31 July 2024

Companies Amendment Bill

By Lunga Maloyi

Director: Economic and Fiscal Policy

The Bill is an important piece of legislation in South Africa as it seeks to address inefficiencies, ambiguities, and gaps in the current law, aligning it with modern business practices and international standards. Some of the changes include disclosure of senior executive pay, remuneration policy transparency, and good corporate governance. Additionally, this legislation aims to enhance transparency and give shareholders better oversight of remuneration processes, improve public access to information, as well as counter money laundering and terrorism. Business is particularly encouraged with the following proposals in the current iteration of the Bill:

  • The Bill introduces measures to increase accountability and transparency among company directors, it requires directors to declare conflicts of interest more comprehensively. A tangible case is the Steinhoff scandal, where inadequate oversight and lack of transparency led to massive financial losses and eroded investor confidence. The amendments aim to prevent such occurrences by tightening governance rules.
  • Streamlining of regulatory requirements, particularly for small and medium-sized enterprises (SMEs). For instance, the current requirement for all companies to hold annual general meetings (AGMs) can be burdensome for SMEs. The amendment proposes that companies be allowed to opt for written resolutions instead, reducing the time and cost associated with physical meetings.
  • Improved corporate governance and reduced compliance costs will benefit local businesses. In the mining sector, where local companies often face significant regulatory burdens, simplified compliance can help these companies focus more on productivity and growth rather than administrative requirements.
  • Proposals that allow for more efficient processes for corporate restructuring and insolvency are welcome, current procedures for business rescue operations can be cumbersome and lengthy. The amendments aim to expedite these processes, helping companies recover more quickly from financial distress.

While some of the proposed amendments do provide for a more coherent regulatory environment, the Bill is not without its own challenges and unintended consequences. One particular proposal that is problematic is encapsulated in the proposed amendments which deals with access to company records.

In its current form, the proposed amendment will enable members of the public to access the complete annual financial statements of private companies over a certain public interest score, for the preceding seven years. Information contained in the annual financial statements may be made available to a company’s competitors, and suppliers and may have a negative consequence on a company’s commercial operations. Furthermore, access to the remuneration of a named director of private companies (including subsidiaries of listed companies) would constitute the sharing of sensitive information that may violate the privacy rights of named directors, expose confidential information to competitors, and expose directors to security risks. 

The requirement for the disclosure of the pay gap between the highest and lowest earners of companies is of concern, the remuneration information provided in the disclosures may be misinterpreted if the correct context is not provided. One unintended consequence might result in senior executives looking for opportunities in countries with more favourable financial disclosure regulations that protect their rights to privacy as citizens. Companies might downsize or outsource labour to address salary discrepancies, negatively impacting job availability in South Africa. Lower-wage employees, already struggling, could face further job losses or diminished prospects.

Business argues that comparing the top and bottom 5% of earners is arbitrary and suggests adopting the Palma ratio (which compares the bottom 40% with the top 10%) as it better reflects wage inequality in developing nations.

By aligning South Africa’s corporate laws with international best practices, the Bill aims to attract foreign investors. clearer regulations and enhanced corporate governance could attract multinational companies that require a stable and predictable legal environment for their operations.

Despite its potential pitfalls, the Bill represents a significant step towards a more coherent regulatory environment, holding executives accountable and increasing transparency and governance. However, the implementation date remains unclear, and while further public input is improbable, draft regulations may provide future clarity.

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