Disclosure rules have set off a race to the top
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18 February 2005

Johannesburg – The massive increases
in the value of remuneration packages that followed the forced
disclosure of executive income ranks as the most costly unintended
consequence in South African corporate history.

Evidence suggests that since 2002, when listed companies
were first required to disclose how much they paid their executive
directors, those remuneration levels have increased as much as

Five years ago few executive directors received
remuneration of more than R1 million a year. In addition, the value of
packages varied widely, reflecting the inevitably wide variation in
executive performances.

Now it would appear no chief executive of
a listed company receives less than R2 million a year and there is far
less variation in the value of packages. If the profit generated on the
exercising of options is excluded, remuneration packages now tend to be
bunched up in the top quartile.

In the late 1990s there was growing
pressure on local firms to follow the lead taken by US and UK companies
years earlier and disclose the remuneration packages of their
executives. The belief was that disclosure would not only enable
shareholders to determine whether they were getting value for money but
would also curb suspected excess payments.

After three years the
reality is that the quality of disclosure makes it virtually impossible
for shareholders to determine whether they are getting value and, much
more distressingly, disclosure has sparked an ever-upward spiralling
game of catch-up in which the most generous package on the JSE
Securities Exchange becomes the one to beat.

This ratcheting up
transcends details such as size, performance or market sector. It has
been accompanied by a tight control on inflation-linked general wage
increases, which has resulted in a massive widening of the wage and
income gap in South Africa.

According to an analysis published
last year by Labour Research Services, the average fee for executive
directors of all listed companies was just under R3 million. When
compared with the average annual minimum wage of R24 000 this implies
that the average worker has to work 111 years to get paid what an
executive director receives in a year. This is an issue that finance
minister Trevor Manuel has cautioned the business community about.

experts say that disclosure in the US and the UK was followed by the
same ratcheting game, which enjoyed added impetus from the share market
boom of the 1990s. Only in recent years have institutional shareholders
in the US and UK made any serious attempts to rein in the excesses.

South Africa it was initially the mining companies, boosted by the huge
profits generated by the weak rand, that were the big payers. Then the
banks moved into the number one position and now it looks as though
being an executive director at one of the retail companies is also a
good place to be.

But as an indication that no executive believes
he or she should be left out of the game, even media company Primedia,
with a market capitalisation so small it does not rank in the FTSE/JSE
Africa all share index and with just R1 billion of assets to manage,
behaves as though it is in the big league. In financial 2004 the firm
paid chief executive Willie Kirsh R5.2 million.

The move at the top
of the table from mining companies to banks and retailers has followed
the behaviour of macroeconomic factors such as the exchange rate, the
prime rate, money supply and gross domestic product growth. This
suggests that strong corporate performances are significantly
influenced by factors beyond management control.

By 2000, local
executives probably realised the days of secrecy were numbered, but
they put up a strong rearguard action against what they seemed to think
was an intrusion into their private lives.
Their favourite
explanation for their resistance to disclosure was not that it was none
of anybody's business what they took home but that it would attract the
attention of the criminal class and would lead to a dramatic increase
in the incidence of car hijackings and kidnappings.

The weakness in
this argument was, of course, that the lifestyle of most of the
executives could probably best be described as one of conspicuous
consumption, which left little to the criminal imagination.
As it
happens, far from precipitating a spike in criminal activity, the
disclosure of executive remuneration has coincided with a decline in
such activity. So remuneration disclosure certainly has been a win-win
situation for our country's executive directors.

For other
stakeholders, such as shareholders and employees, the ratcheting up of
executive remuneration has been far more problematic.