, fees, benefits, share options and bonuses.
Although the intention is for King to apply to all companies, whether listed, unlisted or parastatal, it has few teeth and these amount to no more than peer or outside pressure. Said Westcott: “It is the visibility of the King recommendations themselves; a certain amount of public and media pressure and, secondly, worker pressure around the issue of transparency [that make companies comply].”
To increase the pressure, the JSE now asks companies as a listing requirement to state whether they comply with King. Indications, said the chartered accountant, are that such compliance will be “slow” as companies are still looking for guidance from the Institute of Chartered Accountants, while the JSE itself “can’t really make up their minds about what they want”.
British company law requires all companies to disclose the individual remuneration of the company chairman and highest-paid director, as well as state how many British directors are remunerated within each band of 5 000. That was modified in 1992 by the business-initiated Cadbury Committee report, which recommended a more detailed breakdown, and again last July by the Greenbury “code of best corporate governance”, which demands complete disclosure of each aspect of the remuneration of each director.
Adherence with Greenbury, an industry initiative after a massive public outcry over directors’ pay in privatised public utilities, is not enforceable at law, but has become a listing requirement for companies on the London Stock Exchange.
In the US, the Securities and Exchange Commission requires listed companies to fully disclose the remuneration of the five highest- paid employees, as well as supply data to show how pay squares up with company performance.