UPFRONT : Are New Zealand directors undervalued?

A double digit increase for the second year running shows clear acceleration in local directors’ fees though we’re still playing catch-up with Australian pay levels, particularly when it comes to rewarding board chairs.
But directors are earning their increases with extra work and extra risk, according to the recently released Sheffield Director Remuneration Survey 2006 which covers over 400 organisations representing broad cross-section of New Zealand and Australian enterprise. Post the impact of Sarbanes-Oxley, almost 60 percent of respondents say director workloads are rising, while 72 percent believe the risks involved – particularly to personal reputation – have increased.
Sheffield reward practice manager Sherry Maier believes directors’ work in New Zealand tends to be under-valued – partly because it’s seen as semi-retirement option for those who want out of fulltime management/partnership roles.
“In Australia there is wider class of professional directors and it’s not retirement thing, more of main event. The tendency here for one person to be ‘overboarded’ – on perhaps 10 different boards wouldn’t be accepted there, not because of regulation but because of market pressure. How can they be adding value if they’re stretched that thin?”
Maier believes the need to build greater diversity into boards will push New Zealand to “tune up its act” about who is appointed to directorships – and it will be more to do with what you know than who you know.
The need to attract top-performing directors has prompted some companies to supplement fees with allowances for extra time on committee work or meetings and the fees themselves have risen dramatically. Last year they rose 20 percent; this year the median increase in non-executive director fees was 13 percent – more than three times the overall market increase of four percent in base salaries and well ahead of the 5.8 percent lift in the base salaries of CEOs.
Fee levels not unexpectedly reflect company size but the median annual base for non-executive directors in Sheffield’s database is $28,000. Chairs are consistently paid nearly twice that level, reflecting the greater time, responsibility and accountability involved – the median for 2005 is $50,000 with an upper quartile of $75,000.
Although the trans-Tasman gap for board chair pay has actually widened in the past year – generally Australians are earning premiums of between 30 to 100 percent against their local counterparts – Sheffield predicts more convergence across the two economies over time.
“Even though regulation changes [in Australia] mean any director fee increases will have to go to shareholder vote next year, there they’ve risen eight to 10 percent [over the past year] compared to 13 percent here,” notes Maier. “ So I think we’ll see further narrowing – though I don’t think they’ll ever be identical.”
Where the two countries do differ is in the area of director benefits. These are something of rarity on this side of the Tasman – few publicly listed New Zealand companies offer share options or plans to board directors while more than fifth of Australia’s listed companies do. The latter are also required to pay superannuation which means that the majority (90 percent) of Australian companies fork out some kind of further benefit for their directors compared to just 23 percent of local companies where it mostly goes on vehicle allowance and travel.
That said, you could ask why local directors are positively dashing ahead on the overall pay increase front – given pressures exerted on the latter by continuing tight labour market. Can we blame Enron et al?
Certainly the tightening control over corporate financial control and disclosure spearheaded in the US with the Sarbanes-Oxley Act in 2002 has helped load board work and accountability over the past few years, says Maier.
“It chewed up an enormous amount of time – but I think the peak of that was last year and now people have got it pretty well nailed down. But next year there’ll be the introduction of IFRS [international finance reporting standards] and I expect that will also require lot of work.”
There’s some concern the emphasis on compliance and regulatory issues has rather dominated board agendas – at the expense of such critical areas as strategy, planning and performance-managing the CEO and senior teams. Almost 80 percent of the sample think more time needs to be spent on strategic planning with succession planning, industry/competitive analysis and CEO performance/development following on.
Perhaps in line with the increased focus on board performance, the personal fallout factor is potentially quite high. Nearly one fifth of respondents felt their reputation had been negatively affected in the past five years and one tenth had notified their liability insurer of potential claim. These, notes the survey report, are not great odds.
Such figure, it says “gives credibility to the pervasive sense that the risks of being non-executive director have indeed risen” though the risks are more to reputation than bank balance.
Hard copies and CD Roms of the Director Remuneration Survey 2006 are available for purchase from Sheffield at www.sheffield.co.nz


Survey snippets
• Women still scarce: in the Sheffield survey they comprise 18 percent of non-executive directors, 11 percent of chairs and four percent of non-executive directors. The median total of members per board is six.
• Networks rule: more than half of all directors are recruited via informal networks but more companies (27 percent) now use external search consultants.
• Auckland premium: it’s where the bigger companies are based so it’s unsurprising that those chairing Auckland companies earn more (median $70,000), followed by Wellington ($50,000), lagged by regional South ($35,450).
• Evaluation gap: 98 percent of respondents think board performance should be formally evaluated – but just one quarter actually have formal evaluation process.

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