It’s been more than a decade since the Great Financial Crisis (GFC) hit the global economy and made governments, regulators, and boards rethink their respective roles in protecting the interests of various stakeholders. Soon after the GFC, the tech disruption came along, challenging traditional business models and introducing new risks for businesses to deliberate upon. Some countries adopted new or revised regulations to tackle these risks. For instance, the Malaysian Code on Corporate Governance (MCCG 2017) was updated to strengthen corporate culture and enhance accountability and transparency.
These factors have increased the responsibilities of Board directors, while still maintaining the role of a strategic guide for the management and a guardian of shareholder interests. As these responsibilities place a distinct demand on the diversity of skills and experiences amongst Board members, the question of remunerating non-executive directors (NEDs) for these skills, experiences, and very importantly, time, is becoming more pertinent.
Cost of Governance
The most important question to a shareholder is the total cost of governance, which is subject to approval at annual general meetings (AGMs). The total cost of governance is the aggregated fees of individual directors, which comprise overall basic Board fees (retainer fees), meeting allowances for each Board or Board committee meeting attended, and/or Board committee fees for providing specific expertise to Board committees such as audit.
In our experience, the two key issues influencing NED remuneration structure in emerging markets today are a) Meeting allowances and b) Board committee Fees.
While countries such as the U.K., Hong Kong, and Australia have very low prevalence of remunerating NEDs for each meeting attended, companies operating in South East Asia (except for Singapore, in which case more than half of companies do not pay meeting allowances) still have a significant amount of NED remuneration geared towards meeting allowances. In extreme cases, this amount can form as much as 80 to 85 percent of total fees for NEDs.
Board and Board committee meetings are part of the ongoing performance oversight that NEDs are supposed to provide as part of their Board service. Remunerating directors for individual meetings may encourage this Board service to be viewed as a discrete series of meetings instead. With the advent of technology and telecommuting, work is also being increasingly completed outside of formal boardrooms and meetings. Therefore, meetings are not the only proxy of time spent.
In other cases where the Board has convened multiple times in a year, this may invite questions from shareholders on the Board’s productivity and the perception of excessive meeting allowances being paid.
Finally, the desire for simplicity and a clean fee structure builds the case for moving away from meeting allowances. The total cost of governance also becomes more predictable to the shareholders and is less likely to vary wildly.
Board Committee Fees
The topic of committee fees is a slightly more complex one. There is a high prevalence of NEDs being remunerated for the strategic oversight provided to each Board committee, often calculated or expressed as a ratio to the Board retainer. The key questions that are being raised on this issue are:
- Is there a need for committee fees?
- What is the right remuneration for different committees?
The issues Boards are facing are becoming more diverse and complex, ranging from succession to cyber risk. Instead of rushing through packed board agendas, some of these topics are being delegated to the Board committees to deliberate on before recommending to the Board for endorsing. The NEDs sitting on these Board committees bring specific skill sets to contribute to the agenda. They also devote additional time to discharge their duties and responsibilities on the Board committees. As such, there is an increasingly strong case for building in Board committee fees.
The right remuneration for different committees should take into account the skills, amount of effort and time required. In addition, Audit and Risk committees typically also take on more potential liabilities and therefore, are typically remunerated more. The framework for the Board committee fees need to consider these factors to ensure that it is internally equitable, while also ensuring that the total cost of governance is not excessive.
Complexity vs Simplicity
Increasing complexity and diversity in subject matters for Board deliberation should not necessarily result in complex structures for Board remuneration. The foundational principles of remuneration such as compensating incumbents for skills, experience and time as well as market benchmarking, still need to be adhered to. Ideally, the fee structure fee should be robust enough to attract the right talent and skills and be able to stand up to the scrutiny of shareholders.
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