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King IV™ provides critical guidance to help companies solve remuneration issues

By in Business, Economy, Finance on November 22, 2016

Executive remuneration, both in terms of its quantum and the disparity between top and bottom wage-earners, has become a major cause of social discontent and fuelling the debate on inequality. The recently launched King IV™ Report on Corporate Governance recognises that this has become a key governance issue, with major implications for long-term corporate sustainability.

“In line with King IV’s qualitative approach, it focuses on what outcomes boards and remuneration committees should be aiming to achieve,” explains Ansie Ramalho, who was King IV Project Lead for the Institute of Directors in Southern Africa, owner of the King IV™ trademarks. The applicable principle, Principle 14, is framed in those terms: The governing body should ensure that the organisation remunerates fairly, responsibly and transparently so as to promote the achievement of strategic objectives and positive outcomes in the short, medium and long term.

King IV™ recommends certain practices for governing bodies to consider in order to achieve the outcomes expressed in the principle. One important development is enhanced accountability through more definitive disclosure recommendations. King IV™ asks for remuneration to be disclosed in three parts: a background statement which explains the context for remuneration considerations and decisions, an overview of the remuneration policy which is forward-looking, and an implementation report which is looking back at the details of remuneration awarded to each director and member of executive management.

Perhaps the biggest innovation is the provision for greater involvement of shareholders on this important topic. King IV™ proposes two separate, non-binding advisory votes by shareholders at each AGM, one on the remuneration policy itself, and one on the implementation report. King IV™ also specifies that in the event that either is voted against by 25 percent or more of the votes cast, the board should engage with dissenting shareholders to understand their concerns and objections.

“In all other jurisdictions that we had researched, the threshold below which a vote against would require a formal response from the board is higher, at 50 percent. This will mean that South African companies will have to become much more responsive to the concerns of their shareholders, who could also take on the role of proxies for the broader stakeholder group,” explains Ramalho.

The JSE is making the passing of the two non-binding advisory votes and the responses as stipulated in King IV mandatory through its proposed amendments to the listings rules. The draft amendments to the rules are currently out for public comment before finalisation.

In relation to the highly inflammable issue of the wage disparity within organisations, King IV™ recommends that arrangements be provided for in the policy that ensures that the remuneration of executive management is fair and responsible in the context of overall employee remuneration. An explanation of how this matter is addressed should also be disclosed in the remuneration report.

Furthermore, King IV™ recommends that boards look beyond financial indicators when identifying performance. While financial performance is obviously important, account should also be taken of the effect (both positive and negative) the organisation has on the different types of capital it uses or affects, and the triple context of the economy, society and the environment.

“Governing remuneration could be one of the board’s most important tasks in the current climate and, of course, there is no such thing as a perfect system for remuneration governance that will satisfy everybody,” Ramalho concludes. “But we hope that by focusing on what is fair, responsible and transparent in promoting the strategic objectives and positive outcomes of companies, boards will be able to chart a defensible course.”