It’s difficult not to conclude from PwC’s latest report on non-executive directors, released every year in January, that the system of corporate governance in which the board and its various committees play an oversight role is broken.
Perhaps it was foolish to assume an oversight system based on committees of ‘outsiders’ would be effective in directing, or even controlling, the individual flair of executives tasked with managing what are often large and complex organisations.
Inevitably perhaps, much of this oversight responsibility has fallen to the remuneration committee. This was never intended but given that pay is a major determinant of behaviour it should have been expected that shareholders would look to members of the remuneration committee to influence the behaviour of executives.
The PwC report refers to the increased expectation from stakeholders that remuneration committees (Remcos) pay greater attention to the wider context in which pay considerations are made.
These expectations have been intensified by the Covid-19 environment which, says PwC, has had profound implications for workforces in many industries.
New world needs new skills
“Remcos are being asked to predict and strategise in a world in which organisations are experiencing change at a faster rate than ever before,” says PwC, adding that “new skills” are required in this new world.
The challenge facing Remcos is made even tougher by what PwC describes as a “decreasing pool of South African talent”.
The audit and financial services firm does not explain, despite the steady increase in third-level educational establishments over the past two decades, on what basis it believes the local talent pool is shrinking.
But the smaller talent pool combined with a faster moving world replete with new skills requirements means companies need a strong people strategy. And despite a plethora of board committees, there’s generally little sign of any sort of people strategy.
This appears to be where today’s board structure is failing.
“While significant hours and resources are expended to create successful business strategies, often far less attention is directed to the people strategy and considering how to best engage and inspire the individuals who will drive and implement these strategies, and who are core to the organisation’s success,” says PwC.
But should oversight of this apparently crucial people strategy be added to the Remco’s already stretched role, or that of the human resources committee?
What about another committee?
“Or is this the domain of another body or committee, and is there consensus that the remuneration strategy and human resources (HR) strategy in its basic form is no longer sufficient?”
Shareholders already weary of the costly burden of corporate governance compliance might be inclined to shudder at the prospect of yet another board committee, with its attendant board committee fees.
PwC reckons the old remuneration committee days are over.
“Remcos can no longer operate in a silo in which remuneration is their only weapon in tackling the issues that appear on their agendas.”
It seems, according to PwC, that there’s a growing awareness that retention, motivation, and issues of fairness and responsibility cannot be solved with remuneration alone.
Furthermore, says PwC, “stakeholders are no longer willing to accept money being thrown at the problem”.
Meanwhile, as PwC battles to get to grips with just how broad and unwieldy the board’s role should be, the grim news for shareholders is that they face ever-increasing fees for their non-executive directors. The average fee for the chair of a listed company, which is a part-time job, was almost R2 million in 2020. A non-executive director managed to bag just over R1 million.
Remarkably, according to PwC, a company’s size makes little difference to the size of fee earned by a non-executive director.
Of course in addition to the fees, shareholders have to fork out huge expenses for running a board; these can become extremely steep when having to accommodate travel to various international locations.
While size wasn’t wholly determinant of fees, anyone lucky enough to get a slot on one of the top 10 companies on the JSE could look forward to more money that most CEOs were getting five or 10 years ago.
The chair of a top 10 company could look forward to pocketing as much as R16 million for their part-time work while a non-executive director, again a part-time position, could look forward to just over R5 million.
A major factor in size of these fees is that eight of the top 10 have their primary listing outside South Africa. This also helps to explain why 20% of directors covered by PwC’s report are paid in foreign currencies.