The shortcomings of the common law and the Companies Act 61 of 1973 in regulating executive remuneration in South Africa : is the code of corporate practices and conduct the answer for listed companies?

Abstract

King II articulated in an open manner, issues of disclosure, transparency, comparator ren1lmeration packages and a robust approach to the paYment of con1pensation in relation to poorly performing directors. While directors owe fiduciary duties to the company (shareholders present and future), by paying themselves huge packages, they do no longer act in the best interests of the con1pany because awarding themselves exorbitant packages may frustrate their duty to maximise shareholder value. The solution is that their interests be linked to those of shareholders by requiring that their pay be linked to their performance. With the advent of corporate governance reforms, other stakeholder interests have to be taken cognisance of by directors in corporate decision Inaking. As such, a huge gap between the salaries of rank and file employees and those of executive directors is seen as a conscious move to ignore the interests of legitimate stakeholders when there is no compelling reason to do so. To try and align the interest of shareholders and directors, it is felt that more emphasis has to be placed on actively engaging shareholders and employees in the determination of executive remuneration. It is subn1itted that pay that is not linked to performance is a breach of fiduciary duties, in particular, duty to avoid conflict of interest. However, our common law and Companies Act 61 of 1973 fail imn1ensely to address concerns relating to excessive remuneration pay. In particular, the business judgment nl1e precludes minority shareholders taking action on the basis of wrongs committed against the company by virtue of pay not being linked to performance. Neither has the introduction of corporate governance reforms impacted heavily on setting executive remuneration. They have not proved effective in curbing fat cat pay. It is acknowledged that these reforms have ~rought about a profound impact on attitudes in the corporate environment. However, numerous deficiencies, particularly in the context of South Africa can be identified. This thesis serves as a means of establishing whether fron1 a legal perspective, following recent reforms, the negative impact of exorbitant remuneration pay is of such a serious nature as to warrant more stringent regulation in one form or the other. South Africa should consider revan1ping and tightening current legislation, which as submitted is lacking in a number of respects. As a strategy to eradicate exorbitant pay, it is submitted that directors fiduciary duties have to be revised and legislated in order to successfully establish directors wrongdoing. It is felt that legislative enactment may be made stronger by the fact that it may have stronger and sharper teeth and hence able to reach where self-regulated codes are weak.