South African boards are under immense pressure to continuously transform in many aspects, in the face of socio-political and economic uncertainty, a volatile market, digital disruption, and increasing demands from shareholders and other stakeholders.
The South African economy is experiencing low growth, high levels of unemployment, and persistent inequality. National Treasury has stated: “The country needs growth reforms that promote economic transformation, support labour-intensive growth, and create a globally competitive economy.”
Boards are centrally placed to drive the required shift.
Leila Ebrahimi, associate director in PwC’s People and Organisation department and editor of PwC’s Non-executive directors: Practices and fees trends report, 2020, says: “Against this backdrop of uncertainty and constant change, companies are being asked to take the lead in some of society’s most complex and challenging issues. From seeking action on climate change to threats of disruption to the workforce, stakeholder expectations are increasing, and some boards already are responding.
“The private sector has an important role to play, together with government and the public sector, to inspire the productivity and innovation which we need to build the globally competitive economy which we aspire to. But growth must be inclusive — within our country, high income inequality continues to pose a risk to economic growth.”
It is evident that there is a greater awareness of this issue, and a move to action. A good example is the anticipated proposed amendments to the Companies Act, which are expected to introduce a mandatory disclosure of the wage gap.
PwC’s 13th 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 and FTSE 250.
In this report we set out some thinking around what boards should be focusing their energy and attention on in order to play their part in this transformation.
Effective board committees
A focus on board effectiveness and capabilities of board members is leading to an increase in the number of organisations relooking their approach to board performance. There is also an increased awareness in organisations around the need for soft-skills training, and an understanding of board dynamics.
Even with the most skilled people sitting on a board, there is always a risk of groupthink, unhealthy boardroom culture, and in some instances, incidents of manipulation and conflicts of interest.
The report identifies several areas that companies can consider for improving boards and committees, as well as some starting points to finding solutions for improvement, where required.
Reporting on the internal pay ratio
The inclusion of fair, responsible and transparent remuneration principles as set out in the King IVTM Report on Corporate Governance remains a key focus, with many companies taking steps to regulate their adherence to it. Recent amendments to the Regulations of the Employment Equity Act have also introduced more stringent reporting requirements and hint towards a future where mandatory disclosure of the wage gap for South African countries will be a reality.
Ebrahimi, adds: “Companies should ensure that they have done their ‘due diligence’, and are properly equipped and aware of where they stand from a fair and responsible pay perspective, so that they are not caught off guard and have already taken steps to address any anomalies when public disclosure becomes mandatory.”
Boardroom culture and CEO personality
For decades, organisations have looked to personality tests in order to identify suitable candidates to join their businesses. This is no different when it comes to appointing CEOs. The personality of a CEO is of paramount importance with global research indicating that a CEO’s personality has a significant impact on the culture of a company, which, in turn has a direct impact on the company’s employees and its corresponding performance.
The board, in particular the remuneration committee and the nomination committee, should be on the lookout for any signs of adverse behavior and whether such conduct may be problematic in the future, especially when appointing a new CEO.
One way to mitigate and manage potential problematic personality traits is to ensure that companies have a competent board and capable non-executive directors who can sit on its subcommittees. Boards should be acutely aware of the different forces at play within a boardroom and should ensure that they are appropriately upskilled in the relevant soft skills.
Setting fees for non-resident NEDS
South African companies are increasingly looking to appoint non-resident NEDs to their boards as a means of obtaining diverse and foreign expertise. A question that arises is how to determine an appropriate fee for a non-resident NED that will ensure that the company both attracts and retains high quality and experienced NEDs.
Unfortunately, it is not clear from publicly disclosed data what principles are considered when determining the premium payable to non-resident NEDs.
The PwC report sets out our preferred approach to setting such fees and proposes that when determining an appropriate non-resident NED fee, companies should avoid only looking at the premium payable by companies in their comparator group as a basis for determining their own premium.
Instead, organisations should follow a principle-based approach. The company’s operating context (whether local or global) should be considered in establishing the appropriate course to be followed in determining a non-resident NED fee that is both reasonable and appropriate to attract a non-executive director with the requisite knowledge and skill.
Responding to climate change
Climate change is a complex and challenging issue for many organisations and is visibly disrupting business. Companies are under pressure from investors, regulators and other stakeholders to take responsibility by taking an integrated, strategic approach to addressing climate change. So-called ‘long emergencies’ need to be taken heed of and companies should ensure that they are not overly focused on the short-term.
In order to govern climate risks and opportunities effectively, boards need to be equipped with the right tools to make the best possible decisions for the long-term resilience of their organisations. PwC, in collaboration with the World Economic Forum (WEF) has developed a guide to help corporate boards drive climate governance effectively, which could be a good starting point for boards to consider their duties in this regard.
Profile of a JSE non-executive director
At 30 November 2019, the total number of non-executive directors serving on the boards of listed companies was 2 224, which is 178 members less than in the prior reporting period.
The average tenure for non-executive directors has declined to four years (2018: five). Board refreshment appears to be the main driver of this.
The data shows a steady decline in the number of seniors (aged 75+) on boards, accompanied by a steady increase in millennials (25-39) throughout the 12-year period. This is expected, considering that all industries are being influenced by the Fourth Industrial Revolution, and this population group comprises digital natives.
PwC has been doing a lot of research about the ways in which automation and other emerging technologies will impact the workforce of the future. Our research suggests that 50% of current work activities are technically automatable by adapting currently demonstrated technologies.
This will have a profound impact on the labour market and will require a ‘future-proof skills strategy’, significant cultural shifts within organisations and hard work to be done in identifying skills gaps within the future workforce.
It is also positive that gender diversity has improved among non-executives with male representation on boards declining from 80% to 70%. Racial diversity among chairpersons has remained steady since the previous year, while diversity among other non-executives appears to have improved considerably.
Ebrahimi comments: “We are, more than ever, in need of strong, effective boards and board committees with diverse experiences and viewpoints, comprised of members who are free of fear and favour, and who have the requisite knowledge and experience.”
Fees paid to non-executive board members of JSE-listed companies
The median chairperson fee across the entire JSE has risen by 5,9% (2018: 5%) to R834 000. Some organisations include a position of deputy chairperson. This person assists the chairperson and fills in if they are unavailable. Deputy chairpersons received a lower median increase than that of the chairpersons, at 2,3% (2018: 5%) to R704 000.
The median fee for lead independent directors increased at 2,7% (2018: 1,7%) to R550,000 at the median level. The median increase in remuneration for non-executive directors in all sectors was above the consumer price index (CPI) by a wide margin at 6,8% (2018: 5,3 %) to R553 000.
The report also sets out chairperson and non-executive director median fee increases per industry.
London FTSE 100 and FTSE 250
The report provides a trend analysis of the total fees paid to non-executive directors of FTSE 100 and FTSE 250 companies in the UK. It is of interest to note that within the UK the best practice has been to award increases in an interval of two to three years, often resulting in significant increases.
Recently, there has been a move towards reviewing non-executive director fees annually. Where an increase is taking place periodically, these are not exceeding inflation of the percentage increase offered to the employee population.
African stock exchanges
The report analyses the trend 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 African markets analysed (besides South Africa) in this report included a total of 1 975 (2018: 1 966) non-executive directors drawn from 413 (2018: 410) companies.
Reported data for Africa that is available in the public domain is limited, and in many cases, fees paid to non-executives are not disclosed in line with corporate governance best practices. The median total fee increase for chairpersons across the seven countries analysed was 4,2%, and 3,8% for non-executive directors.