Has it ever been less fun to be corporate director? According to Sheffield’s 2008 Director Remuneration Survey, in partnership with Business New Zealand, directors at 290 New Zealand organisations report that the workloads are heavier and the risks higher than ever before. There is broad consensus that boards are working more and enjoying it less.
And is that surprise, really? New Zealand businesses are struggling with high currency, high taxes, high interest rates, heavy regulatory and compliance burden, tight or non-existent credit and now the uncertainty inherent in an approaching election. Besides the occasional collapse such as Feltex, in the past years over 40 finance companies have entered some form of reorganisation, restructure or freeze. Companies such as Fisher & Paykel, Sealord and Silver Fern Farms (PPCS) have suffered public outcry over manufacturing plant closings. Other boards, such as Blue Chip, Auckland Airport or Mercury Energy, have been publicly criticised at every turn for decisions made or unmade.
All of these businesses have board of directors that has presided, in some fashion, over the events that have transpired – or conspired – to stress so many Kiwi companies. There must be literally hundreds of directors who wished they were somewhere else – doing something else – in the past year. Surely, only brave few would have signed on, for the fees on offer, had they known what lay ahead.
Sheffield actively tracks two direct effects of this toxic environment. First, it precisely calculates the annual rate of base fee increases across the market. The 2008 Director Remuneration Survey, released this month, reports median, year-on-year fee increases of 14.3 percent for chairs and 17 percent for non-executive directors. These double digit levels compare to the five percent base salary increase for chief executives. These boosts come on top of an identical chair increase and 15.6 percent fee increase for non-executive directors in 2007, and do not include fee increases still to be announced in the 30 June 2008 annual reports, which are just now being published. Finally, almost half the companies in our database of 290 New Zealand organisations reported raising base fees. Gone are the days when board fees were reviewed – well, maybe – every three years.
Meanwhile, fee increases have slowed in Australia, to 4.7 percent for chairs and 7.4 percent for non-executive directors, according to Riskmetrics. This deceleration comes after 13 percent per annum increases from 2001 to 2006, and surely reflects the new ASX listing requirement that board fee increases require shareholder approval. Thus, the longstanding rule of thumb (confirmed annually by the Sheffield Director Survey which analyses the ASX 300 companies alongside our database of 290 New Zealand organisations) that the board of an Australian business is paid roughly twice that of same-sized Kiwi business, is starting to erode, as local boards gain ground and catch up.
The second effect Sheffield experiences is demand for customised director fee reports. In the past year it provided comprehensive recommendations to over 30 different organisations – listed, start-ups, iwi, trusts, not-for-profits, you name it. Organisations of all ilk are under growing pressure to pay competitively to attract or retain experienced, quality directors. In an effort to do so with justification for shareholders, they need written market support from practices, such as Sheffield, which have data to support their decisions.
Base fee increases alone do not tell the tale. An “unbundling” process is underway in the market; an approach where boards pay separately for committee work and subsidiary boards. This approach recognises that committees are simply doing more of the hard yards for boards, phenomenon confirmed by Sheffield’s survey. Committee fees are simply more precise in tracking the time spent and work done.
What is driving these fee increases? Recently, I can identify two factors. First, if ever there was doubt about the reputational as well as legal risk inherent in corporate directorships, surely the past year has put paid to it. The market is finally starting to pay risk premium to board members. Every director of New Zealand finance company would have to think about the possibility of being pursued through the courts and being accountable for loss of shareholder value.
Second, is significant, long-awaited fee increase to State-owned Enterprises effective late in 2007. My view is that director fee levels at SOEs had acted as lid on the entire market. Now that Meridian Energy pays its chairman $98,000 per year, rather than $72,000, there is “space” for other organisations to raise fees without being perceived as spendthrifts.
It’s been big year. The 2008 Sheffield Director Remuneration Survey has loads to talk about and plenty of data to support its commentary. Be sure to purchase copy.
Sherry Maier is reward team leader at Sheffield. www.sheffield.co.nz
