Gerald Seegers | Head of People and Organisation | PwC Africa | gerald.seegers@pwc.com | www.pwc.com |
South Africa’s non-executive directors cautioned to exercise due care in discharging their responsibilities in the wake of recent corporate disasters.
Boards are under significant pressure to continually transform in the face of disruptive technology, globalisation, political and economic uncertainty, and a volatile marketplace. Various stakeholders are also increasing their impact on the way that organisations operate.
Boards must endeavor to manage these disruptions in order to remain competitive and successful in this changing environment – this necessitates innovation, resilience and agility.
Boards will need the right expertise, experience and diversity to be effective in this rapidly-changing business environment. The increase in cybersecurity breaches is also forcing boards to focus on their internal processes and structures, and remain aware of potential internal security risks.
PwC’s 11th edition of the ‘Non-executive directors: Practices and fees trends report,’ issued today continues with its annual review of fees paid to non-executive directors on JSE listed companies, as well as several African stock exchanges and an analysis of non-executive fees paid to the FTSE 100.
The board agenda in 2018
The increasingly complex corporate environment demands dynamic boards that show ethical leadership, and whose members are technically astute.
Shareholders and stakeholders are placing emphasis on board members’ competency in various areas. In turn, this has placed pressure on organisations to recruit board members with diverse skills and strengths, in particular those who can adapt to uncertainty.
In addition, boards need to keep up with emerging trends such as the rise of cryptocurrencies and other technological developments, while remaining cautious enough to hedge the attendant risks where appropriate.
The board plays a critical role in the strategic direction of a company, and given that the average non-executive director has a slightly longer tenure than the average executive director, their role in the long-term sustainability of an organisation should not be underestimated.
Corporate failures
Given the recent level of corporate disasters, non-executive directors will need to be vigilant and exercise the required due care in discharging their responsibilities.
Non-executive directors have the same legal duties, responsibilities and potential liabilities as their executive counterparts.
Two of the key responsibilities of non-executive directors are around risk and audit. Non-executive directors should satisfy themselves on the integrity of the financial information provided, and that internal financial controls and risk management systems are robust and defensible.
It is also the board’s responsibility to ensure that the company accounts presented to its stakeholders represent a true and fair reflection of its actions and financial performance. Only time will tell if non-executive directors in South Africa will be held accountable for corporate disasters – in the meantime, they should exercise caution and be fully aware of what they may be facing.
Regulatory update
Increased regulatory requirements for non-executive director independence reflect that the need for them to remain impartial is in the public interest.
Independence also needs to be closely monitored. This is reflected in the list of independence requirements that appear in the best practice corporate governance codes. In South Africa this includes the draft Governance and Operational Standards for Insurers.
King IV™ Code: the role of a non-executive director
Some new concepts introduced by the King IV™ Code have begun to impact organisations, especially in their reporting and decision-making processes, and they must demonstrate how they conduct themselves as responsible corporate citizens. These include the concept of fair and responsible pay.
King IV™ has also encouraged organisations to reflect on the ethics of pay, consider executive remuneration in the context of overall employee remuneration within the organisation, and take responsibility for implementing and developing remuneration practices that are considered fair and just by their key stakeholders.
As the integrated reporting movement gains traction, and the external environment within which organisations do business continues to change at a rapid pace, investor expectations about the level of disclosure and communication within remuneration reports continue to grow.
In addition, widespread shareholder activism over the last few years has placed pressure on organisations to re-examine their corporate governance practices. Non-executive directors have been called upon to justify their organisations’ remuneration policies and the implementation thereof to stakeholders, particularly in cases of poor financial performance.
Fees paid to non-executive board members of JSE listed companies
It is notable that there have been above inflation increases across almost all sectors during the current reporting period.
We remains steadfast in our view that fees are not commensurate with the roles and responsibilities that non-executive directors undertake. Fee levels are driven more by company affordability. Of the 2,257 non-executive directors, 353 are paid in foreign currency.
The median chairperson fee across the entire JSE has risen by 8.8% to R566,000 (from R520,000 in 2016). The increase at median level for all non-executive directors serving on the boards of all companies on the JSE was 9.3% from 2016. This saw overall fees increase at the median level from R345,000 to R377,000.
The median fee for lead independent directors increased by 2% to R1,007m (2016: R987,000). Possibly the most significant contribution is the lead director’s dialogue with the CEO about substantive business matters or governance issues. As companies gain more experience and feel higher levels of comfort with lead directors, their role is likely to evolve.
Total fees paid to non-executive directors in large companies in the financial services sector increased marginally by 4.7% to R1,024m (2016: R978,000). Total fees paid to non-executive directors in the large-cap basic resources sector increased at the median level from R1,044m to R1,252m. Companies in the industrial sector also showed marginal increases for both chairpersons and non-executive directors.
London FTSE 100
The report provides a trend analysis of the total fees paid to non-executive directors of FTSE 100 companies in the UK.
Total fees paid to chairpersons at the median levels increased by 3.9% to $538,000 (2016: $518,000). Total fees paid to non-executive directors increased by 6.8% to $141,000 (2016: $132,000).
African stock exchanges
The report analyses the trend in non-executive directors’ remuneration in sub-Saharan Africa beyond South Africa.
Seven stock exchanges were included in our research: Ghana, Nigeria, Uganda, Kenya, Tanzania, Namibia, and Botswana.
The seven markets analysed have a total of 1,824 (2016: 2,057) companies. In some instances, fees paid to non-executive directors are not disclosed in as transparent a manner would be regarded as good governance. In many cases, tribal and community leaders are appointed as non-employee directors with added benefits that are not board fees.
Although non-executive directors received reasonable increases overall, the impact of currency weaknesses against the US dollar has limited the increases in dollar terms. Overall, the total fee paid to chairpersons at median level for the seven selected sub-Saharan African exchanges is $49,000 (2016: $45,000). Total fees paid to non-executive directors at the median level for the seven exchanges are $27,000 (2016: $25,000).
Profile of a non-executive director
As at 30 November 2017, the total number of non-executive directors serving on the boards of active companies on the JSE was 2,257, which is 9 directors more compared to the prior reporting period.
In addition, the board tenure for non-executive directors has shown an increase for both chairpersons and non-executive directors this year, as it did last year. This is indicative of a slowdown in board resignations or changes.
However, board continuity is now at risk since new technologies will demand unique skills sets that many current non-executive directors may not possess. Consequently, board tenure may be shortened as non-executive directors with more appropriate skills are appointed to face the challenges of the fourth industrial revolution.
The median age of chairpersons reflects a slight increase from 54 to 55. The median age of non-executive directors has stabilised at 50 years. In the future non-executive directors with different qualifications and experience will be required to get involved in decision-making. We can expect a mix of younger non-executives being represented on boards together with fewer but key experienced non-executive directors.
The future of the board will need to change to reflect increased and challenging business risks. Boards will need to identify what changes they can make to their strategy, composition and ultimately corporate culture.
In practice, implementing or changing organisational structure is challenging and the responsibility of integrating a revised structure is complex. However, as the board has a significant impact on an organisation, should it be successful at adapting to changing circumstances, this can contribute to the organisation’s sustainability.
