Melanie De Nysschen, Corporate Finance Principal at Bravura, an independent investment banking and advisory firm specialising in corporate finance and structured solutions, discusses the new JSE Listing Requirements coming into effect on 19 June 2017
The JSE announced significant changes to its Listings Requirements, certain of which will already take effect on 19 June 2017. 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.
King IV governance code becomes mandatory
Melanie explains that the first significant change is that certain of the King IV corporate governance requirements will become mandatory for listed entities, as they have now been included in the JSE Listings Requirements. This is notwithstanding the fact that application of the corporate governance practices in the King Code is generally voluntary. Listed companies cannot choose to ignore King IV, which has amended the disclosure regime to “apply and explain”. Listed companies will have to disclose in their annual report which recommended or other practices they have implemented in order to achieve the principles of King IV. 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 respect of 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, including 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 in respect of remuneration policy
The Listings 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.
Unless an exemption can be provided to the JSE, all listed companies must, pursuant to the Broad-Based Economic Empowerment Amendment Act, 2013, and with effect from 19 June 2017, publish a compliance report on its B-BBEE status. The Listings Requirements require issuers to submit this report to the JSE, and to announce via SENS that such report has been made available on their website.
In terms of the B-BBEE Regulations the report is required to include the relevant scores received by the listed entity in the BEE elements of ownership, management control, skills development, enterprise and supplier development, socio-economic development and any other sector-specific element. The compliance report must also state whether the company is an empowering supplier and whether it has achieved the priority element thresholds of ownership, skills development and enterprise and supplier development.
Scores together with the relevant representations submitted must be based on verified information that reflects how they contribute to the outcome of the scorecard in terms of the Codes of Good Practice.
Race diversity at board level to be included in annual report
Melanie states further that there is an extended focus on the diversification of boards through the introduction of a race diversification policy at listed entity board level. Additionally, the determination of directors’ independence becomes a holistic exercise, preferring substance over form, in requiring boards to consider the independence of their members from the perspective of a reasonable and informed third party. “Moving on from a historical reliance on disqualifications from independence and aligned with international best practice, perception trumps qualification in the determination of the independence of directors from a JSE perspective.
Aligned with a practical approach adopted in King IV, setting out principles for the establishment of a unitary board reflective of an appropriate balance of power, the JSE will require a determination of a director’s independence to be made holistically and on a substance over form basis in accordance with the indicators provided in section 94(4)(a) and (b) of the Companies Act and the King Code.”
In addition to a policy on the promotion of gender diversity at board level, the JSE now requires listed entities to include in its annual report a policy on the promotion of race diversity at board level, including the nomination and appointment of directors. If the listed entity has set targets for race diversity, it must also (as with gender diversity), in its annual report, report on progress made against those targets. All annual reports issued on or after 1 June 2018 will have to comply with this required additional disclosure in respect of race diversity.
The Listings Requirements now also require the mandatory appointment of a social and ethics committee which must oversee and report on organisational ethics, responsible corporate citizenship, sustainable development and stakeholder relationships.
Previously a mandatory appointment by listed companies, the requirement to appoint a company secretary is clarified to be required to be made in accordance with the Companies Act, applying the recommended practices in the King Code. The board of directors retains responsibility to consider and satisfy itself on the competence, qualifications and experience of the company secretary and report on the execution of this responsibility in the annual report.