Non-executive directors (NED) report 2019

Practices and fees trends report

Overview

In this edition of our annual review of fees paid to non-executive directors, we take a closer look at investor views on the role of the remuneration committee in South Africa, and the overall state of pay among listed companies. A central theme of this year’s report is the role of the remuneration committee in corporate South Africa, and the question of whether remuneration committees are actually fit for purpose.

There is a strong perception among major South African institutional investors that remuneration committees are not approaching shareholder engagement properly, need to do more to upskill themselves to properly execute their duties, and should not place an over-reliance on external consultants and advisors.

Time and again, international research has shown that diversity and inclusive decision-making yields better financial and strategic results – however, meaningful diversity is not necessarily reflected in the board and management profile of many South African companies.

The report also address the role of sustainable development in the future, and how companies need to do more to engage with the Sustainable Development Goals when crafting their key performance indicators.

 

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Listen to PwC's Anelisa Keke take a closer look at the role of the remuneration committee chairperson and advisors in South Africa, and the overall state of pay, among listed companies.  

 

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Independence status

Independence rules generally aim to ensure that directors avoid conflicts of interest that may impede their service to the board. Furthermore, true independence of a non-executive director should certainly steer his or her thinking to make the right decisions and avoid the potential for acting for vested interests. Independence enhances professionalism.

In our analysis of the independence of non-executive directors in line with the ICB industry classification, we found independent non-executive directors to be well in the majority, except in the energy sector which is very small in the overall context.

The role of the remuneration committee chairperson and advisors

Non-executive directors’ are increasingly being called on to justify their companies’ remuneration policies, and the implementation thereof, directly to shareholders. This is expected especially in instances where a company has experienced poor financial performance, but executive pay levels have continued to climb.

Based on this, there is increased pressure on remuneration committee members to have the requisite knowledge and skill to execute their duties to the best of their abilities, for the good of the company and its stakeholders.

Against this backdrop, the role and independence of remuneration committee advisors is often questioned by institutional investors, as well as some remuneration committees’ over-reliance on advice provided by these advisors due to the committees’ own lack of skill.

Similarly, some of the most influential South African institutional investors have expressed frustration with the current standard of engagement with remuneration committee chairpersons.

We believe the Board chairperson and the remuneration committee chairperson should both be aware of their respective roles with regards to the execution of the remuneration committee mandate and shareholder engagement. They also need to actively fulfil those roles throughout the year to ensure that they meet their fiduciary duties.

Institutional investor views on remuneration

PwC hosted a round table event in October 2018 for major South African institutional investors and governance institutions to gauge their views on the state of executive pay in the country.

While some expressed hope that remuneration governance had made significant progress over the past few years, others were dismayed at the current state of executive pay, and called for stronger remuneration committees.

The observation was made that remuneration is one of the leading areas of concern among global asset owners, and asset managers are expected to play a greater role in developments in this area.

Representatives at the round table included heads of environmental, social and governance; investment analysts and representatives of governance bodies such as the United Nations Principles for Responsible Investment.

They voiced the official views of their respective constituencies, and also shared their experiences engaging with companies on remuneration-related matters in the relatively new King IV™ era.

Specific issues discussed at the round table included:

  • Engaging with shareholders
  • The role of the remuneration committee
  • Benchmarking executive and non-executive director pay
  • Non-executive director fees
  • Performance conditions.

 

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The board agenda in 2019

The suitability of skills, experience and independence of individuals serving on boards are the areas of most concern to South African directors when it comes to general perceptions of governance, according to a recent study by the Institute of Directors Southern Africa. The study suggests they are also the areas directors have been the most negative about in recent years.

Some South African investors are not taking the situation lying down, and have gone as far as attempting to dissolve boards of companies they found problematic. Our report discusses this trend in more detail, and examines investor voting patterns around board reappointments.

In the previous edition of this report, we highlighted some of the major areas of disruption that would affect boards in 2018. In this edition we go further and examine whether, in order to adapt to a world of rapid disruption, boards should do more to incorporate millennial directors. Similarly, embracing gender and diversity in organisations also remains a pressing agenda item for all boards, and this is covered in more detail.

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Diversity in the workplace

Many successful companies regard gender and ethnic diversity and inclusivity as a source of competitive advantage. Inclusive diversity is not only a matter of corporate social responsibility, but is also essential to the company’s overall growth strategy.

In previous editions, we have discussed how in the South African context, particularly given the underrepresentation of women and people of colour in the boardroom, the need to actively promote the growth of diverse leadership in the private sector is an even greater imperative. But as our analysis highlights, South African businesses are failing to close the race and gender gap in a meaningful way.

Gender and ethnic parity, not only in terms of numbers, but also in terms of remuneration, should be an area of major concern and focus for boards. Given the South African social and economic context, and the proven financial and strategic benefits of a more diverse and inclusive boardroom and (of equal importance) corporate culture, boards should set concrete goals to promote diversity throughout their organisations, and pursue them zealously.

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Environmental and social governance

In the 2015 edition we introduced and discussed the need for Boards to consider the importance of the global set of goals, otherwise referred to as ‘sustainable development goals’ (SDGs), driven by the United Nations, that governments were expected to adopt. When a government signs up for the SDGs it looks to society, and business in particular, for help to achieve them.

The introduction of SDGs heralded a major change for business as governments started measuring and monitoring their progress and managing the effectiveness of their interventions. In turn, businesses need to assess their impact on the SDGs and review their strategies accordingly.

To have a meaningful purpose that takes account of SDGs, organisations need to bring economic, fiscal, societal and environmental metrics together in a way that is relevant to the organisation and its stakeholders.

Similarly, Boards also need to ensure that the relevant metrics find their way onto their executive directors’ remuneration scorecards, thereby aligning the organisation’s purpose with executive remuneration. These criteria cover a broad spectrum of often nonfinancial measures that are hidden from day-to-day accounting, but which have a direct and significant effect on the well-being and future sustainability of the organisation and the planet.

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Regulatory update

South Africa is still reeling from large-scale corporate governance failures that have occurred over the past few years. Frontline regulators have taken steps to encourage greater corporate accountability, and this has resulted in proposed amendments to the Johannesburg Stock Exchange (JSE) Listings Requirements and the Companies Act respectively.

We have also had some time to observe how the introduction of the King IV™ Code on Corporate Governance (King IV™), as well as the two-part non-binding vote on the remuneration policy and implementation report, has impacted the corporate landscape.

The report sets out a high-level summary of remuneration-related developments in South Africa and abroad.

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Boards with good shareholder relationships may be able to build up credit that they can draw on if times get tough. In reality, however, South African investors are of the view that many listed companies below the JSE top 40 do not necessarily invest in these relationships, which is reflected in their poor approach to engaging with their shareholders on remuneration.

Contact us

Gerald Seegers

Partner, PwC South Africa

Tel: +27 (0) 11 797 4560

Anelisa Keke

Manager, PwC South Africa

Tel: +27 (0)21 529 2450

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