Article:

It Pays to Pay your NED’s their worth!

30 May 2016

Allan Feinberg , Managing Director, Remuneration and Reward Services |

Introduction

BDO Remuneration analysis for Non-Executive Directors (NED’s) indicates that their pay remained flat last year. This is strange considering raised governance is driving demand for diverse and specialised NED’s. A series of governance disasters over the past number of years including Centro Properties, Babcock and Browne as well as the Woolworths/ Masters debacle should be the proverbial ‘wake up’ call for organisations to ensure that they have the right people on their boards who are able to carry out their corporate governance roles diligently, and in return are remunerated in an appropriate and defensible manner.

What does increased governance mean for the individual NED?

Assiduous preparation and commitment to the company!

All directors including Non Executives have a fiduciary duty “to exercise their powers and discharge their duties with an appropriate degree of care and diligence”. In August 2009 the NSW Supreme Court penalised former John Hardie NED’s by imposing a fine on them of $30,000 each and disqualifying them from managing a corporation for a period of 5 years.

The message is clear - pleading ignorance of the facts is not an excuse. The onus is on NED’s to “obtain, read, evaluate and—where appropriate—question all relevant material” before making any important decisions.

Thorough preparation will require NED’s  to devote additional time and energies in order to fully meet the obligations required of them.

What does this mean for the Organisation?

Good corporate governance is not going to come “cheap”!

NEDs are entitled to be fully and fairly compensated for the time, work and expertise they bring to an organisation. The increased workload associated with corporate governance rigour will become apparent, requiring organisations to be supportive of this situation, if they are genuinely committed to the role of NED’s in delivering the corporate governance standards necessary to successfully operate in today’s increasingly competitive business environment.

If organisations do not offer fees which are commensurate with the time commitments and responsibilities of the job, it is unlikely that NED’s will accept new appointments or challenges especially in their existing positions. Given the integral role that NED’s play in corporate governance arrangements, the fee that is paid must be sufficient to attract, retain and motivate the right calibre of individual for the job.

What does this mean for Shareholders?

It’s all good news! Because a well-paid, alert and competent board is probably the cheapest form of insurance and most effective comfort that public investors can have against expensive nasty surprises”. [AICD Volume 3, Issue 7, April 18h, 2005]

How do boards go about determining fees?

Organisations are required to seek shareholder approval on the maximum fee pool for NEDs. Once a fee pool is approved, the board or remuneration committee then determines how much individual NED’s should be compensated. In order for shareholders to make an informed decision the motivation for an increase in the fee cap needs to be straightforward and justifiable. If boards fail to provide such rationale it is unlikely that shareholders and/or shareholder related bodies would approve the request for the cap to be lifted.

Shareholders need to be “convinced” that the fees they are paying are fair and worth the investment they are making.

What factors need to be considered when setting NED fees?

Pursuant to the BDO NED Pay Model the following factors should be considered:

  1. The size and complexity of the organisation
  2. The time needed in order for the NED to execute his/her duties. This would include interstate and overseas travel, company functions, time spent at board meetings, plant or site visits, preparation for meetings and special projects.
  3. The purpose of the role and specific responsibilities to be undertaken i.e. Group Chairperson, Committee Chairperson or Committee Member/s
  4. The company's existing remuneration policies i.e. director pay should reflect the company’s unique business strategy and the internal value of the role to the organisation for instance, experience, personal attributes and reputation of the incumbent is essential in determining an appropriate fee.

Conclusion

Increased time commitments, greater levels of scrutiny by the public and regulatory boards, reputation risk and exposure to legal liability may cause NED’s to “think twice” before accepting new appointments or continuing with their current ones. It’s a question of risk verses reward and 2016 will see increasing pressure on boards to increase NED fees in order to attract and retain the right calibre of individual to serve on their boards.