Are Boards Ready To Defend Their Executive Pay Decisions?

Executive Job Evaluation and Directors’ Duties:

Shining a Torch on Board Accountability under the Companies Act

– Insights by Dr Chris Blair

Directors of South African companies carry statutory and common-law duties that demand more than formal compliance. Section 76 of the Companies Act 71 of 2008 requires every director - executive and non-executive alike - to act in good faith and for a proper purpose, in the best interests of the company, and with the degree of care, skill and diligence reasonably expected of a person carrying out those functions and possessing that director’s knowledge, skill and experience (Republic of South Africa, 2008, s 76(3)). For purposes of section 76, the definition of “director” also includes prescribed officers and certain board and audit committee members. A breach may expose a director to personal liability under section 77 where the statutory requirements, including loss, damage or costs and the necessary causal connection, are established; liability is not automatic merely because a decision later proves unsuccessful (Republic of South Africa, 2008, ss 76–77).

One of the less visible but potentially consequential blind spots in board practice concerns the evaluation and grading of executive roles. The Companies Act does not prescribe a job-evaluation methodology, and an incorrect grade is not, by itself, a breach of directors’ duties. Nevertheless, where boards rely on title matching, disregard organisational size and structure, or fail to distinguish the demands of a rapidly changing industry from those of a relatively stable environment, they may form an incomplete view of accountability, risk and decision magnitude. That weakness can affect appointments, performance oversight, incentive design and succession planning - matters that fall within the board’s wider governance responsibilities.

The stakes have risen further with the commencement, on 22 May 2026, of sections 30A and 30B of the Companies Act. Public and state-owned companies must now place both a remuneration policy and an annual remuneration report before shareholders for approval by ordinary resolution. The policy vote governs the remuneration framework, while rejection of the annual report triggers specific governance consequences for non-executive directors serving on the remuneration committee (Republic of South Africa, 2024, s 6; Republic of South Africa, 2026). Executive grading is not itself disclosed or voted on, but a weak grading foundation can undermine the coherence and credibility of the remuneration decisions presented to shareholders. This article links the practical complexities of executive job evaluation to section 76 and to the heightened accountability created by the new remuneration provisions.

The Companies Act standard: a short reminder

Section 76(3) remains the cornerstone. A director must exercise the powers and perform the functions of director:

(a) in good faith and for a proper purpose;

(b) in the best interests of the company; and

(c) with the degree of care, skill and diligence that may reasonably be expected of a person carrying out the same functions in relation to the company as those carried out by that director, and having the general knowledge, skill and experience of that director (Republic of South Africa, 2008, s 76(3)).

The business judgement rule in section 76(4) provides a statutory safe harbour in relation to the duties to act in the best interests of the company and with care, skill and diligence. It applies where a director has taken reasonably diligent steps to become informed, has dealt appropriately with any material personal financial interest, and has a rational basis for believing that the decision is in the company’s best interests. It does not protect a failure to act in good faith or for a proper purpose, nor does it excuse a director who has not taken reasonably diligent steps to understand the matter being decided (Republic of South Africa, 2008, s 76(4)).

The statutory duties apply to executive and non-executive directors, although the care, skill and diligence standard is sensitive to the functions performed and to the particular director’s knowledge, skill and experience. Prescribed officers are also included for purposes of sections 76 and 77. Directors may rely on competent employees, professional advisers and board committees in the circumstances set out in section 76(4) and (5), but delegation to a committee does not, by itself, constitute compliance with a director’s duties (Republic of South Africa, 2008, ss 72(3), 76(4)–(5)).

The new statutory remuneration framework: sections 30A and 30B

With effect from 22 May 2026, public and state-owned companies are subject to a statutory remuneration-governance regime under sections 30A and 30B (Republic of South Africa, 2024, s 6; Republic of South Africa, 2026). Section 30A requires the remuneration policy to be presented to shareholders at the annual general meeting for approval by ordinary resolution. Once approved, it remains in force for three years and must be approved again every three years. A material amendment may not be implemented until shareholders have approved it. If the policy is not approved, it must be presented again at the next annual general meeting or at a shareholders’ meeting called for that purpose. CIPC has advised that the new provisions generally apply to annual general meetings held after 22 May 2026, except where a valid notice convening the meeting had already been issued before commencement (CIPC, 2026).

Section 30B requires an annual remuneration report in respect of the previous financial year, also for approval by ordinary resolution. The report must contain a background statement, a copy of the remuneration policy and an implementation report. The implementation report must disclose the total remuneration received by each director and prescribed officer; the total remuneration of the highest- and lowest-paid employees; the average and median remuneration of all employees; and the ratio between the aggregate remuneration of the top 5 per cent and bottom 5 per cent of employees. “Total remuneration” is defined broadly to include salary, benefits, employer contributions and short- and long-term incentives, including share options and incentive awards (Republic of South Africa, 2024, s 6).

Non-approval of the remuneration report triggers a statutory two-strike process. After a first failed vote, the remuneration committee must explain at the next annual general meeting how shareholder concerns have been taken into account, and non-executive directors serving on the committee must stand for re-election as committee members. If the following year’s report is also rejected, those directors may continue as directors only if they are successfully re-elected at that annual general meeting and they are ineligible to serve on the remuneration committee for two years. These consequences do not apply to committee members who served for less than 12 months in the year under review (Republic of South Africa, 2024, s 6). Separately, amended section 30(4) requires companies whose annual financial statements must be audited to name each director and prescribed officer and disclose that person’s remuneration and benefits (Republic of South Africa, 2024, s 5).

For public and state-owned companies, executive job grading can no longer be viewed as a purely internal technical exercise. Although sections 30A and 30B do not require disclosure of the grade itself, grading influences remuneration architecture and may therefore affect the policy, implementation outcomes and pay relationships subjected to shareholder scrutiny. The quality of the underlying analysis is relevant to informed board decision-making under section 76, but a grading weakness would not automatically establish a breach of duty or liability under section 77.

How flawed executive grading may affect directors’ duties

The earlier analysis of executive job evaluation highlighted several recurring weaknesses: reliance on job titles without regard to organisational context; treating size metrics as sufficient while overlooking capital structure, the number of core businesses, geographic scope and industry conditions; allowing the incumbent to influence the evaluation of the role; and failing to document the business rationale for the grade. These weaknesses can undermine informed decision-making. However, the Companies Act does not make job evaluation compulsory or prescribe how an executive role must be graded; any allegation of breach under sections 76 or 77 would remain fact-specific and would require the relevant statutory elements to be proved.

Duty of care, skill and diligence

Section 76(3)(c) establishes a combined objective and subjective standard: the conduct expected of a person carrying out the same functions, while also taking account of the particular director’s knowledge, skill and experience. A director who accepts a grading outcome based only on the title of an executive, without interrogating whether the organisation is a single-business, mid-scale private company or a multi-business, multi-country group, may struggle to demonstrate that reasonably diligent steps were taken to become properly informed. Context is also relevant when assessing whether a particular executive is suited to a role (Spencer Stuart, 2017).

Executive roles vary considerably in the demands they impose. Research on executive job demands identifies differences in task challenge and performance challenge as relevant to the difficulty of senior roles, while executive-assessment research emphasises the external environment, strategy, culture, organisational complexity and stakeholder expectations (Hambrick, Finkelstein and Mooney, 2005; Spencer Stuart, 2017). Measures such as capital employed, total assets, employee numbers, operations and geographic reach may therefore be relevant inputs, depending on the chosen methodology and the organisation’s context; they are not statutory grading criteria. If these factors are ignored, the board may have an incomplete understanding of role scope and decision exposure. Under section 30B, the resulting remuneration outcomes - rather than the grade itself - are then placed before shareholders for approval.

Duty to act in the best interests of the company

Section 76(3)(b) requires directors to act in the best interests of the company. Flawed grading can create two opposite risks. Over-grading may inflate remuneration costs, create internal-equity concerns and contribute to an unsustainable cost structure. Under-grading may impair the organisation’s ability to attract or retain the calibre of executive required by the role’s actual complexity. Whether either outcome amounts to a breach of duty would depend on the facts, the decision-making process and any loss suffered by the company.

Incentive design can suffer from the same distortion. Variable-pay arrangements calibrated against a misunderstood role may reward the wrong behaviours or fail to focus attention on decisions that matter to long-term value. For public and state-owned companies, the resulting remuneration outcomes are visible in the section 30B implementation report and subject to shareholder approval, although the Act does not require the underlying job grade to be disclosed.

Good faith and proper purpose

Section 76(3)(a) requires directors to act in good faith and for a proper purpose. A board that adopts a grading outcome without genuine enquiry into organisational context risks relying on convenience, precedent or incumbent influence rather than a bona fide assessment of the company’s needs. Where a director has a material personal financial interest in the matter, section 75 must also be observed. If a remuneration or appointment decision is later challenged, the absence of a documented, context-based rationale may make it more difficult to demonstrate that the decision was informed, taken for a proper purpose and rationally believed to serve the company’s best interests (Republic of South Africa, 2008, ss 75–76).

Practical implications for the board

The relationship between executive grading and directors’ duties is practical, but it should not be overstated. Grading is one input into several recurring board activities, and the new statutory remuneration framework increases the visibility of the resulting pay decisions.

Appointments and succession. Selecting an executive without a clear, context-based understanding of the role’s decision magnitude and environmental complexity increases the risk of mismatch. If the process is materially deficient and the company suffers loss, questions may arise about whether the board took reasonably diligent steps in making the appointment. A poor appointment outcome alone does not prove a breach of duty.

Remuneration policy and report. Under sections 30A and 30B, a public or state-owned company must present a forward-looking remuneration policy and an annual remuneration report for shareholder approval. If the underlying grades do not reflect organisational complexity, the remuneration architecture may rest on a weak foundation. A first rejection of the report triggers explanation and committee-member re-election; a second consecutive rejection can require the relevant non-executive directors to stand for re-election as directors and makes them ineligible to serve on the remuneration committee for two years, subject to the 12-month service exception (Republic of South Africa, 2024, s 6).

Performance oversight. Boards that do not understand the real scope of an executive role may struggle to set meaningful performance expectations or evaluate results fairly. That weakness can be relevant to the duty of care, skill and diligence, although the legal assessment will always depend on the particular facts and the steps taken by the directors.

Risk, disclosure and internal control. Executive roles in rapidly changing industries or complex structures may carry wider decision exposure and require stronger assurance or support arrangements. If grading or role design understates that complexity, the board may under-invest in the oversight the role requires. Section 30B’s disclosure of individual remuneration and workforce pay relationships increases the visibility of any disconnect between role scope and reward, but does not itself determine whether a grade is correct.

What diligent directors can do

Directors who wish to meet the section 76 standard, and to withstand scrutiny under the new remuneration regime, can take several practical steps.

First, insist that the executive-grading process captures the organisational parameters relevant to the selected methodology and the role under review. These may include the industry environment, turnover, capital employed, total assets, employee numbers, organisational structure, the number of core businesses, operations and countries of operation. The appropriate factors and their weighting will vary between methodologies; they are not a fixed statutory checklist.

Second, require a documented rationale linking the grade to the relevant organisational parameters and to the role’s impact, strategic latitude, accountability and problem-solving demands. A clear audit trail can help demonstrate the reasonably diligent steps taken by directors and strengthen the explanation of the remuneration architecture. Documentation is evidence of process, however, not a substitute for a rational and properly informed decision.

Third, distinguish the role from the incumbent. Grading that inflates or deflates because of the person currently occupying the seat contaminates the process and weakens the board’s ability to demonstrate objective care.

Fourth, treat grading as a living input to governance rather than a one-off technical exercise. When the organisation’s size, structure or industry dynamics change materially, the grades of key executive roles should be reviewed. Failure to do so can leave the board working with an outdated map of accountability and can undermine the credibility of the remuneration policy presented under section 30A.

Fifth, ensure that non-executive directors, particularly those serving on remuneration and nomination committees, understand enough of the organisational context and the chosen methodology to challenge management or consultant recommendations constructively. Section 76 allows directors to rely on competent employees, professional advisers and committees in specified circumstances. However, section 72(3) makes clear that delegation to a committee does not, by itself, satisfy a director’s duty to the company (Republic of South Africa, 2008, ss 72(3), 76(4)–(5)).

The Companies Act does not require directors to become technical job-evaluation specialists, nor does it prescribe a particular grading system. It does require directors to exercise genuine care, skill and diligence, to act in the best interests of the company, and to do so in good faith and for a proper purpose. Executive job evaluation can be an important governance input at the intersection of these duties. When grading is reduced to title matching or the mechanical use of size metrics without regard to organisational reality - particularly differences in operating environment and between single-business and multi-business structures - the quality of the board’s decision-making may be compromised.

The commencement of sections 30A and 30B on 22 May 2026 has increased the visibility and consequences of remuneration governance for public and state-owned companies. Flawed grading does not, by itself, establish a breach of section 76. It may, however, weaken the evidential foundation for remuneration, appointment and oversight decisions; contribute to shareholder rejection of the remuneration report; and expose remuneration-committee members to the specific re-election and two-year ineligibility consequences created by section 30B. Shining a torch on directors’ duties in this area means asking hard questions about how executive roles are understood, graded and overseen.

The answers help determine whether the board was properly informed, whether remuneration decisions served the company, and whether the requirements of the business judgement rule can be met if those decisions are later scrutinised (Republic of South Africa, 2008, s 76(4)).

This article is based on research conducted by Dr Chris Blair of 21st Century, a remuneration and job architecture consultancy operating across Africa. Please contact us at [email protected] for further information.

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