South Africa: Corporate board remuneration set to rise
The remuneration of non-executive directors is on the rise as stringent governance regulations and increased fiduciary responsibilities result in a smaller pool of available candidates for board positions.
“This flies in the face of demands to cap corporate remuneration so as to reduce the pay gap,” says Sandra Burmeister, CEO of the Landelahni Recruitment Group. “However, we must be realistic. In any scarce skills market, companies are likely to pay a premium for candidates. Non-executive directors and, in particular, independent directors are in short supply – and becoming scarcer.
“It can be argued that individuals who carry substantial risk and are required to steer their companies through tough economic times should be appropriately rewarded. Currently, there is an inverse relationship between the risk and reward of non-executive directors with the risk far outweighing the reward. This imbalance will be addressed by market realities.”
The new Companies Act and the King III Code of Corporate Governance have imposed onerous responsibilities on non-executive and independent directors. “As a result,” says Burmeister, “some directors have retired from boards, and will not consider any further board appointments, thus reducing the pool of already scarce candidates. This is exacerbated by governance requirements dictating shorter tenure on boards, an increased number of board committees and the fact that directors are tending to sit on fewer boards so they can play a more focused, dedicated role.
“This has led to a shortage of qualified and experienced individuals available to fill non-executive and, in particular, independent director positions,” says Burmeister. “The local situation is a reflection of a broader leadership scarcity as corporations globally grapple with the turmoil generated by the economic crisis in Europe and the United States. Boards need experienced leadership to guide them through the crisis. But it comes as a cost.”
Recent surveys indicate that, although the economic downturn has moderated non-executive director fee increases, there has been a rise in fees at least partly commensurate with an increase in their risks and responsibilities.
In South Africa, according to the 2011 PwC Executive Directors’ Remuneration Report, the average fee of the chairpersons of JSE-listed companies dropped by 23% in 2010, while fees of non-executive directors increased by 18%.
This fee increase, off a relatively low base by international standards, compares with an average 8% increase in non-executive director compensation in the United States S&P500, down from double-digit increases a few years earlier. In the United Kingdom, FTSE 100 companies increased non-executive directors’ fees by 11%. Also in the UK, a premium is paid to senior independent directors, who received a significant 38% fee increase.
Globally, there is a growing demand for a high proportion of board directors to be independent, with little or no shareholding the company. “In South Africa,” says Landelahni director Alan Witherden, “the need for independent directors is intensified by black economic empowerment requirements. Many organisations have BEE partners on the board, and to avoid segmental interests and maintain a balance of power, have increased board size to accommodate independent directors.
“King III posits that independence is a vital component of the board. It recommends that directors should be non-executive. Moreover, the majority of these should be independent, as should the chairman of the board, the lead independent non-executive director and all audit committee members.”
The PWC report indicates that these requirements are far from being met in South Africa. Among JSE-listed companies, the percentage of independent non-executive directors varies from 47% in basic resources, through 48% in financial services and 53% in industrials to 56% in services. By way of contrast, in the US more than 80% of S&P 500 boards have independent directors, compared with the UK FTSE 100 at 77%.
“Globally and locally,” says Witherden, “there is pressure on increasing board remuneration for non-executive and independent directors to compensate them for the increased role they are expected to play and for the greater time contribution expected of them, which limits the number of board seats they can hold.
“This independence requirement will cost organisations significantly more, whether by way of increased packages as in the UK, paying a higher retainer or increasing payment for committee meetings, or simply through increasing the board size.
“Given that Board fees are driven by scarcity and increased responsibility, the cost of running a board looks set to rise over time.”
Burmeister points out that there is a global trend towards consolidating the way in which the board is paid. “Instead of receiving a variable fee, partly contingent on attendance at meetings, there is a move across the US, the UK and Europe towards paying retainers to directors serving on the board,” she says. “In addition, boards may begin to contemplate a ‘pay for performance’ mechanism to encourage strategic, measurable contributions by board members.
“To attract the calibre of director required to lead South African companies to grow the economy and generate employment opportunities, the reward system for non-executive and independent directors will need to be revised to ensure that it is commensurate with the job required of them.”
About Landelahni
Established in 1997, Landelahni was the country’s first black-owned and women-owned executive search company. Today, the Landelahni Recruitment Group consists of a number of companies offering recruitment, assessment and coaching services in both the public and private sectors.
The group consists of:
· Landelahni Business Leaders (Amrop SA) – executive and non-executive director search
· Landelahni Leadership Development – Board and executive coaching and mentoring
· Landelahni Assessments – Executive and management assessments to identify leadership potential
· Landelahni Professional and Technical Appointments – large project professional and technical recruitment
· Landelahni Workforce Management – on-site managed staffing.
Since inception, Landelahni has built a substantial track record in the appointment of black executives, and more than 40% of the executive appointments made by Landelahni are black women.
