Walter Bhengu | Project Director | Legislation & Governance | South African Institute of Chartered Accountants (SAICA) | mail me |
During Parliamentary debates on amendments to the Companies Act in 2023, it was noted that the biggest opposition to the amendments related to the disclosure of remuneration.
With the President signing the Companies Amendment Act on the 26th of July 2024, debates on the new remuneration requirements will resurface. It has been touted that the new amendments will promote the ease of doing business and enhance corporate transparency, primarily in relation to the earnings gap between the highest and lowest paid employees in a company.
With that in mind, it must not be forgotten that the amendments also relate to:
- The inclusion of the social and ethics committee report as a mandatory report for public companies.
- The cooling off period for rotation of individual auditors has been decreased from 5 years to 2 years.
- The period for applying to declare a director delinquent has been increased from 2 years to 5 years.
- Clarification on the period within which to claim damages for losses from a director.
- Update on compilation of annual financial statements.
- Access to information of companies.
Elephant in the room
Transparency objectives in introducing requirements to name each director or prescribed officer who receives remuneration (including benefits) from a company and the extent of the remuneration individually set the tone for the far reaching changes to the Companies Act. This requirement to name every director is one that is required to be included in annual financial statements.
The elephant in the room is the obligation to have an approved remuneration policy, remuneration report and implementation report to be tabled at shareholders meeting. The contentious aspect relates to the publication of the pay gap between the lowest paid and highest paid individual in the company.
Irrespective of the company size – the gap between the lowest and highest paid will be substantial. It does not take into account that the lowest paid individual may be a seasonal worker, whose remuneration may distort the actual payment structure of a company.
The report would likely need to clarify the context of the pay structure and to clarify the roles and responsibilities of the highest paid (likely the CEO) to assist in crafting the narrative for users of the report. Now that this disclosure will be mandatory, consideration should be given as to what or how this information may be used by stakeholders alike.
It has been argued that the process to get approvals and auditing of the remuneration documents creates an added compliance burden which goes against the principle of ease of doing business.
Cooling off period
The threat to independence for an auditor is one of the issues that is under continuous scrutiny.
An auditor must be independent not only in fact and appearance but in mind as well. On that basis, the Companies Act initially set a cooling period of five years arising from an auditor’s involvement in aspects of the company before they can be reappointed. The period has been reduced to two years.
A reduction that has also been supported by the Independent Regulatory Board for Auditors (IRBA). The key is to ensure that there are robust independence checks and balances to mitigate any threats.
Confidentiality
The section that relates to access to company records has narrowed the scope of companies it applies to.
Ordinarily, the right to inspect or copy the securities register of a profit company, or the members register of a non-profit company that has members, or the register of directors of a company, upon payment of a fee by any member of the public is permissible. This has always been contentious as it has been argued that, healthy competition between private companies is laid bare where the provisions allow any person to access all company records.
The new amendment states that these provisions will not apply to a private company, non-profit company or personal liability company, wherein an annual financial statement is internally prepared in a company with a public interest score of less than 100 or an annual financial statement is independently prepared in a company with a public interest score of less than 350. This exclusion on the surface is laudable, however, since the public interest score has been static for 13 years, the impact is minimal.
We made parliamentary submissions, together with IRBA during the Companies Act hearings in 2023 to motivate for the review of the public interest score which in turn would go a long way in contributing to the ease of doing business. If the regulations that outline the public interest score are not reviewed, these amendments will be a lost opportunity to simplify company law processes.
In conclusion
The road to reinventing company law in South Africa, still has a long road ahead to ensure that its aligned with changing times and elevates the principle of ease of doing business.
In the interim, companies need to familiarise themselves with the new regulatory obligations and be on the lookout for the updated regulations which are anticipated to be finalised in the next few months.
Related FAQs: South Africa’s new Companies Amendment Act
Q: What are the main changes introduced in the Companies Amendment Act?
A: The New Companies Act requirements in South Africa include mandatory social and ethics committee reports, reduced auditor rotation cooling-off periods, extended time to declare a director delinquent, clarified claims for director-related losses, updated financial statement compilation and revised company information access rules.
Q: What is the purpose of the social and ethics committee report requirement?
A: The social and ethics committee report is now mandatory for public companies to ensure transparency and accountability in social and ethical business practices.
Q: What changes have been made to the auditor rotation period?
A: The cooling-off period for the rotation of individual auditors has been reduced from five years to two years to enhance auditor independence while maintaining flexibility.
Q: How has the time frame for declaring a director delinquent changed?
A: The period for applying to declare a director delinquent has been extended from two years to five years, giving stakeholders more time to act on misconduct.
Q: What clarifications have been made regarding claims for losses caused by a director?
A: The amendments provide clarification on the time frame and procedures within which to claim damages for losses resulting from a director’s actions.
Q: What updates have been made to the compilation of annual financial statements?
A: New updates clarify the process and standards for compiling annual financial statements to align with current business and regulatory practices.
Q: How has access to company information been revised?
A: The amendments have narrowed the scope of access to company records, especially for private companies with a low public interest score, enhancing confidentiality.
Q: What is the impact of these changes on businesses?
A: The amendments aim to promote ease of doing business by reducing compliance burdens and increasing transparency in corporate governance.
