2021 marks a year which should be characterised by transformative change and reinvention. 2020 was a uniquely challenging year, which tested companies and their boards, demanding rapid responses to new challenges, and decision-making with a far wider ambit of influence.
Boards and RemCos are being asked to predict and strategise in a world in which organisations are experiencing change at a faster rate than ever before, and as the COVID-19 pandemic continues to unfold, companies continue to navigate unchartered territories, characterised by mounting pressures and demands from various stakeholder groups for boards to look forward to the future and to seriously reflect on what the organisation’s purpose is.
This era is marked by heightened expectations for societal engagement, coupled with stakeholder and regulatory pushes to drive diversity and transformation, and focus more strongly on ESG issues.
These are some of the key highlights from our 2021 Non-executive directors: Practices and fees trends report 14th edition.
We are seeing real appetite and impetus for change in the way we do business, with investors and other stakeholders demanding that we discard what we perceive to have worked in the past, and look forward to the future, exploring a longer time frame in which value can be created, or destroyed.
In this report we explore some themes which, while not new, have developed significantly in the past year. These important topics, such as diversity and ESG integration, underpin the main theme – the ‘people agenda’ – which asks organisations whether their people strategy is transactional, or transformative.
A transformative people strategy and data-driven decisions
The risk and responsibilities inherent in a RemCo member’s role are significant, decisions relating to executive pay ever more complex, and meeting and preparation time increasingly limited.
The mandate of the remuneration committee (RemCo) is constantly increasing, and it is clear that RemCos can no longer operate in a silo where remuneration is their only consideration.
There is an increased expectation from stakeholders that RemCos pay more attention to the wider context in which pay considerations are made and be more cognisant of the people’s context both within the organisation itself, and within which the organisation operates. This has only been intensified by the COVID-19 landscape and its associated people implications.
The question of ‘opportunity cost’ is top of mind – with RemCos traditional mandate being the determination and oversight of the pay of a small number of executives, the focus is being perceived as being too narrow, missing the important link between people management and company culture, and company performance.
This requires a move away from the traditional, process-orientated human resources strategy towards a longer-term people strategy which sets out how the organisation will tap into its core asset – being its workforce – to deliver a new forward-looking strategy which is fit for a future characterised by COVID-19 and its implications, which will be with us for a few years yet, and outlines the emergence from that world into a new world.
Through this journey, the importance of company culture, and a strong focus on looking after its people, is paramount.
Data, and speedy access to it, will be vital to this change. Our report sets out a framework for a ‘RemCo dashboard’, with live updates from various information sources, which will allow a RemCo to access the information they need, in the format required, at the touch of a button.
NEDs are expected to make overarching decisions that have long-term impacts on the company’s future success and that impact shareholders profoundly.
With remuneration committee meetings and processes which are complex and time-consuming, RemCos need quick and easy access to the data analysis and insights to effectively discharge their responsibilities.
Purposeful board strategy and KPI setting
Our report also explores the question of whether boards and remuneration committees should be thinking differently about the link between strategy and executive pay to create a closer link between ‘how?’ the earnings or were returns achieved, rather than measurement based on the outputs alone.
This also links to ensuring that such value is delivered in a manner that supports all stakeholders (rather than shareholders alone), and paves the way for continued, long-term sustainable value creation that may extend beyond an executive’s natural tenure horizon.
The report also sets out some criticisms levied against some of the more traditional performance measures associated with long-term incentive schemes and explores a possible approach which could assist in mitigating against these.
Translating ESG into performance conditions
Embedding ESG into an organisation can be challenging, as ESG is a multifaceted and complex concept, with short-, medium- and long-term implications.
It is vital that organisations start by considering how their organisational purpose reflects and incorporates ESG, and beyond this, how their remuneration strategy and policies give effect to this. This link, and an honest assessment of which ESG risks and opportunities are material for the organisation, will form a basis for the incorporation of ESG metrics into executive pay structures.
It is also important for organisations to clearly establish with whom the responsibility for ESG integration lies – this should not be outsourced to the head of ESG alone, or a social and ethics committee.
Our report sets out our analysis of ESG incorporation in South African executive pay structures, finding that of all the companies listed on the JSE, 95 have disclosed performance links to ESG measures, with 68 of these having ESG metrics integrated in their short-term incentives, and 27 with ESG incorporated in their LTI plans.
Board diversity
Board diversityThere has been progress made in the diversity of South African boards, and internationally, several prominent proxy advisors and institutional investors have taken stronger stances during 2020.
Despite this, there is still work to be done, with South Africa being no exception. A strongly developed business case for diversity, both from a gender and race perspective, is vital not only at board level, but throughout the organisation, with an increasing body of research demonstrating that financially speaking, and for the long-term value creation of an organisation, diversity is key.
For years, our Annual Corporate Directors Survey has been monitoring boardroom views on several ESG issues, like climate change, income inequality, diversity and human rights. This year’s survey of 693 American company directors across more than 12 industries found that these issues are finally gaining traction in the boardroom — but too slowly to make any real impact in the short term.
However, the survey also found that balancing gender representation on boards can bring about positive changes to the way in which boards discuss and prioritise ESG.
Following the release of King IV™ and the update to the JSE Listings Requirements in 2017, many South African companies have implemented a policy on the promotion of gender and racial diversity at board level.
Although there is widespread support for targets to further transformation goals, there are still no consequences for listed companies that have not complied with the listings requirements.
While there are various shareholder and regulatory pushes to drive diversity in its many forms, lip service is more common than real, considered action that seeks to recognise and address the root causes of a lack of diversity in companies. It is disappointing that some organisations still have not fully accepted that diversity is good for business.
Reluctance to change, a hesitance to lead from the front, and a stubborn view that what worked in the past will continue to serve us, means that many organisations have found themselves struggling to adapt to the challenging environment that businesses have found themselves in.
We hope 2021 will see boards looking afresh at their board diversity policies, solidifying the business case for diversity in their organisations and interrogating their succession, board evaluation, and other policies and practices to ensure that the issue is addressed from all angles.
Profile of a JSE non-executive director
As of 31 October 2020, the total number of non-executive directors serving on boards of active companies on the JSE was 2,106 (2019: 2,224), which is 118 less than in the prior reporting period.
The median tenure for chairpersons of JSE listed companies is six years (2019: six). The median tenure for non-executive directors has increased to five years (2019: four).
The data indicates that the median age of South African chairpersons is in the sixties, with the median age of board members in the upper fifties. This indicates a need for a greater focus on transformation within South African boards, and the consideration of age dynamics when assessing effective board functioning and making board appointments.
Of the South African non-executive directors (including chairpersons), the majority were White (48%), with Black African non-executive directors making up 40%.
The remaining two categories reflect low percentages, with Indian/Asian non-executive directors at 7%, and Coloured non-executive directors at 5%. This split remains very unreflective of South Africa’s racial demographics.
When it comes to gender, it is notable that there is still a heavy weighting (71%) towards male non-executive directors among JSE-listed companies. This is close to our findings from last year (limited to Top 100 companies), which was 70% male and 30% female. Among industries, Health Care is the most equally represented, with 57% male and 43% female non-executive directors.
Fees paid to non-executive board members of JSE-listed companies
COVID-19 has impacted industries to varying extents. During 2020, some non-executive directors took a temporary or permanent reduction in fees or did not receive increases.
Furthermore, the pandemic may have resulted in additional meetings and the associated payment of ad hoc fees for such meetings may have countered the effect of fee suppression in some instances.
The median fee paid to chairpersons across the entire JSE was R934,000. The median fee paid to non-executive directors was R554,000. Lead independent directors received a median fee of R723,000.
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 377 companies analysed have 1,897 (2019: 1,975) active non-executive directors, of which 377 are chairpersons and 1,520 are other non-executive directors.
The median total fee paid to chairpersons was US$54,000 and the median fee paid to non-executive directors was US$30,000.
In conclusion
In conclusionThe time for the ‘compliance mentality’, which many organisations have found themselves adhering to, has passed, and the adage ‘adapt or die’ comes into its own – as it is too late to ‘disrupt yourself before you are disrupted’.
We have been disrupted – and the challenge is to take the pieces and build something better, stronger, and more resilient by being purpose-driven.
Leila Ebrahimi | Director | People and Organisation Division | PwC South Africa | mail me |
