A new law in South Africa will materially change how shareholders vote on executive pay at publicly traded companies, including binding votes and a two strike rule that puts the spotlight on members of the remuneration committee.

In this post, we provide an overview of the new voting regime, and discuss the potential impact on shareholder voting.

Changes to the Remuneration Voting System

Six years after the first presentation of a draft bill by the Minister of Trade, Industry and Competition, the First Companies Amendment Bill was signed into law in July 2024. While the date of implementation has yet to be determined, companies and their investors will need to prepare for significant changes to remuneration voting.

Shareholders will have the opportunity to approve the remuneration policy and the remuneration report through binding ordinary resolutions, as opposed to advisory votes. The remuneration policy will only need to be approved every three years or upon material changes to the policy, while the remuneration report will continue to be submitted every year.

The consequences of a failed policy vote are not yet clear (presumably, as is the case in many European markets, the policy currently in place will be maintained until a new one is approved). However, the consequences of a failed remuneration report vote involve a new ‘two strike rule’ that includes significant consequences for members of the remuneration committee.

  • First Strike: If shareholders reject the remuneration report (>50% against votes), all members of the remuneration committee must stand for election in their capacity as committee members at the next annual general meeting.
  • Second Strike: If shareholders reject the remuneration report for a second consecutive year, the members of the remuneration committee must stand for election in their capacity as directors at the next AGM, and may not serve on the remuneration committee for two years.

It is important to note that the strike rule only applies to directors who served on the committee for the previous 12 months.

Two Strike Rule

Two strike rules are rare, but South Africa is not the first country to adopt them. Australia introduced a two strike rule on remuneration votes in 2011.

In the Australian case, the threshold for a strike is lower than the South African (25% shareholder dissent vs 50%), and upon two consecutive rejections of the remuneration report, shareholders vote on a separate, conditional resolution at the same AGM to determine whether the directors will need to stand for re-election (the spill resolution). If the spill resolution is passed by 50% or more of eligible votes cast, another meeting of the company’s shareholders must take place within 90 days (the spill meeting).

Although strikes are common (41 strikes in companies in the ASX 300 last year, up from 22 in 2022), Australia has not seen many spill meetings, as shareholders appear to prefer addressing remuneration concerns through engagement with issuers rather than by voting on drastic board changes.

Looking Ahead

JSE Listing Requirements

The listing requirements of the Johannesburg Stock Exchange (“JSE”) require issuers to engage with shareholders in cases where shareholder dissent exceeds 25%. Following the approval of the Companies Amendment Act 2024, No. 16 of 2024, the JSE has published an Amendments Paper, in which it proposes the replacement of the current requirement for engagement by a clause for foreign applicant issuers to engage with shareholders following a dissent exceeding 50%, in line with the Companies Act.

The introduction of binding, rather than advisory, pay votes should provide shareholders with a stronger hand when trying to engage with issuers regarding the remuneration policy or its implementation.  However, given the amendment of the JSE requirement to engage, companies may not feel obliged to engage with shareholders even with a 25% or more votes against its remuneration proposals, particularly controlled companies certain that ordinary resolutions will pass.

Impact on Shareholder Voting

The South African two strikes regime differs from Australia in ways that could impact shareholder voting. In particular, the South African second strike has immediate consequences, rather than merely triggering an additional vote on the spill resolution. While those immediate consequences do not involve removing directors from the board, the potential disruption of blocking certain directors from serving on the remuneration committee may nonetheless discourage shareholders from voting against the remuneration report for a second consecutive time, particularly at companies with smaller boards.

Historically, majority opposition has been uncommon in South Africa, and majority opposition in consecutive years extremely rare. Between 2021 and 2023, 73 of the 409 South African remuneration policies analysed by Glass Lewis received 25% or more opposition, but only 10 were opposed by a majority of shareholders. Out of 408 remuneration reports, 101 received 25% or more opposition, of which only 17 were rejected. And just two companies, Life Healthcare Group Holdings Limited and Northam Platinum Holdings Limited, had their remuneration report rejected in consecutive years. Whether, and how, investors adjust their voting processes to the new regime remains to be seen.