Are company directors overpaid?
02 April, 2015
Is there such a thing as an overworked, underpaid company director? What about an underworked, overpaid company director?
I'm not going to risk anyone's wrath by answering directly. However, I do think some trends in director remuneration and participation deserve to be scrutinised.
I recently reviewed the NZ Institute of Directors' 2014 report on directors' fees and was interested in several results from their survey of 1,883 directors and 1,262 organisations. The first was the median length of directorship — 3.5 years. My immediate reaction was, how much can a director really know about a company and therefore contribute to its success if they're only on the board for three and a half years?
The question became even more pertinent as the survey showed the median number of board meetings was 10 per annum, at an average of four hours. Typically directors spent four hours preparing for each board meeting so, over three and a half years, a director would devote a total of seven weeks to the company.
When I think of new employees and how much they know about our company after seven weeks (and our business is relatively simple compared to some of those surveyed), I wouldn't let them loose on any major decisions. Directors aren't immersed in the business each day, so at least part of those seven weeks would be spent refreshing one's knowledge about the business.
I remember a company director telling me he didn't need to know a whole lot about the business or even care deeply (you can imagine how well that comment went down). His argument was there is a difference between management and governance and directors should only be expected to have an overview rather than a deep understanding of a business.
That might be right in theory, but knowing that boards make all major decisions that determine the strategic direction and success of a company, I think directors have a responsibility to know lots and care even more.
Which leads us to remuneration. The survey confirmed that the median fee for a non-executive director was $40,000 and the hourly rate ranged from $153 to $1,168. At first glance, a $40,000 fee doesn't seem that onerous but, when you think about the number of real value-add hours spent by the director, and consider his/her hourly rate, I do have to wonder whether all 1,262 companies got their money's worth.
Interestingly, all directors got a raise in 2014 with the increases ranging from 2 per cent to 25 per cent. Despite the seemingly good hourly rate — on average — and the reasonably generous fee increases, only 52.7 per cent of surveyed directors were satisfied with their level of remuneration.
A lot of company directors will be bristling at the picture I am painting and it is important to remember that I have used median numbers. The sample will likely have included some exemplary directors who put in long hours and have a deep commitment to the firms they govern. But there will be others who don't.
There has been much hand-wringing over director fees and CEO pay for many years. One detractor, John Gillespie, a former US investment banker who might know a bit about being overpaid, went so far as to write a book entitled "Money for Nothing: How the Failure of Corporate Boards is Ruining American Business and Costing Us Trillions". The book concluded board members get too much for too little work and said "the world of boards has become an entrenched insiders' club — virtually free of accountability or personal liability".
I acknowledge there are reputational and other risks associated with the role of director and often these risks are given as justification for high fees. But boards should be just as focused on guiding strategy for the good of the company as they are on managing risk.
If they can do both, and commit sufficient time and energy to doing both properly, then maybe their remuneration will be less open to criticism.