In today’s environment, reviewing director fees – let alone adjusting them – might seem to be losing proposition. John Key’s message about freezing MP pay levels and tightening belts has been received loud and clear. The entire corporate market watched attentively as Contact Energy’s October bid to increase board fees was roundly ridiculed and ultimately withdrawn. Vector made feint and then nobly stood down.
And throughout this period it seems obvious that the public is confused about the role of board versus the role of management. The board is held accountable when the stock price drops, but given no credit when the stock price rises. Does that make sense? When things go wrong, who is to blame?
Surely we have all drawn the obvious conclusion that board fees, regardless of level or other circumstances, are untouchable in 2009. Simply off the table for discussion.
But not so fast. Businesses are now operating in largely uncharted waters. Have companies ever relied so heavily on the wisdom, experience and judgement of their boards? The quality and timeliness of decision-making by boards is absolutely critical and may literally result in life or death for those businesses. The stress, workload, and pressures on boards are soaring.
But of course, since today it might be unpopular to review or raise board fees, the public will expect our directors to soldier on for what are regionally and internationally – in absolute and relative terms – unusually low fee levels. The median non-executive director base fee in New Zealand according to the Sheffield 2008 Director Survey was $30,000. This compares with median CEO pay package of $275,000, per the Sheffield 2008 CEO Survey. Of course I realise that directorship is not full-time job, but given the time requirement on director in times of strife, the order of magnitude difference certainly gives one pause. In today’s world, which job would you rather have?
What is board to do? One problem is largely self-inflicted. Boards tend to review board fees every two, three or even four years. This is in distinct contrast to executive and manager pay which is rigorously reviewed annually. No CEO would tolerate going three years between pay increases. Since base fee levels are typically low to begin with, and since past Sheffield surveys confirmed that when board fees are increased, the median annual rate has been 15 percent, it is not surprising that when market increase is calculated and proposed, it is often percentage increase of 50 percent, 75 percent or even 100 percent. This was precisely the case for Contact Energy which had made no adjustments over four years.
Percentage increases of double and triple digits draw the attention and outrage of shareholders, media and the public. Boards simply appear greedy. Nobody bothers to estimate the actual dollar amount involved per director or even in total which may be quite modest. Certainly very modest in comparison to what that same business’ CEO or top executives are paid. However, it is the percentage increase that makes the headline and creates the public relations stir – not the underlying dollars or remuneration theory.
In order to avoid, or at least minimise this pitfall, I advocate an established annual board fee review with the expectation that modest annual increases will be approved and implemented. If companies are increasing board fees at five percent to 10 percent each year, they avoid the headline-catching one-time 50 percent market movement, especially at times when they want to attract and retain high calibre directors.
Which leads me to prediction. I expect there will be considerable turnover among directors in the coming year or so for two reasons. First, some directors will be found wanting in terms of key skills or competencies and will be asked to leave. Second, some directors will simply not have the resilience or the desire to operate in such stressful conditions, especially for the generally low fees now paid. It will not be worth staying.
Both situations will give rise to board openings at time when company will be under pressure to find strong director candidates who possess the commercial skills or experience that are vital to survival. Such directors will be in high demand and will not come cheaply.
Despite John Key’s admonishments and despite the chilling effects of Contact Energy and Vector, I anticipate that board fees will judiciously and modestly be adjusted throughout 2009 as matter of sheer business imperative.
Sherry Maier is consultant with Maier Ltd.
