New JSE King IV requirements have teeth

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The Naspers AGM took place against the background of shareholder Allan Gray announcing that it would vote against the Naspers remuneration policy, because it isn’t aligned to the performance of the business outside a stake in Chinese media giant Tencent Holdings.

Naspers paid chief executive officer Bob van Dijk $2.2 million (R28.96 million) in the year to March 2017, an increase of 32%, and awarded him $10.4 million (R137 million) in long-term share options. That corresponded to a period in which Naspers reported a trading profit of $2.75 billion, or a loss of $379 million when Tencent is stripped out.

Allan Gray owns about 2.3% of Naspers’ stock. Pieter Koornhof, investment analyst at Allan Gray, commented that Naspers’ remuneration policy “is not aligned with shareholders’ interests, the disclosure is poor and the performance targets appear to be very easy to achieve. On top of that, they are now also proposing to shorten the vesting periods for the long-term incentives.” But will a negative vote make any difference?

Rob Lewenson, the governance and engagement manager at the Old Mutual Investment Group, did not comment on how they would be voting at the Naspers AGM. He did, however, make it clear that they intended to engage with Naspers on executive remuneration. He made the point that the vote on the company’s remuneration policy would be non-binding anyway. It may expose shareholder displeasure, but it wouldn’t on its own change anything or even offer an alternative. Taking the issue further, therefore, requires direct engagement with the company about how its executive pay should be structured so that it is more aligned to shareholder interests and rewards executives for the right things.

Van Dijk was quoted to say that the Naspers board believes its remuneration policy and practices are “fit for purpose and compare well to those of many of our global peers. While we have increased our disclosure this year compared to previous years based on earlier shareholder feedback, there is always room for further improvement, which the remuneration committee will carefully consider before the publication of our next integrated report.”

But things are about to change. Melanie De Nysschen, corporate finance principal at Bravura, comments that listed companies can no longer choose to ignore King IV. Certain of the King IV requirements have now been included in the JSE Listings Requirements and become mandatory for listed entities.

Apply and explain

Listed companies will have to disclose in their annual report which recommended or other practices they have implemented to achieve the principles of King IV (‘apply and explain’). This change is effective to annual reports submitted to the JSE on or after 1 October 2017. All new listings must comply with King IV from 19 June 2017.

Wide-ranging disclosure requirements in remuneration

The revised listings requirements require full disclosure of the remuneration policy and implementation report in the annual report. According to King IV, this would require at least the following:

·       a requirement that the board of directors approves a remuneration policy that articulates and gives effect to its direction on fair, responsible and transparent remuneration;

·       the remuneration policy must set out all elements of remuneration that are offered in the organisation and the mix of these, among others, base salary (including financial and non-financial benefits), variable remuneration (including short- and long-term incentives and deferrals), payments on termination of employment or office, sign-on, retention and restraint payments, provisions, if any, for pre-vesting forfeiture and post-vesting forfeiture of remuneration, any commission and allowances; and

·       the fees of non-executive members of the board as well as the remuneration of executive management during the reporting period must be disclosed.

Increased rights to shareholders

The requirements now provide that the remuneration policy and the implementation report must be tabled every year for separate non-binding advisory votes by shareholders of the listed company at the annual general meeting. The remuneration policy must record the measures that the board of directors of the listed entity commits to take in the event that either the remuneration policy or the implementation report, or both, are voted against by 25% or more of the votes exercised. If 25% or more shareholders vote against this resolution, the company is required to announce this in their results of AGM meeting, including an invitation for dissenting shareholders to engage with the company, and the manner and timing of this engagement. Listed companies will also be required to disclose in their annual report the voting results and the nature and steps taken to address objections raised by shareholders.

“Whilst Naspers will only be required to formally engage with dissenting shareholders such as Allan Gray (and then only in the event of 25% or more of Naspers’ shareholders voting against its remuneration policy) with effect from its next AGM, the company would be well advised to hear Allan Gray and others out on their concerns. Even more so given Naspers’ confirmation in its 2017 human resources and remuneration committee report that it is ‘aware of the incoming remuneration reporting requirements under King IV and has endeavoured to improve remuneration disclosure this year, in anticipation of applying the recommendations, as appropriate, of King IV in 2018’.”

The revised JSE Listings Requirements will impact the emphasis placed on executive remuneration. Listed companies are well advised to take note of these requirements. Although some of these changes were expected, the timeous and appropriate implementation thereof will require careful planning and consideration.

Read more: Stringent King Code IV and BEE requirements for JSE listings