Corporate governance should not rely on big rewards, but on well-chosen board colleagues
Should non-executive directors be paid more?
There is a growing body of opinion that there is a shortage of suitable candidates to sit on boards as non-executives, and one of the reasons for this is that non-executives are not rewarded adequately.
Paul DareThis debate is based on a misconception. What is needed is a new type of non-executive, one that has the time, skill and inclination to undertake corporate governance duties. One that can relate to board colleagues and yet not feel beholden to the chairman and board because they invited them to join. These new directors would complement the traditional non-executive.
Chairmen and company boards have tended to seek out non-executives who are serving in an executive capacity on other boards, often as chief executive. This is because appointments are made with a mind to profit, not corporate governance. These people are already highly paid in their main jobs.
This means that financial incentives would have to be raised considerably to persuade reluctant candidates to come forward for non-executive positions, particularly since many non-executive directors pass on their fees to the companies of which they are executives.
One of the problems is that boards do not generally see corporate governance as enhancing to profits, but rather as a deterrent that puts off would-be non-executives from joining their boards. In fact, many see it as a hindrance to profits because time has to be spent by board directors on combined code duties rather than, say, strategy.
Investors approach the issue differently. They want companies to take whatever steps are necessary to improve business prospects and results, but they also expect corporate governance requirements to be attended to.
The UK corporate governance model, in its present form, requires there to be independent non-executive directors on boards to fulfil the combined code committee requirements. These directors have to want to do this job. If they are reluctant to start with, then it is pointless to try to persuade them by offering them greater financial rewards.
The large size of remuneration necessary to persuade them to take on the corporate governance role would compromise their independence once appointed. This would be the case whether they were paid in cash only or cash plus shares.
Is there really a shortage of suitable people to fill the corporate governance role of independent non-executive director? The answer has to be no. Enquiries show that when a company goes about its recruitment process using the same methods it would use for any other recruitment, such as a newspaper advertisement or a search and selection firm, then the resulting long list contains more than enough candidates with the knowledge, skill and experience to do the job.
Pay does not seem to be a significant barrier to attracting enough suitable applicants. The impression that there is a shortage of candidates arises from the use of narrow candidate specifications that exclude suitable people or unsystematic recruitment methods that fail to make sufficient contact.
Rather than ramp up pay for non-executives, it would be more sensible and cost-effective for companies having recruitment difficulties to recruit two types of non-executive: executives in other companies that are at main board level or just below, perceived to be profit enhancers and others who want to dedicate themselves to all board duties, including sitting on combined code committees.
The former are more interested in avoiding tedious corporate governance duties than earning larger fees. They could be excused from committee duties if necessary.
Evidence suggests that there is no shortage of the latter corporate governance type to carry out committee roles. For example, the role of the remuneration committee, if done properly, is making increasing demands on the time and skills of its members. A busy chief executive of another company may be inappropriate for remuneration committee membership.
Many feel that the present system encourages non-executives to take a back seat and avoid controversy on those issues that could cause ill-feeling among their executive colleagues on the board. Perhaps incentivisation would help to improve performance, but there are other ways. One would be to reduce the impression that non-executive directorships are in the gift of chairmen, particularly when recruitments are made for governance roles.
Where this impression exists, it can create a misplaced sense of loyalty in the minds of those appointed.
As an example of a possible solution, fund managers could empower the trade associations, the National Association of Pension Funds and the Association of British Insurers, enabling them to become involved in the selection of one or two non-executive directors per board.
Paul Dare is corporate governance consultant at F&C Management