Fees paid to New Zealand’s non-executive directors (NEDs) increased by 20.5 percent at the median last year, compared with increases of between five and seven percent in Australia. But, Kiwi directors are still paid less than half the equivalent going rate in Australia.
But just as important as the revelations on pay differential are the insights the Sheffield survey provides into the changing times, workload and personal risk demands on directors serving on New Zealand’s publicly listed, private and public sector boards.
The survey of 268 New Zealand organisations provides comprehensive new benchmark for governance recruitment and remuneration practices. It also identifies director and board concerns at the impact increased governance regulation and compliance is having on board time and individual director liability.
“The change in work commitment is more significant than we expected,” says Sherry Maier, Sheffield’s remuneration practice manager and survey advocate. Almost two thirds (60 percent) of survey respondents reported increased directorship workloads in the past year. They reported more work in board committees, an increase in the number of committees, more frequent and longer committee meetings. The survey suggests directors spent about 38 days year on typical directorship.
“In addition to audit, remuneration and nomination committees for example, there is long list of special purpose committees that boards set up to look at special projects,” says Maier.“They include committees to deal with one-off transactions – due diligence related for instance – credit and risk committees, property committees, risk and superannuation committees. Boards are playing more hands-on role and are more engaged [with the organisation] which requires more time and commitment from individual directors than in the past.”
Risk management issues, transactions (such as acquisitions or mergers), regulatory and compliance issues are the three top ranking reasons for increased director workloads. As the executive summary of the survey points out: Although 68 percent of respondents considered regulatory requirements are reasonable, majority – 60 percent – believe regulatory compliance has become “a burden or distraction”.
And 77 percent of respondents believe the risks involved in directorships have increased over the past five years. Almost quarter of directors reported having “negative experience” over the time – none of which involved financial risk but obviously the perceived (and actual) reputational risk is high. “These are not good odds,” says Maier.
Compliance peak
It is possible, however, that the compliance and regulatory demands may have peaked. “Some chairs and directors have indicated that there was lot of start-up work to develop pro-cesses and systems [following the implementation of Sarbanes-Oxley Act provisions] and now that these are set up it converts into review process. We expect the risk management regulatory compliance time requirements to decline in the next couple of years,” suggests Maier.
However, the full impact of the implementation of new International Financial Reporting Standards will kick in soon and this may be reflected in compliance time demands next year.
The survey also asked if, in meeting governance regulations and compliance standards, their company’s performance had improved and fewer than 30 percent felt it had. On the other hand, however, little under 50 percent of respondents felt that by meeting regulatory requirements they had gained industry or market confidence. An acceptance perhaps, that compliance reporting is worthwhile evil.
Directors would rather spend more of their time on issues other than compliance and regulatory matters. For instance, 80 percent of them believe they should spend more time on strategic planning. And around 50 percent of them would rather spend time discussing industry and competitive issues, succession planning and CEO development.
The survey provides New Zealand-wide snapshot of board composition; pay movements in 2004-2005; base fee details for chairs, deputy chairs and non-executive directors; the functioning of board meetings; committees; composition of benefits, performance pay and share options; analysis of governance issues, and director attitudes and performance evaluation processes.
The majority of the survey does, however, focus on remuneration, differential pay levels between chairs, committee chairs, non-executive directors and comparability with Australia across most of these functions. It also confirms the conventional wisdom that for comparably sized businesses, director fees in Australia are at least twice those of New Zealand at the NED level and more than twice for chairs where the difference is almost 2.3 times and widening.
Maier thinks the difference in fees between New Zealand and Australia is unsustainable. “We believe this survey shows that the gaps are narrowing,” she says. “We need to be keenly aware of the market level and the structure of director remuneration in Australia. Directors will increasingly come from and operate on both sides of the Tasman. And more businesses will have to address these regional remuneration gaps.”
In Australia chairs are paid 2.6 times more than non-executive directors and, according to Maier, this margin is growing. The margin in New Zealand is less, closer to simple two times multiple. The premium paid to chairs to reflect their greater workload, responsibility and higher risk profile is, according to Maier, also growing. “Data from Australia shows that the difference [between what is paid to chair and NED] is on the move in Australia and we would expect that to happen here,” she said. “There is move to greater premium to reflect what is unquestionably greater personal workload, legal liability and reputation risk.”
New Zealand directors are not just paid lower basic fees than their Australian counterparts, they receive fewer benefits or share options and less performance pay. The survey provides evidence on the incidence, types and values of benefits but only 13 percent of respondents reported paying any sort of benefit to directors. And the incidence of benefits is trending down. The situation in Australia is radically different. Companies are legally required to make superannuation contributions to directors who are, in this regard, viewed as company employees.
Risk profile
And when it comes to risk, an overwhelming 77 percent of New Zealand directors believe that their risk as non-executive director has increased over the past five years. Only one felt the risk had decreased. Of greater concern is the 23 percent of directors who felt their reputations had been negatively affected in the past five years. On the other hand, none had made any claim on the directors’ liability insurance although notification of potential claims has occurred. The “increased” risk perceived by directors is about reputation and not financial risk.
What does the survey say about the number of boards directors should serve on? The majority, 53 percent, agree there should be limit on the number of boards an individual can chair and 45 percent agreed to limit on the number of boards on which an individual can serve. The consensus seems to be three chairmanships, six NEDs or four audit committee chairs. On the basis of 38 days per directorship and possibly twice that per chairmanship it is obvious that, for those paid fees at the median, Kiwi directors and chairmen won’t get rich.
Publicly listed companies pay better fees than either privately owned or state sector organisations with the medians at $30,714, $21,689 and $22,100 respectively. At the upper quartiles these fees range from $50,000 to $31,250 and $28,782.
The survey suggests that if directors limit themselves on the number of boards on which they should serve, they will not get rich. And when compared with the remuneration packages paid to most CEOs they appear to
