Kumar Subramanian is Partner & Practice Leader – Executive Compensation & Governance, APAC MEA at Aon Consulting
For most listed companies, Annual General Meetings (AGMs) are just around the corner. Fees for Non-Executive Directors (NEDs) will be one of the many items that will be tabled for shareholder resolution. Like many other items on the shareholder approval menu, this will need to be addressed with more subtlety on this occasion.
Based on the circular dated April 21, 2020, the Ministry of Corporate Affairs (MCA) has allowed companies with fiscal year closure on December 2019 to conduct their AGMs latest by September 30, 2020. It is possible that companies that close their books on March 2020 may get more breathing room. In either case, reported financials are unlikely to capture the economic debacle of Covid-19 and would seem out of date with the current financial situation of the firm.
Viewed purely from the lens of historical financial performance, there seems to be no compelling case to reduce sitting fees or commissions for NEDs. However, shareholder optics do matter. Companies may reduce dividend declarations to conserve cash for reinvestment into the business. A fee cut can give a strong signal of solidarity and alignment with shareholder interests. As a case in point, many notable large cap companies (STI 30) in Singapore have announced fee reductions in the range of 10-30% for their NEDs. NEDs may also be under 'peer pressure' to follow suit any voluntary or involuntary pay reductions applied on Executive Directors.
Are fee cuts then a reasonable course of action? Not always.
Stakeholder activism always peaks during times of crises. Boards are often called upon to take on the task of spending more time engaging with shareholders, government, bondholders, customers and the broader community, thus releasing management bandwidth to deal with more burning issues on the ground. Outside Directors can act as a good bouncing board (no pun intended!) on difficult choices management need to contend with. Their invaluable crisis management experience enables them to serve as a strategic guide. CEOs can lean on them for much needed personal resiliency and agility during these challenging times. Responsible Boards also unfailingly ramp up their commitment to help management mitigate the negative consequences of the crises and set up the building blocks to succeed as and when the 'new' normal plays out. All of these requires more commitment and leverage of Outside Director skills. Thus, undertaking fee cuts seem counter-intuitive and an unfair consideration for the value they bring to the table. The Australian Institute of Company Directors (AICD) notes that where substantial extra time and effort is needed of Directors in response to corporate events, it is appropriate that they be entitled to an additional fee.
How should companies then balance between shareholder alignment and fairness? In fact, it does not have to be one versus the other. Fees for outside Directors must be based on the skills and time commitment they invest on the Board and Committees. 'Skin in the game' with shareholders can be encouraged through NED share ownership. For example, most of the ASX 20 companies have a remuneration policy that require their NEDs to have a shareholding in the company equal in value to at least one year of a NED's base fee. They are often given a period of five years to reach the requisite shareholding level. Such share ownership guidelines do not dilute Director independence, since the goal and mechanism are different from that of an Employee Stock Option (ESOP) scheme or similar such equity awards that cover executive management.
To recap, it may not be a good idea to cut NED fees to save costs or to make a statement to shareholders. In contrast, a few progressive Boards have decided on Director fee cuts to fund initiatives for healthcare workers and other disadvantaged sections of the society. A noble but a voluntary action. And that is where it should be left at.
The writer is Partner & Practice Leader – Executive Compensation & Governance, APAC MEA at Aon Consulting