PwC reveals significant changes to the remuneration of non-executive directors

2009 proved to be a challenging year for non-executive directors as demands from shareholders and actions from regulators around the world increased in the wake of the international fiscal crisis. However, according to the third edition of PricewaterhouseCoopers’ (PwC) Non-executive Directors: Practices and Fees Report – South Africa 2009, non-executives shouldn’t expect these challenges or expectations to alleviate in 2010.

The report summarises the actions taken by regulators around the world and with data collected from 383 companies listed on the Johannesburg Securities Exchange (JSE) it continues to follow trends in the level of fees paid to non-executive directors. For the first time, the report reviews the level of fees on the Alt-X and the Namibian stock exchange. The overall increase in 2009 for chairpersons in SA is 15% and 13% for non-executive directors.

During 2009 there was no evidence of a pay freeze in SA. The average total fee, excluding payments for delegated duties such as consulting, for chairpersons was R449 000 (2008: R390 000) and for non-executive directors R203 000 (2008: R180 000). By comparison in the UK there was a significant rise in the number of companies which had operated a pay freeze in 2009 – 65% of the UK companies had frozen chairperson fees.

Corporate Governance played a prominent role since the global economic crises battered international financial systems. The US Government alone committed US$7.36 trillion to bail out its distressed economy. This equates to more than double the amount spent on World War II if inflation is adjusted accordingly. Gerald Seegers, PwC SA Director of Human Resource Services from PwC says, “Boards and committees are going to be very closely scrutinised and will need to prove their effectiveness to shareholders. Executive remuneration will take centre stage as many have associated this with the unjustified risks taken by executives seeking short-term gains regardless of the consequences.”

4 pivotal areas for non-executives directors to consider

Market conditions are likely to remain tough in 2010, meaning that there will be tension between paying higher fees to attract the right individuals and being able to afford to do so. According to the report, the following areas are going to be important in terms of recruiting and rewarding non-executive directors over the next 12 months:
  • Training and Development
  • Time Commitment
  • Fees
  • Talent Pool
Seegers emphasises, “Unless these issues are carefully addressed and a sufficient investment is made, non-executive directors are unlikely to succeed or accomplish what will be expected of them in the near future.”

King III – a milestone in the evolution of corporate governance in South Africa

The release of King III and the Code of Governance Principles for South Africa 2009 became necessary as a result of the new Companies Act and changing trends in international governance. King III will have a significant impact on non-executive directors.

The report highlights specific provisions aimed at the board and directors regarding the constitution of the board and the roles of non-executives as outlined in King III. Seegers says, “Performance evaluations of executive and non-executive directors are not only vital to assess the efficiency and competence, but also to review re-appointment and training needs. Large companies with significant international exposure should implement processes geared at acquiring a deeper understanding of the role, responsibilities, thinking, dialogue and dynamics of the board.”

In a review of approximately 300 annual reports of South African listed companies, 26% of the companies state that they have an induction and training process for new board entrants and in large-cap companies, 76% made mention of the process in their annual report. It appears that induction and training is in-house and it’s not the norm in SA to have formal induction procedures as outlined in the Tyson Report on Recruitment and Development of Non-Executive Directors in the UK. However there is evidence of a trend towards this type of regulatory approach especially following the recommendations in King III.

Too many solutions to the perceived executive remuneration ‘problem’ focus on the form of governance rather than its substance. More attention needs to be paid to behaviour in the boardroom. Behaviour is different from process. The report reviews a variety of ways in which independence from management can be maintained. Seegers says, “Perhaps most challenging for committee members is being prepared to have difficult conversations about pay and performance with executive management”.

Remuneration of non-executive directors

Although King III focuses on executive remuneration, some of the principles laid down also affect non-executive directors:
  • The chairperson and other non-executive directors should not receive options or incentive awards geared to share price or corporate performance;
  • Non-executive directors’ fees should be approved by shareholders in advance; and
  • Their fees, including committee fees, should recognise the responsibilities borne by the directors throughout the year and not only during meetings. Fees should comprise a base fee, which may vary according to factors including the level of expertise of each director, as well as an attendance fee per meeting.
Seegers says, “Paying a base fee together with a meeting attendance fee would represent a shift for most companies. Most companies pay a basic board fee plus a fee per meeting. It’s debatable whether the proposed structure will recognise the responsibilities borne by directors. It may be preferable to reward non-executive directors by reference to their contribution, whether or not that happens to coincide with their attendance in person at a meeting. It will be interesting to see whether companies choose to apply this principle or explain why other fee structures are appropriate.”

The report highlights the significant variances of fees paid to non-executive directors by sector. For example, the average fees paid to chairpersons in the large-cap financial services sector increased by 18% and only by 3,5% in the large-cap base metals and mining sector. Lead directors earned an average of R605 000 and deputy-chairpersons an average of R704 000. Chairpersons on the Namibian exchange earned an average fee of N$135 000 and non-executive directors N$90 000.

Non-executive directors, the JSE and an ailing talent pool

The number of non-executive directors serving on JSE-listed companies increased by 6% from 2 043 to 2 159. This includes 234 chairpersons, 33 deputy chairpersons and 55 lead directors. The average age of SA chairpersons is 55 (2008: 58) and 48 (2008: 49) for non-executive directors. This trend is a clear indicator that the talent pool in South African market is plagued with a severe shortage of skills. As a result, many non-executive directors have taken on additional positions in other companies in 2009. The current trend is for executive directors to take on non-executive director roles in other companies if their company policy allows this.

King III states that non-executive directors should ensure that they have (and take) the time required to attend properly to their duties. In SA 87% of the non-executive directors serve on one board and less than 5% serve on three or more boards. Serving on multiple boards may impinge on the required dedication. In the UK, the average number of service days per annum spent by a chairperson of an industrial and service company with revenue in excess of £2,5bn is 100 days and for non-executives 20 days. In 2008, non-executives in the financial services sector spent an average of 80 days.

Seegers concludes, “One of the biggest challenges facing all companies is the ability to attract individuals with the requisite skills and knowledge to their institution. The skill shortage in South Africa does not allow for diversity and this can be a problem for companies seeking quality individuals. The desire to empower the local pool of directors in order to build up the local knowledge of local talent has negatively influenced sourcing and appointing non-executives from overseas.”