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Director fees rising slowly, company risks rising

Director fees rising slowly, company risks rising

An increasingly complex operating environment is demanding more time from directors, the latest annual Directors’ Fees Report 2018 has found.

Directors are working harder and longer as they grapple with an increasingly complex business environment and more company risk.

The Directors’ Fees Report 2018, a joint publication between the Institute of Directors and EY New Zealand, reveals median fees for non-executive directors have risen only 2.3% in the past 12 months, from $44,000 to $45,000. At the same time, executive directors’ fees rose from a median $35,000 to 436,000, an increase of 2.9%.

“Directors are spending more time on strategy, performance, compliance and risk-oversight. Public scrutiny on performance and behaviour can be intense, and fiduciary responsibility is weighty,” says Institute of Directors Chief Executive Kirsten Patterson.

Time spent by directors on board matters has increased from 106 hours a year in 2017 to 127 hours in 2018. This is up from 88 hours in 2014. Seventy-nine percent of boards meet six to 15 times a year and most professional non-executive directors have an average of four directorships.

“Nowadays there are more legislative and regulatory requirements, including health and safety issues. Directors must keep on top of complex risks such as cybersecurity and climate change. There is more disclosure, reporting and transparency expected on environmental and social impacts.”

“For directors to lead sustainable organisations, they need to keep up with rapid technological advances, disruptive business models and engaged stakeholders.”

Adding to responsibilities has been the revised NZX Corporate Governance Code 2017, applying from 31 December 2017, and the refreshed Financial Markets Authority (FMA) corporate governance principles and guidelines, which took effect from February 2018.

“Directors’ fees should be transparent, fair and reasonable,” says Kirsten Patterson. “Boards should support and justify fees with good disclosure, governance and accountability practices.

Fifty-eight percent (58%) of non-executive directors in the survey sample said they were happy with what they were paid.

Seventy-six percent of organisations provided directors with liability insurance.

EY New Zealand Partner Una Diver says while boards are typically good at providing oversight of financial risk, historically there has been less focus on non-financial areas.

“The report encourages boards to closely monitor how non-financial risks – including reputation and conduct – are identified, rated and remedied,” Una Diver says.

The survey showed the number of women non-executive directors on boards increased by 4% - up from 30% in 2017 to 34% in 2018. Kirsten Patterson says this increase is a healthy trend, though the Institute would like to see further movements towards more diversity.

Women board chairs had the largest median increase in fees in 2018, surpassing male chair fees. A woman board chair is paid a median $60,000 fee compared to the median fee for a male chair which is $54,029. The women chairs work more hours – a median of 194 hours worked compared to a median 152 hours worked by male chairs.

Una Diver believes there are lessons and learnings – and warnings - for all directors, regardless of industry sector or geography, from the recently-released Australian Prudential Regulation Authority’s report into the Commonwealth Bank of South Australia.

Alongside their traditional duties around oversight, governance and risk, directors are also expected to be closely involved in the company’s broader impact on society, for example, organisation purpose and a “social licence to operate”. So they must consider and engage with all stakeholders on governance, social and environmental issues, not just shareholders.

“This means boards and management need to ask questions like ‘should we?’ rather than ‘can we?’” Diver says.

Most non-executive directors in the Fees Report 2018 survey sample were New Zealand European (85.3%). Other ethnicity figures were Māori (4.7%), UK and Irish Republic (2.0%), Australian (1.4%), Northern American (0.8%) and Pacific peoples (0.7%).

Of the 1,546 organisations represented, 90% were New Zealand-owned. The organisations included 38% unlisted private companies, 17% listed private companies and 21% not-for-profit organisations. The report analysed data collected from 2,158 directorships and 792 members of the Institute of Directors of New Zealand.

The report is a key source of detailed information on director remuneration trends in New Zealand, and market insights. Data collected in the confidential survey is extensively checked for credibility and quality.

This year was the first time directors’ fees by market capitalisation was captured, as many listed companies view market capitalisation as the best way to compare their directors’ fees with other entities with a similar market capitalisation.

The full 109-page Directors’ Fees Report 2018 contains comprehensive detail and is available for purchase from EY.

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