Recent cases have highlighted the very real personal liability board directors can face if things go wrong. And these high-profile cases are sure to lead to some thoughtful conversations around boardroom tables. But are we paying directors enough for the responsibilities they shoulder?
As the demands on directors rise and their personal liability, if things go badly wrong, comes under greater scrutiny one of many implications inevitably arising is whether the average director is paid adequately for the risks and responsibilities he or she shoulders.
Sherry Maier, a senior consultant at remuneration specialists Strategic Pay, who is involved in the firm’s annual survey of directors’ remuneration, has no qualms in raising this question.
She says it’s one of many questions to be posed when considering what levels of board fees are appropriate.
Strategic Pay has published its annual New Zealand Directors’ Fees Survey for 25 years – the longest continuous board fee survey in the country. It covers the entire market including local and central government and government agencies; the private sector: both listed and unlisted companies; and the not-for-profit sector.
The 2018 Strategic Pay Survey reports that the median, base annual fee for publicly listed companies’ directors is $68,000; the median base annual fee for private unlisted company directors is $45,000, while base fees for not-for-profit sector organisation directors are $12,000.
At the same time, comparable median figures for chairs at publicly listed companies are $110,000, $72,100 for chairs at private sector unlisted companies, and $30,000 for chairs at not-for-profit organisations.
While not analysed in detail, Australian listed companies tend to pay ahead of comparably-sized New Zealand listed organisations.
Maier says that as a rule of thumb, the larger the business, the wider the gap may be.
“This disparity complicates matters when a New Zealand company operating in Australia wants to recruit an Australian-based director for strategic reasons such as bringing in Australian market expertise. Do they pay Australian or New Zealand level board fees? What is fair? There is no agreed approach.”
Maier also notes that not-for-profits are increasingly paying board fees to attract and retain directors with commercial and/or governance experience. In the past, many of these organisations operated with an all-volunteer board, but not-for-profits face challenges today that may require a board with specific skills or experience that warrant payment of fees – even if nominal.
Board fee levels and fee increases can be controversial and subject to considerable scrutiny. Proposed increases may be debated in the media, and listed companies require shareholder approval.
So, why are such fees so controversial – certainly more so than CEO pay?
First, in Maier’s view, there is not a clear understanding of what governance entails in terms of responsibilities, workload, risks and time commitment.
And, there is not a clear understanding of the value that a really good board can contribute to a business: strategic direction, accountability, compliance and risk management.
“Indeed, from a distance, it may look pretty easy. Done well however, good governance can make a significant difference in the success, profitability and growth of a business.”
Meanwhile, the personal liability faced by directors continues to rise.
Maier says that health and safety systems and compliance have become major board projects reflecting in part the personal liability risks to board members.
“It is understandable therefore that health and safety has become an area of enormous effort, focus and board time in recent years to address and manage these risks effectively in each and every business.”
Another aspect is that board fees seem to be considered as salary or wages – not the professional fees that they are.
“There is an expectation that board fee levels should track wage growth without regard to the growth, scope or challenges presented by the business itself. Therefore, board fee increases are invariably expressed solely as a percentage increase on the current fee level.
“Let’s think about this. If the median director fee is $36,000, even a hefty 10 percent increase represents only $3,600 – usually not significant for a multimillion-dollar company. It is better to consider both the dollar and the percentage increases together to properly assess the true costs of the decision.”
She notes too that unlike a base salary or wages, board fee levels are typically reviewed only every two, three or even four years, such that there is often a one-time “catch-up” to meet the current market.
“No self-respecting executive would ever agree to a salary review on a two or three yearly basis.”
Maier also observes that to keep board fees – and the total cost of governance – in perspective, it is useful to compare the total annual fees and costs attributable to a company board and compare that figure with the CEO’s total pay package. In her experience, the total cost of governance is usually less – and often a lot less – than what the respective company CEO earns.
“Again, while the contributions and pay structure are different, can we agree that the value contributed by the entire board could be – or should be – at least as great as that of the CEO?
She says that in summary, being a board director “is a high value, high risk position that should be remunerated fairly and commensurate with the value-added and those very real risks”.
Professional director and president of the Institute of Directors, Liz Coutts, sits on eight boards including Oceania Healthcare, Ports of Auckland and Skellerup Holdings where she is the chair.
Queried about the $45,000 median fee the recent Institute of Directors’ Fees Report cited, she says the figure takes in smaller companies, not-for-profit and government bodies. She also notes that government organisations pay significantly less than in the private sector.
But some organisations have not increased their board fees materially over the last 20 years to take into account the additional stakeholder expectations and legal responsibilities. Many people will still do these roles because they are gaining governance experiences and/or they wish to give back to the sector.
As to the liabilities involved in being a director or chair, Coutts says that is where you need to be well qualified as these significant liabilities are not understood by everyone. Directors are on call 24 hours/seven days a week and the role doesn’t stop because you leave the office.
She notes too that New Zealand directors are paid substantially less than offshore directors, where professional directors tend to take on fewer roles because of the higher rate of pay.
She has been a full-time director for 20 years and it has always been difficult to get increases in directors’ fees. Not everyone understands the role and she sees a need for more education on what directors do.
So, what are the traits needed to become a good director?
Coutts points to an enquiring mind, someone who is always seeking additional knowledge, is always learning, can listen to alternative views and looks to find different sources of information to form thoughtful opinions.
She says directors are always seeking alternative views and spend considerable time understanding the industry, what the competitors are doing and the technological trends in that industry.
You don’t just rely on board papers. She expects to have to do her own research on issues. In a director, she says, you look for judgement, wisdom and intuition and a good balance between taking an opportunity and understanding the risk.
Coutts says you get all this through experience and you need to give the issues considerable thought.
She was a very young director in a listed company, aged 34, but her previous experience as a CEO was of benefit. “It’s not just years, but the type of experience they might have.”
Another area is relationships. As a chair you want directors who have strong relationship skills and see that as important and recognise others’ skills and experience.
In strife, or in difficult times, the board must show good support [for one another], must have positive relationships and a chair needs everyone behind them.
