In general, Directors have three main roles – viz- monitor and provide leadership to Management on behalf of Shareholders; provide Strategic Direction and Policy Support; acquire resource for the company. These roles presuppose that through the expertise, wisdom, experience and information available to individual Directors, the Board will provide the required direction to the enterprise and would identify and acquire tangible as well as intangible resources required for sustainable performance. The monitoring role includes protecting and assuring the integrity of internal controls; the audit function; appraising and measuring management performance etc.
Today Directors are clearly spending more time on their Board roles with full Board meetings, Committee meetings, teleconferences, shareholders meetings and Director Development programmes among other commitments. They also need to make out time to attend to Board and individual Director performance evaluation. With more stringent corporate governance expectations, reputational risk is included to an already time-consuming job. Given the vital importance of the responsibilities assigned to Non-Executive Directors, it is expected that they will devote significant time and effort to their boardroom and non-boardroom duties.
Boards are expected to have Non-Executive Director compensation policies that seek to attract and retain highly qualified Directors; align Directors’ interests with those of the long-term owners of the corporation; provide complete disclosure to shareholders regarding all components of Director Compensation and seek to provide for long-term stewardship of the corporation. (International Corporate Governance Network).
Although Non-Executive Director compensation is generally immaterial to a company’s bottom line and insignificant when compared to executive pay, it is an important aspect of a company’s governance. Since Director pay is set by the Board and has inherent conflicts of interest, care must be taken to ensure that there is no appearance of impropriety. In setting Director Pay, the Board should take cognizance of the following:
Peer Groups – As Directors are recruited from many industries, the Board should consider competitive data both pertaining to the industry in which the company is operating and across a broader group of size-appropriate companies. In addition, it is important to assess total Director Compensation, and not pay by component since companies tend not to offer all components to Directors. Thus, a periodic benchmark of what comparators are paying is good practice and a useful guide to the Board in fixing and reviewing Director Compensation.
Workload – It is nearly impossible to determine the actual number of hours a Director will put into the role. While number of meetings is an imperfect way to determine workload, and more importantly, to determine the value that a Director will bring to the Board, it nevertheless is useful information when benchmarking pay packages. Consideration should also be given to other time commitment required of Directors in the discharge of their responsibilities.
The merit and timing of pay increases – Boards generally feel a bit awkward about approving an increase in their compensation. However, it is suggested that an increase may be justified if the Company is doing well and where a peer review suggests that the company’s Directors’ pay lags the market. (http://www.farient.com/2010/12/directors-compensation)
Section 267 of the Companies and Allied Matters provides that a company is not bound to pay remuneration to Directors but where the company agrees to pay, Directors shall be paid such remuneration out of the funds of the company and such remuneration shall from time to time be determined by the company in general meeting. The CBN Code of Corporate Governance provides that Director Remuneration shall align with the long-term interest of the Bank and its shareholders and the levels of remuneration shall be disclosed to the shareholders in the Annual Report. The Code limits Non-Executive Director Compensation to Sitting Allowance, Directors’ Fees and reimbursable travel allowance.
The decision on Non-Executive Director compensation should not be that of Management. This is to ensure that the Board is able to maintain its independence of Management and not feel beholden to the CEO for his/her “benevolence”. The Board Governance/Remuneration/Nomination Committee, armed with appropriate data, should make recommendations to the Board, mindful of the company’s ability to pay and sustain the compensation package as well.
Increased demands coupled with the unique requirements of each Board means that Non-Executive Director pay should be fair, but not enough to tilt the balance of independence required of an effective Board. Section 14.6 of the SEC Code of Corporate Governance provides that compensation for Non – Executive Directors should not be at a level that could compromise their independence.
It is also not good practice for the Board to use executive compensation as a benchmark for determining Non-Executive Director remuneration. In addition to their statutory responsibilities, Executive Directors have day-to-day responsibilities to which they are expected to devote all their time and attention.
Just as executive compensation is heavily scrutinized today, so is Non-Executive Director compensation. Opaque and “off radar” remuneration that cannot stand the test of scrutiny should not be paid to Directors to avoid compromising their independence.
The Board should continue to strive to strike the right balance and ensure that appropriate disclosures are made in the interest of transparency and accountability.
On Thursday, 25th October 2018, DCSL will be hosting a Masterclass themed “Beyond Compliance – The Role of the Internal Audit & Compliance Function in Business Sustainability”. Kindly contact ntaiwo@dcsl.com.ng or 08037699347 for registration and further details.
Bisi Adeyemi is the Managing Director, DCSL Corporate Services Limited. Kindly forward comments and reactions to badeyemi@dcsl.com.ng.