Understanding Public Interest Scores in South Africa: A Complete Guide 2024
Public Interest Scores (PIS) play a critical role in the regulatory framework governing companies in South Africa. Introduced under the Companies Act of 2008, PIS measure the level of public interest in a company’s operations and activities. This guide explores what PIS entails, how they are calculated, their significance for companies, and compliance requirements.
What are Public Interest Scores (PIS)?
Public Interest Scores (PIS) are numerical values assigned to companies based on specific criteria defined by the Companies Act of South Africa. These scores are used to determine the level of oversight and regulatory scrutiny required for companies based on their size, turnover, number of employees, and public interest in their operations.
Importance of Public Interest Scores
Public Interest Scores serve several purposes within the regulatory framework:
Regulatory Oversight: Determines the level of regulatory oversight and compliance requirements for companies.
Transparency: Enhances transparency by providing stakeholders with insights into the governance and operational practices of companies.
Risk Management: Identifies companies with higher public interest exposure, ensuring appropriate safeguards and protections for stakeholders.
Accountability: Holds companies accountable to higher standards of corporate governance and ethical conduct.
How Public Interest Scores are Calculated
The formula for calculating the Public Interest Score is as follows:
Number of employees – 1 point per employee
Third party liabilities – 1 point per R1 million (or portion thereof)
Turnover – 1 point per R1 million (or portion thereof)
Number of shareholders – 1 point per shareholder (irrespective of how many shares they hold individually).
What Does the Public Interest Score Tell Us?
The PIS is a crucial measure for South African companies as it determines several key regulatory and compliance obligations. Understanding the results of the PIS can guide companies in fulfilling their statutory requirements efficiently. Here’s what the PIS indicates:
Audit or Independent Review Requirements: The PIS helps determine whether a company's annual financial statements need to be audited or can undergo an independent review.
A company with a PIS of 350 or more points in a financial year, must have its annual financial statements for that financial year audited.
A company with a PIS of between 100 and 349 points (both inclusive), must have its annual financial statements audited only if they were internally compiled.
Companies with a PIS of less than 100 (one hundred) are not compelled to have their financial statements independently audited, unless if otherwise stated in the Memorandum of Incorporation of the company.
If an audit is not mandated by the company’s Memorandum of Incorporation or PIS, then the company may elect to voluntarily have their financials independently audited.
Social and Ethics Committee Requirement: A company with a PIS of more than 500 points in any two of the previous five years must appoint a social and ethics committee. Every state-owned company and listed public company is obliged to appoint a social and ethics committee. This committee is responsible for monitoring the company's activities in relation to social and economic development, good corporate citizenship, the environment, health and public safety, consumer relationships, and labour and employment issues.
Business Rescue Practitioner: The size of the company, as indicated by the PIS, is an important factor when appointing an appropriate business rescue practitioner. Larger companies with higher PIS may need to engage more experienced practitioners with specific expertise to handle complex business rescue processes.
Filing Annual Financial Statements with CIPC: Depending on the PIS, certain companies may be required to file their annual financial statements with the Companies and Intellectual Property Commission (CIPC). This filing ensures that the company's financial information is publicly available, promoting transparency and compliance with regulatory standards.
KING IV: The King IV principles embody values of good corporate governance standards, which guide companies that meet or exceed a PIS of 350 to stringent levels of accountability, regulatory and financial reporting standards.
Understanding and accurately calculating the PIS is essential for compliance with South African corporate governance and financial reporting regulations. It helps companies align their internal processes with legal requirements, thereby mitigating risks associated with non-compliance.
Additional considerations to assist with your calculations
Number of employees:
When making the calculation, ‘employee' has the meaning set out in the Labour Relations Act, 1995 (Act No. 66 of 1995). In this Act, an employee is defined as:
“a) any person, excluding an independent contractor, who works for another person or for the State and who receives, or is entitled to receive, any remuneration; and
b) any other person who in any manner assists in carrying on or conducting the business of an employer.”
The Act lacks a clear definition and specific guidance on how to calculate the average number of employees.
At Eqeight, we believe the most accurate approach involves listing the number of salaried employees on a monthly basis and the number of wage-earning employees on a weekly basis. Using this data, an average number of employees can be calculated for a more precise result.
Third party liabilities:
The Act does not clearly define and does not provide clear guidance on what is classified as a third- party liability. We have experienced that in practice group loans and shareholder loans will be excluded from the calculation as these are classified as related party liabilities. Trade payables to group companies are also excluded.
Deferred tax is also not regarded as a third-party liability because its only a book entry due to a timing difference between tax and accounting treatment and will therefore be excluded from the calculation.
Turnover:
The term "turnover" is not explicitly defined in Regulation 26 of the Companies Act. However, the regulation refers to turnover as defined by revenue in Financial Reporting Standards. Consequently, a company's turnover should be interpreted according to the revenue definition in these reporting standards.
Owner Managed Entities:
If a company have a PI Score of between 100 and 349 and the company is owner managed and the AFS are independently compiled and their MOI does not require them to have an audit, then such entity does not need an audit or Independent review per the Companies Act.
An owner-managed company can be best defined as a Private Company or Personal Liability Company where:
one person holds, or has all the beneficial interest in all of the securities issued by the company (one shareholder) and is also a director, or
every person who is a holder of or has a beneficial interest in any securities issued by the company is also a director of the company (that is, all shareholder are directors), unless the company has only one director, and that director is a person contemplated in section 69(12) or
in the case of a trust, it must be an inter vivo trust, with all its beneficiaries being directors of the company.
Shareholders who are juristic persons are excluded from the definition. Therefore, if one of the owners is not a human being (except for an inter vivos trust), the company cannot be considered an owner-managed company.
Please note, "owner managed" means that every shareholder of the entity is also a director. While there may be directors who are not shareholders, it is essential that every shareholder holds a director position.
Conclusion
Public Interest Scores are a pivotal aspect of corporate governance and regulatory compliance for companies in South Africa. By understanding how these scores are calculated, their implications for regulatory oversight, and compliance requirements, companies can enhance transparency, accountability, and stakeholder trust.
For more information on Public Interest Scores or assistance with regulatory compliance, consult with a qualified corporate governance advisor or legal professional. Ensure your company meets its obligations and operates with integrity in the dynamic business environment of South Africa.
