• From King III™ to King IV™: The Journey of Shareholder Remuneration Approval

From King III™ to King IV™: The Journey of Shareholder Remuneration Approval

28 November 2016

By Shantel Dartnall, Head of Governance Services at Statucor and Ronelle Kleyn, Statucor governance consultant

The recent launch of the King IV Report™ follows a global trend of organisations finding themselves under increased scrutiny, particularly their board and executive remuneration. An increased number of regulators and institutional investors are paying more attention to the processes of voting and reporting on organisations’ remuneration procedures. There has also been an increase in shareholder activism around remuneration of board members.

The stakeholders that organisation’s deal with have changed. In recent years organisation’s and boards need to become more hands-on and accountable in terms of decisions made by different segments of an organisation. There is a greater shift towards the inclusiveness of stakeholders in the decision making processes of an organisation.

Principle 14 of King IV™ addresses remuneration practices for organisation’s; it states that “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. Remuneration policies need to ensure that they attract, motivate, reward and retain human capital.”

An important aspect in King IV™ is that the remuneration of executive management should be viewed as fair and responsible in respect to the overall employee remuneration, addressing the possible pay gaps between the remuneration of executives and the rest of the staff.

To add to this, King IV™ advises governing bodies to consider introducing a dedicated committee to oversee remuneration processes. This committee should not include executive members of the governing body or the CEO, with the majority being independent members, and chaired by an independent non-executive member.

In terms of the Companies Act (s67), shareholders have to approve director remuneration for services on the board by special resolution. Whereas an ordinary resolution is passed by 50% of the voting members present at a meeting, a special resolution is 75% of the voting members present at a meeting.

Although King III™ requested companies to apply or explain, King IV™ advises companies to comply AND explain, thus application is assumed. This applies to all organisation’s, but listed companies are required to apply these principals to a greater degree.

What is revolutionary about King IV™ is that it provides companies with a mechanism for the board and the shareholders to address members and shareholders who voted against either the remuneration policy and/or the implementation report. If more than 25% of member’s present vote against the remuneration policy or the implementation report, the governing body has to engage with those shareholders, and this process has to be stipulated in the remuneration policy in advance.

In effect, King IV™ creates an informal dispute resolution mechanism where an increased number of shareholders now have voice with the board. This doesn’t necessarily mean that the board has to take their recommendations into consideration, but at least King IV™ creates a mechanism for interaction on the matter.

Apart from a stakeholder focus, King IV™ places heavy focus on reporting. It stipulates that organisation’s should have two separate non-binding advisory votes. The one is on the remuneration policy and the other is on the implementation report. It is expected of companies to show how their policies around remuneration will be implemented and what the roll-out plan is. Thereafter this will be a historic report showing how this was implemented, and what plans the company has for future policy making. Thus, if any company experienced any major labour disputes, particularly with regards to remuneration, the incident has to be reported on, and discuss how this was resolved, or what future resolution plans are.

Organisation’s need to bear in mind that because stakeholders include employees, there will be opposing interests on this view, as in the cost of your product or service will directly affect your consumers should you increase your spend on employees. Companies need to find the balance between these two conflicting interests.

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