The issue of directors’ fees is interesting. The arguments are not complex. Good quality directors are in demand and short in supply. Quality directors have choice and can opt to go to companies where their skills are valued and appreciated. It follows that company that refuses to pay for quality people will eventually lose good contributors from the board.
So it is logical that company must be prepared to pay to have those skills and experience available to it and so create stable board. Considering the level of revenues generated by companies, the cost of directors’ fees is often relatively small compared to the benefit of having steady governance.
A board will always have to walk line of logic and emotion in this type of debate and will often be pulled into what are essentially highly emotive shareholder politics-of-the-moment and naturally, the target at an annual shareholders’ meeting, are the directors – who better to ‘have go at’?
At recent ASM I chaired, the board proposed resolution to increase directors’ fees. It was timely in the sense that review of fees had not been done for four years, but it was subjected to rigorous debate between directors. The review had been carried out by independent consultants and the recommendation was to increase directors’ fees significantly to bring them into line with average fee levels in similar sector companies.
There is never good time to suggest an increase in directors’ fees and least of all when shareholders are suffering in the primary industry export sectors and are feeling the impacts of high Kiwi dollar and increasing costs. Many growers are working extra hard to maintain their livelihoods, prices are low and there is little optimism for positive change in the near future. While the downturn is cyclical, the company also suffers and becomes vent for stressed growers to relieve some frustration, even though that may relate to pressures that are far beyond the company’s control.
Consequently, the resolution was lost and the increase in fees denied by shareholders. This was not surprising given the economic issues facing shareholders.
However, the company and the board have responsibility to all directors to remunerate their role to level that is comparable to other like-sized companies and to pay fees to independent directors that attract high level of skill and competence to the board table. Shareholders expect their company to deliver high levels of service and financial performance and they also expect high level of expertise of the directors. They should also expect to remunerate directors fairly in good times and not so good times.
There is no point putting it off year after year as directors consider the financial plight of shareholders. Directors have responsibility to bring these matters forward for shareholders to decide. Should shareholders continue to deny directors fair remuneration, it will not be long before the company becomes ‘headless chicken’ and loses strategic direction. The increments should also be regular and smaller, rather than major readjustment, as was the case in my ASM.
I expect that we will see more frustration by shareholders of other primary industry export companies as the general economy moves into less robust phase.
Directors as group are often remiss in not reminding shareholders of the benefits of having quality people on the board and highlighting the competence and experience of the current board members.
We need to address communication more seriously. With good preparatory communication, shareholders can adjust to proposal and have time to consider rationally the reason the board is proposing the resolution. I have faith in the common sense of shareholders. They will understand the need for solid people on their board. They understand the need for consistent board membership and they understand the need to pay appropriately and fairly for good governance. It is even more important to have high levels of skill, experience and governance when the company is trading in difficult economic climate.
Andrew Fenton, is chairman of Satara Co-Operative Group, which has investor shares listed on the NZAX. The company operates facilities that are mainly in the Bay Of Plenty, packing and cool storing avocados and kiwifruit. www.satara.co.nz
