"This flies in the face of demands to cap corporate remuneration so as to reduce the pay gap," says Sandra Burmeister, CEO of the Landelahni Recruitment Group. "However, we must be realistic. In any scarce skills market, companies are likely to pay a premium for candidates. Non-executive directors and, in particular, independent directors are in short supply - and becoming scarcer."
"It can be argued that individuals who carry substantial risk and are required to steer their companies through tough economic times should be appropriately rewarded. Currently, there is an inverse relationship between the risk and reward of non-executive directors with the risk far outweighing the reward. This imbalance will be addressed by market realities," she says.
The new Companies Act and the King III Code of Corporate Governance have imposed onerous responsibilities on non-executive and independent directors. As a result some directors have retired from boards and will not consider any further board appointments, thus reducing the pool of already scarce candidates. This is exacerbated by governance requirements dictating shorter tenure on boards, an increased number of board committees and the fact that directors are tending to sit on fewer boards so they can play a more focused, dedicated role.
"The local situation is a reflection of a broader leadership scarcity as corporations globally grapple with the turmoil generated by the economic crisis in Europe and the United States. Boards need experienced leadership to guide them through the crisis, but it comes as a cost," Burmeister continues.
In South Africa, according to the 2011 PWC Executive Directors' Remuneration Report, the average fee of the chairpersons of JSE-listed companies dropped by 23% in 2010, while fees of non-executive directors increased by 18%. This fee increase, off a relatively low base by international standards, compares with an average 8% increase in non-executive director compensation in the United States S&P 500, down from double-digit increases a few years earlier. In the United Kingdom, FTSE 100 companies increased non-executive directors' fees by 11%. Also in the UK, a premium is paid to senior independent directors, who received a significant 38% fee increase.
"In South Africa," says Landelahni director Alan Witherden, "the need for independent directors is intensified by black economic empowerment requirements. Many organisations have BEE partners on the board, and to avoid segmental interests and maintain a balance of power, have increased board size to accommodate independent directors. King III posits that independence is a vital component of the board. It recommends that directors should be non-executive. Moreover, the majority of these should be independent, as should the chairman of the board, the lead independent non-executive director and all audit committee members."
The PWC report indicates that these requirements are far from being met in South Africa. Among JSE-listed companies, the percentage of independent non-executive directors varies from 47% in basic resources, through 48% in financial services and 53% in industrials to 56% in services. By way of contrast, in the US more than 80% of S&P 500 boards have independent directors, compared with the UK FTSE 100 at 77%.
