Remuneration and performance of boards of directors has been the subject of extensive conceptualisation and empirical research over many years. Internationally, most of this research has dealt with European and American based companies.
Alternatively, and particularly in Africa, it has focused on listed companies and public entities. This has left a huge knowledge gap regarding non-listed African board practices, particularly relating to privately-held company and family business board fees.
Research in privately-held and family businesses
An in-depth survey based research was launched this year by collecting crucial data from board members of privately-held and family businesses across Africa for analysis.
After months of in depth analysis the group has released the findings into high-level understanding for privately-held and family companies, shareholder-managers and non-executives directors on three subjects:
- The fees payable to the non-executive and independent directors of privately-held and family companies across Africa.
- The diversity of board structures of such African companies.
- The perceived performance of these boards.
The research challenged boards in stepping up to higher levels and provides context for fair and reasonable fees for independent and non-executive directors. The overall report provides valuable insights for boards of directors in these two sectors.
Boards with at least one independent director are outperforming boards without one
The respondents were asked to self-evaluate their board against various key performance indicators (KPIs). These KPIs were selected to represent the activities of a high-performance board.
Boards without independent directors evaluated themselves poorly compared to boards with at least one independent director. Only 27.3 percent of the boards without any independent directors were satisfied with the impact of their board on company performance compared to 51.2 percent for boards with at least one independent director.
We also saw boards with independent directors were more likely to implement a performance evaluation process as strongly encouraged in most African governance codes such as King IV in South Africa. The survey notes 45.1 percent of these boards conduct evaluations at least annually compared to 18.2 percent of boards without an independent director.
Independent directors seem to be essential to keeping a good balance of power among the board
The research showed having independent directors serving on the board reduced the risk a power imbalance. Asked whether a subset of directors was holding a disproportionate amount of power, 63.4 percent of boards with independent directors answered no against 50 percent for boards without independent directors.
Moreover, when asked to identify the directors holding a disproportionate amount of power, shareholder-directors (or directors appointed by shareholders) were designated in 48,9 percent of the answers. When excluding these shareholders, non-executive directors were designated in 20 percent of the answers (none of these non-executive directors are independent).
Consequently, increasing the number of independent directors reduces the influence of shareholders and non-executive directors over board decisions.
Primary drivers of diversity in director fees
The level and structure of fees for non-executive directors are principally driven by enterprise size. International reports reference industry segmentation taking into account the complexity of the operations, business risks and challenges and market factors.
Director-specific factors like the scarcity of qualified non-executive directors, qualification and experience also play a role in the final fee-setting process. Within a board, the main distinction between fees relates to workload; the chairman’s role verses other directors and recognising committee involvement in addition to the standard board process.
Survey evidenced huge differences in director fees
Many respondents stated they received no director fees. Due diligence was taken in recognising this as a concern in sharing this data, but it is common, albeit not necessarily appropriate practice for boards without independent directors, not to pay non-executive directors fees to people who are also company shareholders. Hence, the survey excluded boards not paying its non-executive directors from the analysis.
The survey evidenced a huge diversity in fees, reflecting the company diversity participation in terms of industry, size and country. The dataset spreads from one to 99.9 where the highest fees amount to 99.9 times higher than the lowest ones.
The average fees of the top 10 percent are 23.3 times higher than the average fees of the lowest 10 percent – a spread also evident in the percentile breakdown where a quarter of the non-executive directors are paid less than US$3,716 annually compared with 50 percent being paid more than US$8,000 and the balance more than US$14,189.
However, extreme data is driving this spread. When the top and bottom five percent are excluded, the spread drops to 18.1 and 70 percent of the data shows annual payments between US$2,104 and US$20,347.
Turnover is the main driver of directors’ fees
The research provided a positive correlation between turnover and fee levels. Mapping the boards according to the fees paid to non-executive directors (independent or not) against turnover, there is an overall increase of the fees with the turnover.
The spread of fees decreases as turnover increases
The survey clearly showed the disparity in fees paid relative to those paid by their competitors decreases as a company’s turnover increases. This may reflect either a maturing in their governance processes or more formality in setting directors’ fees, but regardless of the underlying principle, what holds true is that the higher the turnover, the smaller the fee range.
The full data set reflects a fee scale between one and 99.9. Among companies with turnovers below US$50 million, fees range from $759 to $34,127 per annum or a spread of one to 45. Companies turning over between US$50 and $100 million paid non-executive directors between US$6,977 and US$22,757 (or a spread from one to 3.3).
Companies with turnovers above US$100 million set their fees between US$6,616 and US$75,841 (a spread from one to 11.5). Excluding the extreme US$75,841 data, the fees range between US$6,616 and US$30,000 (a spread from one to 4.5).
Employee numbers second driver of fees
Linked to the diverse fee spread paid by boards with turnovers below US$50 million are employee figures, apparently driven by the threshold of 100 employees (figure A1).
Fees paid in this band are below those paid by boards with over 100 employees and more heterogeneous (except for companies employing 100 and 200 employees where the fees paid are similar).