Executive remuneration has become a symbol of inequality in today’s global economic order. Shareholders are becoming more active in demanding that executive pay is more closely linked to results and stakeholders want a broader focus on the context in which the organisation operates. 

For example, Anglo American recently responded to investor criticism of its executive remuneration policy by announcing it would revise its policy. It seems excessive executive reward will continue to attract push-back from investors. 

As a result, says Ray Harraway, Chair of the Remuneration Committee Forum of the Institute of Directors in Southern Africa (IoDSA), the work of the remuneration committee is critical to a company’s social licence to operate, and thus its sustainability. 

Speaking after the launch of the Remuneration Committee Forum’s position paper on fair and responsible remuneration recently, Mr Harraway said that getting remuneration right is not easy. “There are no right or wrong answers, there is no ‘number’ that a consultant can provide you with,” he pointed out. “What’s needed is professional judgement exercised within the context of the organisation and the society in which it operates. I fear that many remuneration committees do not have the skills, or courage, needed to make the right decisions.”

The position paper addresses many of the deep questions that remuneration committee members must ask themselves. They include why remuneration should be fair and responsible in the first place, and what the difference between “fair” and “responsible” actually is. 

A particularly contentious area is the wage gap within organisations. The paper argues that using pay ratios is ultimately not helpful when trying to come to grips with it. The main reason is that the ratio is significantly affected by the organisational structure of the company. For example, a company with both a COO and a CEO would have a better pay ratio than one with just a CEO, while a company that outsources lower level jobs could have a lower pay ratio than a competitor that does not. Similarly, a bank that has more high-skilled workers would have a lower pay ratio than a miner or retailer with large numbers of low-skilled workers. 

A better tool could be a pay index which tracks CEO pay, median employee pay and the total shareholder revenue of the company in question. 

“An important recommendation in King IV is that the remuneration of executive management should be fair and responsible in the context of overall employee remuneration. It should be disclosed how this has been addressed,” says Parmi Natesan, Executive, Centre for Corporate Governance, IoDSA. 

The problem with pay ratios is part of the larger one of mindlessly using benchmarks to set pay levels. A much better approach, Mr Harraway argues, is for remuneration committees to develop their own methodology but be prepared to communicate its thinking clearly. In general, remuneration committees must effectively communicate their thinking to all stakeholders. Such an approach actually goes a long way towards resolving concerns about fairness. To do so, it is vital that remuneration committee members understand the company’s strategy and how it creates value, in order to link value creation to pay. 

“This paper positions company directors and remuneration committee members well to rise to the challenge of one of the most vexing but important questions facing governing bodies today,” says Joanne Henstock, EY Executive Director and Remuneration Committee Forum member. This guidance provides critical assistance for boards in Southern Africa, where we continue to experience the challenging effects of a deficit of professional directors and mature board leadership skills.”

“Fair and responsible pay” can be downloaded by visiting http://bit.ly/2mUYROy 

ENDS
 
MEDIA CONTACT: Cathlen Fourie, 082 222 9198, [email protected], www.atthatpoint.co.za
 
For more information on the IoDSA please visit:
Website:  www.iodsa.co.za
Twitter:  @The_IoDSA
LinkedIn: The Institute of Directors in Southern Africa ​

​The ongoing parliamentary enquiry into the SABC has eluded to the suggestion that one of the causes of the public broadcaster’s poor performance was a board that did not possess the right mix of knowledge, skills and experience to be able to discharge its duties effectively. Parmi Natesan, Executive, Centre for Corporate Governance, Institute of Directors in Southern Africa (IoDSA), says that the investigation’s findings make a strong case for the benefits of professionalising directorship. 

“The parliamentary enquiry into the SABC demonstrates that the quality of governance exercised by the board has a knock-on effect on a company’s operational effectiveness,” Natesan says. “It’s also clear that board members must have certain knowledge, skills and experience in order to fulfil their responsibilities. To give one example, recent media reports indicate that some of the board members did not properly understand the Broadcast Act, and thus were not in a position to ensure the legal mandate was fulfilled. 

“However, board members cannot claim ignorance as an excuse, and the onus is on them to be properly informed prior to making decisions.”

This kind of situation can be avoided if board members are properly inducted onto the board, and proactively expand their knowledge of the company, the market/legislative regime in which it operates and developments in corporate governance. But they also need to have a good understanding of what their duties and responsibilities as directors are. 

Angela Cherrington, CEO of the IoDSA, says that because markets change so rapidly and are increasingly competitive, boards are under increasing pressure to maintain the right levels and types of skill, experience and diversity to keep the company on the right course. 

“Directors play a hugely important role, and their job is becoming much harder. The case for a new breed of professional directors is growing stronger by the day. Companies would be able to assess objectively what skills individuals have, and thus whether they would complement the existing board’s skills. As professionals, directors would also have to commit to a formal, ongoing programme of professional development,” she explains. “Professional directors would be bound by a code of conduct enforced by a professional body.”

In response to this growing need in corporate South Africa, the IoDSA launched a professional designation, Chartered Director (SA), or CD(SA). According to Cherrington, this initiative recognises that directors require specialist skills, experience and integrity alongside their purely business skills. The CD(SA) designation also gives directors a way to demonstrate their mastery of the director competencies, and to enhance them through a formal continuous professional development programme. They would have to subscribe to a code of professional ethics. 

In addition, the IoDSA will soon be re-launching Certified Director, an interim designation on the pathway to CD(SA).  This re-introduction aims to capture those individuals who do not yet have the board experience to enter the CD(SA) process, but who have the knowledge necessary to start their directorship journey.

The IoDSA administers, and is the custodian of, the both designations. 

“We were delighted to see that PWC’s Non-executive directors: Practices and remuneration trends report for 2017 predicts that ‘non-executives will become specialised professionals’ in order to meet the challenge of increased business risk,” Cherrington concludes. “The CD(SA) designation provides a framework against which directors can be measured and grown, and it will increasingly become the gold standard for directors in both the public and private sectors.”

ENDS
 
MEDIA CONTACT: Cathlen Fourie, 082 222 9198, [email protected], www.atthatpoint.co.za
 
For more information on the IoDSA please visit:
Website:  www.iodsa.co.za
Twitter:  @The_IoDSA
LinkedIn: The Institute of Directors in Southern Africa