Governance Readout South Africa Edition 2

The publication of the Companies Amendment Act No. 16 of 2024 and the Companies Second Amendment Act No. 17 of 2024 on 25 July 2024 marks a significant shift in corporate governance and operational procedures. The amended provisions are not yet operational and will come into effect when President Cyril Ramaphosa announces the effective date in the Gazette.

These amendments to the Companies Act No. 71 of 2008 introduce crucial changes aimed at enhancing clarity, governance, and efficiency for companies. 

Key updates include a refined definition of “securities,” new mandatory disclosures on remuneration policies and gaps, and enhanced transparency of executive pay, updates to employee share schemes, mandatory establishment of social and ethics committees and revised requirements for annual financial statements and beneficial ownership disclosures.

Section 61 of the Act has been amended to require Public Companies to include the presentation of the Social and Ethics Committee Report and the Remuneration Report at Annual General Meetings. Public Companies must now also provide for the appointment of a Social and Ethics Committee at each AGM, a responsibility that was previously a Board function.

Section 26 of the Act has been amended - these provisions relate to access to company records, including annual financial statements, register of disclosure of beneficial interest, and fees for inspection and copying.

Our view:

With remuneration policies being one of the highest resolutions voted against at AGMs and efforts to address public concerns regarding high levels of inequalities in society, it was inevitable that changes to remuneration would be effected that include pay gap disclosures.  

The total remuneration of the highest and lowest paid employees will need to be disclosed in a company’s report, as well as the pay gap between the top 5% highest paid and lowest paid employees. This remuneration report will also require shareholder approvals according to specified timeframes.

Computershare continues to unpack the amendments and the effect that they may have on our clients, and we look forward to publishing further communications on our observations in the future.  We also intend to host a webinar to discuss some of these amendments and practical implementation of the requirements in more detail.

The Companies and Intellectual Property Commission (CIPC) implemented a beneficial ownership register from 1 April 2023 on a voluntary basis.  The filing of beneficial ownership filings and securities/beneficial interest registers became mandatory from 24 May 2023 upon promulgation of the Amended Companies Regulations to give full affect to the General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Act 22 of 2022 (GLAA).  

On 28 June 2024, CIPC announced that starting 1 July 2024, companies must file Beneficial Ownership Declarations along with their annual returns. 

This new 'hard-stop functionality' means that companies won't be able to file their annual returns via CIPC's electronic platforms unless their Beneficial Ownership Declaration is submitted and up-to-date. Non-compliance may lead to penalties, enforcement actions, compliance notices, and potentially deregistration.

It's crucial to understand the distinction between 'beneficial ownership' and 'beneficial interest' as defined in the Companies Act. The GLAA introduced the concept of a 'beneficial owner' in the Companies Act, specifying natural persons who ultimately control the company, while 'beneficial interest' pertains to rights in company securities. 

Companies must identify whether they are 'affected' or 'non-affected' in terms of these regulations to determine their reporting obligations. This classification is essential as affected companies must maintain a register of beneficial interests and file it with their annual return, while non-affected companies must record and update beneficial ownership information in their securities register and file it with the CIPC.

While affected companies do not have to maintain a beneficial owner register (i.e. warm bodies/controlling persons of juristic entities that hold shares), affected companies are required to maintain a beneficial interest register (underlying shareholders whose shares are held in nominee companies such as CSDP/Broker nominees). Currently the Beneficial Interest Register download is compiled by Strate as the CSD and provided as the uncertificated securities register to the Issuer Agent/Issuer on a monthly basis. As previously communicated, Strate is engaging with CIPC to provide the Beneficial Interest Register (i.e. the sub-registers received in the Beneficial Interest Register downloads) in digital format for listed companies on a more frequent basis.

Please note that while affected companies do not need to submit securities registers to CIPC, there is still a return/beneficial ownership declaration required for listed companies on CIPC’s portal.

Strate has proposed amendments to its Rules and Directives to mandate the provision of personal information by CSDPs and brokers required to be recorded in the securities register so that this information can be provided to CIPC.

We are aware that several comments were raised relating to concerns regarding confidentiality requirements and compliance with POPIA.  These proposed amendments are currently with the FSCA for approval.  Strate has in the interim held workshops with CSDPs and is testing the BIR downloads with participants. 

At the Financial Action Task Force's (FATF) latest review, it kept South Africa on the grey list. While eight of the 22 items have been addressed, 14 are still in progress.  The FATF said that South Africa, among other requirements, must still show that it can implement a modern and comprehensive strategy to counter the financing of terrorism, do more to curb money laundering, and investigate and prosecute complex financial crimes. It is hoped that the country will be removed from the grey list next year by addressing all the required items. It is crucial for South Africa to get off the grey list if we want positive economic growth and to lower unemployment.

 After its recent review, the FATF said that while South Africa has taken steps towards improving its regime including the implementation and updating  of its supervisory risk assessment tools for Designated Non-Financial Businesses and Professions (DNFBPs), updating its terrorist financing risk assessment, and enhancing the capacity of relevant CFT authorities, the concern is that South Africa is still considered to be a hub for financial flows between terror suspects and groups.

 

The FATF said in June 2024, that South Africa should enhance its action plan by:

›       Increasing outbound mutual legal assistance requests;

›       Ensuring AML/CFT supervisors impose effective sanctions for non-compliance;

›       Improving access to accurate beneficial ownership information;

›       Boosting investigations and prosecutions of serious money laundering and terrorist financing;

›       Expanding seizure and confiscation of crime-related proceeds;

›       Effectively implementing targeted financial sanctions and identifying relevant individuals and entities.

The next review for the grey list is in January 2025.

 

The Financial Action Task Force (FATF) is the international financial crime watchdog. South Africa was placed on the FATF’s grey list in February 2023 for not fully complying with international standards around the prevention of money laundering, terrorist financing and proliferation financing. Although there have been efforts to implement measures to exit the FATF grey list, the effects of being grey listed are being felt as foreign counterparties apply greater scrutiny to domestic institutions.

The FATF criticised South Africa’s failure to show serious commitment to prosecuting individuals linked to state capture. When the FATF places a country on its grey list, it means that the country has committed to resolving the identified strategic deficiencies within agreed-upon timeframes and is subject to increased monitoring within reporting cycles. A grey listing means that South Africa is a less attractive investment destination, which results in the country needing to give better returns and paying higher interest on foreign investment.

 FATF identified 22 action items that South Africa must address, to improve its anti-money laundering and combating the financing of terrorism regime, if it wants to get off the list. South Africa has two reporting cycles: September 2024 and January 2025. The next review for the grey list is in January 2025. 

There is increased pressure to seek clarity on the requirements and to come up with alternative solutions for shareholder communication, due to the challenges with the postal services and closure of several branches of the South African Post Office.

We are aware that there are large batches of post that have been handed to the Post Office, which have not been delivered and this results in unnecessary duplication for issuers and significant costs. This also poses a security risk for the shareholder as we are aware that there is a fraud syndicate that intercepts mailed items and then uses the information to commit fraud.

We have previously advised of ongoing engagement with the Department of Trade Industry and Competition (DTIC) and the parliamentary committee in response to the call for public comments on the Companies Amendment Bills. One of the key issues highlighted were the challenges relating to the requirements for shareholder communications, particularly for listed issuers. In particular, this pertains to Electronic Communication requirements and Annexure 3 Table CR 3 – Methods and Times for Delivery. 

There is also a need for issuers to promote ESG initiatives and to take steps to reduce their carbon footprint – this includes measures to reduce the amount of paper printed. We have requested if an interim guidance note or directive could be issued, providing clarification on what constitutes delivery and if companies may use other means of electronic communication/digital platforms besides email to communicate with shareholders.  

The DTIC responded that this was a new issue that had been raised and it would need to follow the formal consultation process before amendments could be included.

 The challenge

The challenge is that the Companies Act, 2008 (“the Act”) does not include the definition of a “sub-register” maintained by a CSD Participant but refers only to an “uncertificated securities register” which must be maintained by either a CSD Participant or a Central Securities Depository (CSD such as Strate), in accordance with the rules of the CSD. A beneficial interest holder is defined in the Act as one who is entitled to certain rights attaching to the company’s securities including the right to receive dividends/distributions, right to vote, trade in their securities etc.

 Our understanding of this amendment was to provide enabling legislation for a securities ownership register (SOR) where accounts may be maintained at CSD level instead of only a sub-register under a CSD Participant. 

 All shareholders whether held on the sub-register (i.e. broker/CSDP nominee company and Own Name holders) or underlying shareholders held in a broker/CSDP nominee (beneficial interest holders) are uncertificated shareholders.

 We have had several conversations with clients recently to discuss these challenges and some of the factors to be considered relating to shareholder communication.

  Our view

One view is that brokers/CSDPs have a mandate with their client and are required to provide services to their clients including notification of all corporate events/meetings and similarly to the process where proxy forms are returned to the CSDP/broker except for Own Name accounts/certificated shareholders, the obligation is on the CSDP/broker to send meeting notices to their clients and the issuer should only communicate to the registered nominee on the sub-register.

 There is also an obligation imposed by Strate for the CSDP to communicate with its clients (which includes the broker nominee) unless otherwise determined in the custody and settlement agreement/client mandate.

 We have also had engagements with the SA Institute of Stockbrokers who are of the view that brokers consider their clients to be their own and that they do not provide email addresses in the Beneficial Interest Register (BIR) download to Strate, as they do not want issuers to communicate with their clients. We are liaising with brokers/CSDPs to obtain a “central” email address for the broker/CSDP to capture this on the securities register for communication purposes.

We are also implementing all possible measures to reduce reliance on the post, encourage the use of Investor Centre and to source updated contact details for shareholders. We will continue with our engagements with the DTIC to implement amendments to the Companies Act and Regulations.

The Road Ahead

In summary, the future lies in collaboration. CoSecs, as they play a pivotal role in shaping corporate governance, are in a position to champion AI adoption. But advancements are necessary as the tools need to evolve to understand context, nuances, and the intricacies of boardroom discussions, for example. But by adhering to ethical principles, combined with human judgment, AI will help CoSecs not only save time but crucially provide more robust governance frameworks.

The Financial Conduct Authority (FCA) have released a draft that contains most of the new UK Listing Rules, which will see a fundamental restructuring of the existing regime. Whilst the core desire of the changes is to attract more companies to list in London there will be significant impacts on existing listed companies.

A new single segment for new equity shares will be introduced and see the existing premium and standard segments fall away and only create a single set of continuing obligations for normal commercial companies. These changes will also see most of the proposed and trailed components discussed in May 2023 become part of the new listing regime, including;

• Shareholder votes no longer being required for significant/class 1 transactions;
• Shareholder votes no longer required for related-party transactions;
• The Modified sponsor regime will remain as a cornerstone of investor and market protection;
• Relationship agreements with controlling shareholders will remain mandatory;
• There will be significant changes to the eligibility requirements for IPOs with a move to a disclosure-based and not a rules-based regime.

There will be a reliance on greater disclosures – so investors will be expected to do more of their own due diligence.

All existing premium listed commercial companies will be migrated to the new category automatically and those companies with a standard listing will be migrated to a new transition category, that will have the same continuing obligations as their current standard listing ahead of them either remaining as they are or utilising a streamlined application process to join the new category.

The consultation on these draft rules closes in two parts 16 February 2024 for the sponsor proposals and 22 March 2024 for everything else. It is expected that the FCA will publish the final rules in the second half of 2024 and them coming into force a few weeks later.

Computershare’s view

It’s good to see these discussions progress, however the true impact can’t be judged until the market has had their opportunity to respond to the consultation and more certainty is available on which changes will be implemented and when. Time will tell whether the combining of the standard and premium listed status will aid in the improvement that the market wishes to see with the exchange, however there are still questions as to if some of these changes will see a degradation in good governance. Investors also need to become better educated on a wider range of matters related to a listed company if reliance is put on them to judge the success of a company’s activities, commercial, ESG or otherwise as more reliance is placed on the company’s disclosures.

The Financial Reporting Council (FRC) Lab published a report looking at structured digital reporting and sets out areas of focus for companies and suggestions to optimise reporting for the needs of investors and stakeholders.

Under DTR 4.1.15, listed companies are required to publish annual reports in a structured electronic format. The report looks at 50 annual reports published in the second year of the requirements being in force.

The report recommendations relate to three areas:

• Tagging, including creating custom tags only when necessary;
• Design and usability; and
• Process including voluntary assurance of tagging.

The report also summarises findings of research commissioned by the FRC on how investors use structured digital reports which found that over a third of investors are utilising XBRL formatted reports as a source of obtaining financial data.

The website Corporate Compliance Insights published an article in early May that considered rebranding the role Company Secretary to better take account of its increasing position influencing strategic decision making.

It argues that few know the full history of the company and it is short sighted if boards view the role of Company Secretary as purely administrative.

The author calls out the fact that the Companies Act 2006 doesn't define the remit of the Company Secretary as is the case with similar legislation, guidance or views seen around the world. Boards should be cognisant of the fact that the role of Company Secretary is highly influential due to the intersectionality between the board, the executives and the investors which provides them with unique perspectives.

The article also articulates how with the growth in focus on ESG matters, the Company Secretary is more often than not the embodiment of the company's governance efforts.

Therefore, when you factor in these elements the article feels that it's time to rebrand so as to attract the right calibre of talent into the roles to ensure the future success of a company and of the role as a whole.

Computershare's view

In our Insight Boards, there is a distinction drawn between the perception of the role of Company Secretary and their teams. Company Secretaries feel that Boards not only “get” the role but appreciate it. And for Company Secretaries, they ensure that their key stakeholders understand the value the role brings.

But things can change the deeper you go. CoSec teams do spend a lot of time on the more administrative; minutes, statutory compliance, subsidiary management, share plans, etc, but the real value they seek is more in the advisory aspects, whether that applies to corporate actions, reporting and disclosures, group re-structuring, etc. There is a catch 22 here, especially, but not exclusively in Financial Services; executives appreciate the presence of a CoSec in their (many) committee meetings. But to step away to add value elsewhere can create a sense that the CoSec team are not actually adding value to executives where they (rightly or wrongly) want it most. The real focus here is on making sure that the right people are supporting the Committees, and this is where having a strong, well-rounded team allows established junior colleagues the chance to step up and stretch themselves. Not only will this help colleagues develop and hone their skills in a safe and supported manner it also helps showcase the strength of the team and in turn the profession of Company Secretaries.

And one of the key issues here is in the name. The arguments are well-established on both sides. There has been a growing trend to move away from the title of Secretary, including from the CGI. Our view? Until the word “Secretary” is better understood (as it is in government for example), it's often a problem and the name alone will not change it until we are all better at articulating what this means to the wider world.