The Sunday Mail
Vision 2030
Allen Choruma
As Zimbabwe works towards attaining Vision 2030, governance issues in both the public and private sectors have taken centre stage.
Most widely publicised corporate scandals in Zimbabwe involve excessive director and top management remuneration, including compensation packages that more often than not are not fully disclosed to shareholders, which goes against corporate governance principles of disclosure and transparency.
The remuneration of non-executive and executive directors is increasingly coming under the spotlight as shareholders demand more disclosures, accountability and transparency in an effort to curb abuse and improve corporate governance standards.
Shareholder dissent
Lack of adequate disclosure of perks of non-executive and executive directors has been singled out by corporate governance practitioners as one of the major reasons for shareholder dissent.
According to a Deloitte report “Disclosure of Remuneration: A Hot Topic”, “Remuneration of directors is increasingly one of the most hotly debated topics in the corporate governance arena due mainly to some infamous recent examples and the resultant tension between shareholders demanding to understand and to be able to rationalise their directors remuneration levels and methods, and the directors’ desire for privacy in their financial affairs.”
Institutional investors in Zimbabwe have largely been lying dormant and have not bothered to ask questions on how directors and top executives are compensated in companies they are invested in.
This shareholder inertia, especially in the public sector, has left directors and top executives with the prerogative to determine what goes into their pockets.
It is only now that shareholders — for example, Government — are beginning to ask questions on compensation arrangements in parastatals and State enterprises, especially after realising the “fat-cat” perks non-executive directors and top executives are awarding themselves, while owners of these entities, the public, are struggling to make ends meet.
Winds of change
Now we are witnessing winds of change as shareholders are demanding more disclosures on how directors’ remuneration is calculated and processed, and the quantum of remuneration, including how it is paid.
According to Good Law & Practice (Right 2 Information) website, “there is a strong international trend to require disclosure regarding the remuneration of directors and executives of both publicly traded, non-State affiliated companies, as well as for SOEs (State-owned enterprises). For instance, the OECD Guidelines on Corporate Governance call for the disclosure of compensation to individual board members and key executives, termination and retirement provisions, and any specific facility or in-kind remuneration provided to management.”
Right to fair remuneration
To avoid doubt, I do recognise that directors and top executives provide services to organisations they lead, for which they are legally entitled to be remunerated.
Section 161 of the Zimbabwe National Code on Corporate Governance, 2015, clearly notes that directors and executives should be remunerated fairly in order to enhance their motivation, reliability, commitment and effectiveness.
At the same time non-executive directors and top executives also have a corresponding obligation to perform and create value for shareholders.
Executive directors (top executives) generally enter into an employment contract with the company in which their remuneration and conditions of service is agreed upon.
In most cases, non-executive directors have no formal contracts, but are paid quarterly retainer fees and/or stipulated fees for attending board and committee meetings.
Advocacy
Practices where directors and executives are given free rein to determine their own compensation are improper.
They give directors carte blanche to compensate themselves ridiculous salaries and benefits, while organisations they lead are struggling to pay employees decent salaries, let alone pay dividends to shareholders.
In order to promote good corporate governance, there should be appropriate remuneration policies in place in every organisation.
All remuneration paid to non-executive directors and top executives should be in terms of laid-out policies.
Further, they should be comprehensive reporting mechanisms that require full disclosure of such remuneration.
Regulatory regime
The regulatory regime in Zimbabwe does not give any specific guidelines on remuneration and disclosure requirements for non-executive and executive directors.
This weakness in our regulatory regime has left the issue of director and top executives remuneration as opaque as mud and, thus, creating corporate governance challenges.
The Companies Act is silent on this matter.
Suffice to say that our Companies Act leaves the issue of remuneration and disclosures thereof as an internal matter to be handled between directors and their shareholders.
The Reserve Bank of Zimbabwe (RBZ) is the only regulator that has put in place some provisions on remuneration and disclosure requirements for directors and top executives of banking institutions it regulates.
In particular, Section 2.15.1 of the RBZ Corporate Governance Guideline (01/2004/BSD) stipulates that the remuneration of directors and top executives shall not be out of line with the nature and size of the bank.
It also prevents directors and the CEO from awarding themselves “unreasonably bountiful remuneration and excessive bonuses and fringe benefits”.
Non-executive directors cannot be given executive pay.
However, the weakness of this provision is that it does not define what constitutes “bountiful remuneration” and “excessive bonuses and fringe benefits”.
In addition, Section 8 (Corporate Governance Information) of the RBZ Minimum Disclosure Requirements for Financial Institutions Guide (01/2007/BSD) requires every banking institution to provide a summary of the remuneration policies, as well as the “aggregate remuneration” paid to directors and key executives.
They should disclose details of their earnings, share options and all other benefits.
The guideline should clearly call for the itemised disaggregation of the remuneration in order to give a clearer picture of what constitutes “aggregate remuneration”.
Zimbabwe can learn from how South Africa and USA approach this hotly debated corporate governance subject.
South African Companies Act
The South African Companies Act of 2008 (Section 30 (5)) requires South African companies to provide full disclosure of all elements of remuneration and benefits — such as base pay, bonuses, share-based payments, share options and other itemised benefits — paid to and received by each individual director and prescribed officer (key top executives) in the financial report/statements.
King IV Report
King IV Corporate Governance Report gives the board, through the remuneration committee, the responsibility for crafting the remuneration policy.
The report goes further to stipulate the director and key executive remuneration elements that should be disclosed in the remuneration policy.
To increase transparency and accountability, King IV requires the remuneration policy be put to vote and approved by shareholders regularly; for example, at annual general meetings.
USA
The USA has been described as a country with the most comprehensive and often complex disclosure regime in the world.
The US Securities and Exchange Commission (SEC) (Executive Compensation and Related Person Disclosure) rules require all publicly traded companies listed on national stock exchanges to disclose executive and director remuneration in a tabular and narrative information format over the last three years. The information should detail salary, bonuses, additional remuneration in the form of equity awards, deferred remuneration, pension, share options and other perks.
Executive compensation policy and pay is put to vote by shareholders every one, two or three years.
This is designed to increase transparency and provide mechanisms that allow shareholders and investors a clearer and more complete picture of how companies compensate their directors and top executives.
Way Forward
One way of addressing the corporate governance failures we are witnessing in Zimbabwe in both the public and private sectors is to make provision for prescriptive guidelines on integrated remuneration reporting and, in particular, more material disclosures on director and executive remuneration.
The prescriptive guidelines can be incorporated into the Companies Act and other regulatory guidelines under the ambit of regulatory authorities such as the Reserve Bank of Zimbabwe (RBZ), Securities and Exchange Commission Zimbabwe (SECZ), Zimbabwe Stock Exchange (ZSE), Insurance and Pensions Commission (IPEC), and the Auditor-General’s Office.
Allen Choruma can be contacted on e-mail: [email protected]
