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20 February 2010

Life in the Boardroom

Tag(s): Boards

This week I attended a seminar presenting the results of the 2010 Chairman and Non-Executive Director Survey called Life in the Boardroom. This survey, in which I participated, has been run annually for 20 years by MM&K limited, a remunerations consultancy and Hanson Green, now part of Directorbank, a headhunter specialising in Non-Executive Director appointments. The survey is deemed to be one of the most authoritative of its kind covering 442 directors – 290 chairman and 152 Nonexecutive directors who provided data on 1,170 appointments on main market, AIM and private company boards across all sectors.

The results are copyright but I can report the principal themes and provide my own comments on them. Average fees are around 10% higher than last year for both Chairmen and Non-executive Directors. For listed companies the median fee works out at around £1600 per day for Chairmen and around £1500 for NEDs. Fees per day work out as much lower than that of executive management, external consultants, accountants and lawyers which can easily reach £5,000 per day. Remuneration is not felt to be adequate for the time commitment and risk in listed companies according to many respondents.

It might be surprising to some that in a time of recession with pay frozen in many areas of the private sector that these fees have risen by 10% but at the same time the demands have increased significantly with greater governance and risk management requirements and so the time that directors are spending on their businesses has also gone up significantly.

Over the long term non-executive pay has not risen anywhere near as fast as executive pay and it looks as if the balance of risk and reward has tilted too much. The Companies Act 2006 which governs the responsibilities of directors does not discriminate between Executive and Non Executive Directors so the responsibilities are the same. Equally the reputational risk is as great for a Non-Executive Director as for an Executive Director.

The average CEO of a FTSE 100 Company now receives circa £4 million per annum in total remuneration when salary, bonus, long term incentives, pension contributions and all the rest are taken into account, about ten times that of his chairman. The multiple of his base salary that he may earn in the form of incentives can be as high as 7 or 8 and at least one of the consultants who presented at the seminar argues that this is too high.

Despite all of this there are plenty of candidates that are willing to take on non-executive roles and indeed I believe that as these are usually men and women aged 55-65 then the baby-boomer generation has now reached the non-executive part of the boardroom and so the market for such roles will be more competitive than in the past.

78% of main market listed boards are rated as fully effective by the directors who serve on them and 21% as partially effective. However, the picture appears worse in AIM listed companies where 34% rate their Board as partially effective and in private sector companies the rate is 35%. There is a worrying difference between Chairmen and NEDs as more chairmen rate their boards as effective than NEDs suggesting that some chairmen might be complacent or over confident. Board effectiveness reviews have now become an accepted part of life in the boardroom although most companies conduct an internal review rather than retaining an external adviser to conduct an independent review. There is always a danger that this descends over time into a box-ticking exercise of no practical value to the boards themselves or their companies’ shareholders.

80% of companies think the credit crunch has had a detrimental effect on their business pointing to the wide impact of this recession. As a result most (60%) are paying more attention to risk. The Walker report recommending the setting up of a separate risk committee in the banks may turn out to be an innovation adopted more widely.

The busiest committee however will continue to be the Remuneration Committee whose Chairmen will have to resolve widely ranging differences in views. In the seminar there was a lively discussion on executive remuneration and the question was asked as to how we got into this mess. The consultants’ view was that it was a contagion from the USA where governance was less well practised than in Britain and CEOs were more easily able to dominate their boards. Often the roles of Chairman and CEO were not separated and so such individuals had successfully bid up their pay to extraordinary levels. Stock options, which in the consultants’ view are of dubious merit, had benefitted the winners in the good years without demonstrating effective value added. Then in the recent past certain leading UK quoted companies, judging that they operated in a global market for talent, decided to benchmark executive remuneration against the US rather than locally based employers. Over time these have inevitably contaminated most of the rest.

For some at least life in the boardroom is good.

Copyright David C Pearson 2010 All rights reserved









 




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