JOHANNESBURG – Remuneration committees are facing increased responsibility, time commitments and risks in the face of new regulation, governance standards and disclosure rules.
Non-executive directors are being called on to justify their companies’ remuneration policies and the implementation thereof, directly to shareholders. This is expected especially where a company has experienced poor financial performance, but executive pay levels have continued to climb.
Gerald Seegers, Head of People and Organisation for PwC Africa, says: “There is a strong perception amongst major South African institutional investors that remuneration committees are not approaching shareholder engagement properly, need to do more to upskill themselves to properly execute their duties, and should not place an over-reliance on external consultants and advisors.”
PwC’s 12th 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.
This year, a central theme of the report is the role of remuneration committees in corporate South Africa, and whether remuneration committees are actually fit for purpose.
The report also considers the role of sustainable development in the future, and how companies need to do more to engage with the Sustainable Development Goals when crafting their Key Performance Indicators. In addition, we examine the ethic and gender composition of all listed companies, by conducting an analysis of 4 945 positions at board, executive and management levels.
Institutional views on executive remuneration
PwC hosted a recent roundtable event for major institutional investors and governance institutions to gauge their views on executive pay in South Africa. While some expressed hope that remuneration governance had made significant progress over the past few years, others were concerned at the current state of executive pay, and called for stronger remuneration committees.
Overall, institutional investors stated that remuneration committees need to engage with investors directly, and continuously, regarding the company’s remuneration policy and implementation thereof. Remuneration committee chairpersons should demonstrate full understanding of their companies’ remuneration policies and how they are linked to the entity’s business strategy, and not rely heavily on remuneration consultants or executive management.
It is notable that some investors believe the legislative framework around directors is not strong enough to hold them to account, and is hard to enforce. The question arose whether there was room in South Africa to introduce a governance code which could strengthen the enforcement of good governance principles.
The board agenda in 2019
The suitability of skills, experience and independence of individuals serving on boards are the areas of most concern to South African directors when it comes to general perceptions of governance. We have already seen some examples of schisms between investors and boards of listed companies, particularly in the face of stagnant financial performance.
The report also suggests there is strong case for including millennials on the boards of South African companies – there is a feeling that millennials have their fingers on the pulse when it comes to emerging trends and risks. However, some critics are of the view that, although the digital skills that millennials can bring are valuable, they should sit on a mirror board, rather than the main board.
Companies are placing more focus on inclusive diversity. International research has shown that diversity and inclusive decision-making yields better business performance. It is notable that gender representation among South African non-executive directors remains well below 50%. Diversity in corporate leadership structures is a global imperative, which is recognised in the corporate governance codes of multiple jurisdictions. Given the South African social and economic context, and the proven financial and strategic benefits of a more diverse and inclusive boardroom and corporate culture, boards should set concrete goals to promote diversity throughout their organisations.
Environmental and social investing
The introduction of the Sustainable Development Goals (SDGs) heralded a major change for both businesses and governments. Acting responsibly is no longer a choice. Businesses need to embrace the SDGs and sustainable practices. According to a PwC study of 729 companies from 21 countries, only 23% of organisations disclosed meaningful key performance indicators (KPIs) and targets related to the SDG goals. The report suggests that, while there is a clear appetite for embracing the SDGs, many organisations still lack the strategy, tools and culture needed to transform these commitments into tangible business actions.
South Africa is still reeling from large-scale corporate governance failures that have occurred over the past few years. Regulators have taken steps to encourage greater corporate accountability, and this has resulted in proposed amendments to the JSE Listings Requirements and the Companies Act respectively.
The introduction of the King IV™ Code on Corporate Governance (King IV™), as well as the two-part non-binding vote on the remuneration policy and implementation report, has impacted the corporate landscape.
JSE non-executive directors’ fees
Of the 325 active companies and 2 402 non-executives serving on boards, several are South African citizens paid in foreign currency. Conversely, some foreign nationals receive payment in South African rand.
The median chairperson fee across the entire JSE has risen by 5.1% to R595, 000 (from R566, 000 in 2017). Overall fees for non-executive directors at the median level increased from R492, 000 to R518, 000. Deputy Chairpersons received a similar median increase to that of the chairpersons, slightly less at 5%.
In the period 2016 to 2018, lead independent directors were not rewarded with an increase at median level and their total fees were reduced by 1.3%.
Total fees paid to non-executive directors in the financial supers sector increased at the median level from R731, 000 to R775, 000. Total fees paid to non-executive directors in the large-cap basic materials sector increased at the median level from R1, 404m to R1, 488m. Total fees paid to non-executive directors in the large-cap consumer discretionary sector increased at the median level from R518, 000 to R549, 000. Companies in the industrial sector also showed moderate 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 from $540,000 in 2017 to $552,000 in 2018. Total fees paid to non-executive directors increased from $142,000 to $145,000.
African stock exchanges
The report analyses the trends 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 1 966 (2017: 1 824) non-executive directors from 410 (2017: 390) 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 the median levels for the seven selected sub-Saharan African exchanges is $48,000 (2017: $49,000). Total fees paid to non-executive directors at the median level for the seven exchanges is $26,000 ($27, 000).
Profile of a non-executive director
As at 30 November 2018, the total number of non-executive directors serving on the boards of active companies on the JSE was 2 402, which is 145 more than in the prior reporting period. In addition, the board tenure for non-executive directors has shown an increase for both chairpersons and non-executive directors, as it did last year. Some practices which have emerged to promote board refreshment in the corporate sector are tenure requirements, and mandatory age limits, for non-executive directors.
Some institutional investors and activist investors have gone so far as to propose that, after a certain length of tenure, non-executive directors should no longer be considered independent. King IV™ does not take a hard and fast approach to the length of a non-executive’s tenure.
Both the mean and median age of chairpersons and non-executive directors has remained 55 over the past two years, with some variation across industry sectors.
Non-executive positions have become more burdensome than in the past. Serving on multiple boards in smaller companies may be possible. The data, however, reflects that many non-executive directors serving on numerous boards are holding different portfolio responsibilities as non-executives on large-cap companies in diverse industries.
It is noteworthy that many non-executive directors do not have specialised qualifications, and the shortage of competent and qualified people is a real challenge.
Seegers concludes: “It is evident that the role of independent non-executive directors is vital to maintaining a sound corporate governance framework and, particularly in the field of remuneration, they are held to increasingly higher standards. In certain jurisdictions penalties are imposed for failure to uphold these duties. In South Africa, this is particularly noticeable in the drive by the JSE to adopt corporate governance principles in its Listing Requirements and the proposed amendments to the Companies Act relating to the disclosure of directors’ remuneration.”