Greater demands and risk are placed on SA’s non-executive directors as boards transform to ‘purpose-driven’ businesses.
Worldwide companies are evolving into ‘purpose-driven’ organisations. “Engagement with stakeholders is becoming increasingly critical to the sustainability of organisations. Having a ‘sense of purpose’ requires an organisation to understand its role with all its stakeholders,” says Gerald Seegers, PricewaterhouseCoopers (PwC) Head of Human Resource Services for Southern Africa.
Gone are the days of organisations having vision statements: it is now all about how they build relationships with their stakeholders, transform their businesses and grow their earnings. “Organisations have to re-evaluate the value they are delivering not only to their shareholders, but also to a wider group, including the community and ultimately society.” Having a sense of purpose necessitates that organisations bring economic, fiscal and environmental metrics together in a way that is relevant for the organisation and its stakeholders. In so doing, it will differentiate itself from its peers.
PwC’s seventh edition of the ‘Annual Review of Non-Executive Directors’ Practices and Frees Trend Report’ continues to look at the ever-changing corporate landscape. The extent of monumental changes taking place, particularly in the social and environmental arenas, means that business is now in a phase that can best be described as ‘business unusual’.
In turn, this raises the question as to whether South Africa’s non-executive directors are adequately equipped to support the company’s purpose, and in ensuring that the organisation executes its purpose and ultimately behaves as a good corporate citizen.
The PwC report examined the boards of 358 (2012: 373) companies listed on the Johannesburg Securities Exchange (JSE) and was based on information publicly available as at 30 November 2013.
Are directors ready to take on new roles and responsibilities?
The demands placed on non-executive directors are substantially greater than they used to be in the past and there are increasing concerns around risk and personal liability, particularly in the wake of stringent corporate governance requirements and the Companies Act of 2008. While these changes signal a step in the right direction, it would be dangerous to assume that directors have engaged with, internalised and understood the value these new concepts bring, or that they are realising the intended value that these concepts and measures sought to disclose.
South Africa’s stakeholders, including shareholders look to non-executive directors to bring transformational change across a range of disciplines. Because every company is different, this requires directors to have more specialist knowledge than ever before.
Directors charged with stakeholder engagements are also feeling pressure created by social media and civic action. Against this backdrop of increased responsibility and accountability, it is concerning to note that the number of non-executive directors serving on JSE-listed companies has decreased by 3.9% to 2 204, compared to 2 294 in 2012.
Knowledge, skills, resources, diversity and the ability to apply these skills effectively is paramount to deal with modern-day challenges. It is not surprising that all boards made up of 20 or more directors belong to large-cap companies. Many companies now have a footprint beyond the borders of South Africa.
“Some of South Africa’s non-executive directors sitting on multiple boards must find it difficult, if not impossible, to be fully prepared for the many meetings they have to attend. Not only does the annual general meeting require adequate preparation, but there are also committee meetings requiring similar if not greater levels of commitment,” says Seegers.
According to the findings of a PwC SA survey conducted among company secretaries of JSE-listed companies, the most sought-after attribute in new directors is industry experience (48%), followed by financial expertise (41%) and operational expertise (38%). Additionally, the demand for familiarity with ‘new age’ business skills (information technology, business globalisation and the influence of social media) has increased as boards look to add new directors.
Fees paid to non-executive directors
Non-executive directors face the same risk challenge as chairpersons and executive directors. However, the fees paid to non-executive directors tend to not be commensurate with their risk level.
The median chairperson fee across the entire JSE has risen by 7.1% to R422 000 (from R394 000 in 2012). Board chairpersons are paid a premium for their services being the person considered to be the most capable member serving on the board of directors. Overall this premium is around 50% when compared to the overall fees of non-executive directors, where the median fee has only increased by 4.3% to R288 000 (from R276 000 in 2012). “This is still relatively low by global standards and has been so for the past few years,” adds Seegers.
The financial services sector, which accounts for 24% of the listed companies on the JSE, has again shown the most restraint, which is expected given the high level of regulation in place. Total fees paid to non-executive directors in this sector increased by 9.3% (2012:26.2%). This saw overall fees increase at the median level from R728 000 to R795 000.
Concern was noted in the fees paid in the large-cap median basic resources sector, where the fees for chairpersons during the current reporting period increased by 51.4%. In the small-cap companies, non-executive directors saw an increase of 48.1% at the median level, which is almost double what they were in 2011. This is largely due to many of the companies paying their directors in foreign currency.
The industrial sector, which accounts for 29% of companies listed on the JSE, shows relatively marginal increases at the chairperson level. Non-executive directors in the medium-cap and small-cap companies saw overall fees increase at the median level from R889 000 to R901 000, almost double what they were in 2011.
In line with previous years, the role of the chairperson of an AltX company has not received any notable increase in fees. The median AltX chairperson fee this reporting period (R177 000) showed a decrease of 15.3%, similar to that in 2010 (-27%) and in 2011 (-11%) In contrast to that of AltX chairpersons, non-executive directors operating in the AltX environment have experienced marginal increases, the median non-executive director fee having risen by 4.4% in 2013 to R119 000.
If one tries to link the issue of risk and potential personal liability to non-executive directors’ fees, then it is fair to say that the current level of fees remain disconnected despite the notable increase in risk.
Profile of a non-executive director
It is encouraging to note that gender diversity and racial transformation on South Africa’s boards continues to improve with the most significant improvement found in the industrial sector with 20% of the non-executive directors being female and 44.3% ACI representation. The average age of the chairperson is 56 (median age is 53) and that of non-executive directors at 50 (median age is also 50).
Seegers concludes: “It is expected that companies will place more emphasis on a ‘sense of business’. Organisations will integrate purpose-building activities into business operations and strategies to ensure they have a meaningful impact and value on their stakeholders. Finding the right metrics to apply to director remuneration is therefore an item that should also begin to appear on the agenda in every boardroom. The quality of our non-executive directors is now the critical focus, not the quantity.”