Understanding Public Interest Scores in South Africa: A Complete Guide
Public Interest Scores (PIS) play an important role in how companies are regulated in South Africa. The concept was first introduced under the Companies Act of 2008 and is used to measure how much public interest there is in a company’s activities and operations.
We’re sharing what PIS is, how they are calculated, why they matter for businesses, and what companies need to do to stay compliant.
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 play an important role within the regulatory framework and serve a few key purposes:
Regulatory oversight: They help determine the level of compliance and regulatory supervision a company must follow.
Transparency: PIS improves transparency by giving stakeholders a clearer view of a company’s governance and operations.
Risk management: They help identify companies with higher public interest exposure, ensuring suitable safeguards are in place to protect stakeholders.
Accountability: Companies with higher scores are held to stronger standards of corporate governance and ethical behaviour.
How Public Interest Scores are Calculated
Curious about the formula for calculating the Public Interest Score? Take a look:
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?
As previously mentioned, the Public Interest Score (PIS) is an important measure for companies in South Africa, as it influences several key regulatory and compliance obligations. However, understanding your PIS helps you know what is expected of your business and how to meet these requirements in a practical way. In short, the PIS shows:
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 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.
It’s essential for businesses to understand and accurately calculate their Public Interest Score, as this ensures compliance with South African corporate governance and financial reporting regulations. It also helps companies align their internal processes with legal requirements, reducing the 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 andthe company is owner managed and the AFS are independently compiled and their MOI does not require them to have an audit, thensuch 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 play a key role in corporate governance and regulatory compliance for South African companies. By understanding how these scores are calculated and what they mean for regulatory oversight and compliance, businesses can improve transparency, accountability, and trust with their stakeholders.
For guidance on Public Interest Scores or help with regulatory compliance, it’s best to speak with a qualified corporate governance advisor or legal professional. This ensures your company meets its obligations and operates with integrity in South Africa’s ever-changing business environment.
If you’re looking for more information, feel free to contact Eqeight.
