NED: is the risk / reward balance right?



It’s that time of year again for headline-grabbing press stories focusing on excessive pay for CEO’s. However, we rarely see any attention given to NED compensation.

Over the last few months, against a back-drop of several high-profile corporate failures and increased shareholder discomfort over excessive executive remuneration packages, a number of NEDs – particularly, those sitting on boards of more troubled businesses – have started to voice their opinions privately to MBS, particularly asking “is it worth it”?

NED fees range from an average of £43,200 in a FTSE SmallCap, through to approximately £83,000 at the top end of the FTSE 100. Considering the risks and responsibilities associated with NED roles, they are asking, is this really enough?

As we know, the role of the collective board is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to our wider society. That’s a lot to ask a collection of roughly five or six individuals – particularly when their NED responsibility is generally as part of a portfolio, and possibly on top of a demanding executive day job.

On paper, a NED role is likely to require 15 to 25 days a year – board meetings, AGM’s, meeting advisors – and, in our sectors, spending crucial time visiting stores, restaurants and factories both in the UK and overseas. When you add to this preparatory work required for board meetings – and time spent informally advising the executive in between meetings – the commitment is likely to be significantly more, particularly in the early years, when you need to get to know a business intimately.

Additionally, when times get tough (and let’s face it, for many companies within our sectors today, they are tough!), and in a worst case there is corporate failure, NEDs are likely to take an even more active role alongside the executive in fronting a transformation plan, and possibly even preparing a business for sale or administration. I have previously argued that veteran talent can provide invaluable counsel to businesses within our sector – surely we should be compensating our NEDs properly for the counsel that they can provide the executive? At the very least, we need to make it attractive for the best and most experienced NEDs to join companies that are experiencing, or likely to experience difficulties – particularly, given the huge personal reputational risk NEDs expose themselves to in such a scenario.

Contrast NED compensation in the UK to the USA where the average total director compensation in the S&P 500 is approximately $290,000 (£229,168) per director. Likewise, in Canada’s CSSBI 100 average compensation for 2017 was CAD188,000 (£111,186) – it therefore does appear we in the UK are far behind the curve.

Shareholders don’t offer much praise when the annual audit is completed, nor for ongoing risk mitigation. Yet if there is a failure in governance, the chair of audit is culpable. This is a huge responsibility, and one which can’t be taken lightly – because when things go wrong, the status of an entire company is at stake.

Likewise, agreeing appropriate remuneration for executives is becoming increasingly complex and polarising – particularly with regard to base salary and constructing the right long term incentives. Without the right compensation, it is simply impossible to attract and retain talent – and yet, without the appropriate level of thought, rewards can be completely disproportionate with performance. Just look at the case of housebuilder Persimmon, which recently paid their CEO a £75m bonus – yet, it has been argued that much of the upside he was measured against what was delivered by factors outside of his control.

I was speaking recently with the chair of a remuneration committee who described how she needed to meet with over 25 investors individually to get their buy-in to a new remuneration package – an absolutely huge, and very political commitment.

According to a recent KPMG report, on average the chairs of FTSE 100 audit committees only receive an extra £23,000 per year and remuneration committee chairs receive an extra £21,700. Whereas in the FTSE 250, audit chairs receive £11,700 and remuneration chairs get £10,700. Again, noting the risks, responsibilities – and time – involved with effectively fulfilling duties here, are these chairs being rewarded appropriately? Given the importance of these roles, surely we want these chairs to be giving more time rather than less to these absolutely critical governance functions?

Non-executive directors usually come from well-paid executive roles – and rightly or wrongly, have certain expectations on the ‘value’ of their time. Are current compensation levels one of the contributing factors for NEDs taking on too many board commitments, forcing them to “go plural”?

Especially in turbulent times, we can all agree that non-executive directors play an absolutely critical role in providing governance, stewardship and direction. Perhaps the time has come to look again at the appropriate level of compensation – and how that compensation is constructed. Otherwise, given the risks involved, will the best talent continue to see a NED portfolio as a natural step after their executive career?

Elliott@thembsgroup.co.uk | @TheMBSGroup