Together at the top
The critical relationship between the chair and the CEO.
The Directors’ Fees Report 2023/2024 was produced by the Institute of Directors (IoD), in partnership with EY. It provides key information on director remuneration and board practices in New Zealand and brings together data for 3,951 directorships held by 1,124 directors across 1,695 organisations. The full report contains comprehensive detail and is available for purchase.
The office of a director carries with it a wide range of ethical, legal and commercial duties and obligations, and a raft of competing challenges from rampant inflation to technological disruption, climate change, modern slavery, geopolitical tensions... the list goes on.
Board governance has changed dramatically over the past few years and this pace of change is set to continue. Having weathered the pandemic storm, and recent storm events, changing stakeholder expectations are forcing boards to rethink their purpose and operating models.
Addressing short- term challenges is no longer enough. Boards need to balance short-term and long-term value creation while investing in resolutions to long-term challenges, frequently without the roadmap that lessons from the past can provide.
Steering organisations through these changes is the board, all the while facing increasing public scrutiny and litigation risk and calls for enhanced accountability and transparency. Board and director performance, conflicts, culture, diversity and remuneration are also under increasing scrutiny from shareholders, stakeholders and the public alike.
Governance is often regarded as a second career. However, the average age of board members is reportedly dropping. Some of this may reflect the diversity of skills being sought on boards, with demand for expertise in contemporary areas such as cybersecurity, AI, decarbonisation and climate change. For some boards, it is a concerted effort to bring a younger voice into the boardroom.
Remuneration, however, remains a barrier for many to enter governance. Being a director can be very rewarding but also very demanding, and it can take a long time to achieve any form of pay parity with executive income.
A key tenet of good governance is having robust and defensible processes and decision-making. The setting and review of director remuneration is one area where processes can come under intense scrutiny. The board is responsible for determining the remuneration policy and the structure of compensation for directors (and senior executives).
Setting director remuneration can be complex. There are a number of factors to take into account including industry, assets and turnover, staff numbers, risk and liability, skills and experience required, shareholder expectations or requirements, responsibilities, committee roles and number of board meetings. Seeking independent advice and ensuring fair, defensible and transparent processes helps to build trust and confidence in governance and helps to close pay equity gaps.
The Financial Markets Authority recommends that the board should have a clear policy for setting the remuneration of executives (including executive directors) and non-executive directors at levels that are fair and reasonable in a competitive market for the skills, knowledge and experience required.
Further, it suggests that publicly-owned entities should publish their remuneration policies on their websites with executive (including executive director) remuneration clearly differentiated from non-executive director remuneration.
In this year’s Report, 301 organisations said that they had a people and/or remuneration committee. The main purpose of a remuneration committee is to advise and assist the board in its responsibilities with respect to oversight of people and culture. The committee’s overarching role focuses on the organisation’s people-related policies, procedures and processes including salary and remuneration.
In establishing remuneration policies and practices for non-executive directors and governing body members, the key formats are either a single annual fee or an hourly rate, or a mixture of the two, with reimbursement of expenses. The 2023 Report found annual remuneration reviews remain the most common practice (31%), followed by when market conditions justify (15.6%), and biennial reviews (10.4%). Similarly, fixed fees remain the most common payment structure (65.9%).
Chairs, deputy chairs and committee chairs are generally paid a higher annual fee to recognise the additional responsibilities of their roles. The median premium received by the chair ranged from 35% to 110% in relation to annual revenue, and -16% to 127% when calculated by industry.
Finding the right board members is both an art and a science. Being clear about what you’re looking for (skills, experience, personal characteristics etc) and what the role entails (purpose, main duties, responsibilities etc) helps to focus both your search, and that of potential directors. Similarly, being clear about time commitment, remuneration, risk, liabilities and the expectations on directors is also important.
The Companies Act (Section 161) states that the setting of board and committee remuneration, including other beneficial payments and termination payments, must be “fair to the company”. And in setting remuneration, directors must certify that the remuneration is “fair”.
The NZX Corporate Governance Code 2023 goes further, stating “the remuneration of directors and executives should be transparent, fair and reasonable”.
In this year’s Report, 36.4% responded that they had turned down a role in the past year. Of those that turned down a role, 53.8% said it was due to the time commitment, 18.7% the fee amount and 17.7% misalignment with values. This represents a significant increase in those who turned down a role due to fee amount, up 6.1% on last year.
The survey also highlighted that, once again, fees paid to directors are not increasing in line with labour market increases. Non-executive directors received a median remuneration increase of only 0.9% in comparison to an increase of 4.3% in the labour cost index to the year ended March 2023. The median annual fee for non-executive directors in 2023 was $52,000, up from $51,529 in 2022.
Trustees received the largest annual fee movement of 9.2%, shifting their remuneration up to $13,100, but they had received no fee adjustment for the past three years. There was also a significant increase in the proportion of unpaid directors, increasing from 12.4% in 2022 to 26.5% in 2023. While nearly half of the unpaid roles were in the not-for-profit sector, 35% of directorships at unlisted (private) companies were also unpaid.
Despite this, over half of directors considered their fees adequately reflect their role and responsibilities, and the value they contribute through their governance work – along with potential personal liability and reputational risks associated with the ever-expanding and increasingly complex role. Personal liability was somewhat offset through directors’ liability insurance, the most common insurance provision, with 98.7% of respondents covered, up from 89.5% in 2022.
Remuneration satisfaction wasn’t universal with concerns about fee adequacy most pronounced at Crown entities, statutory boards and state-owned enterprises. Fees for Crown entity companies, state-owned enterprises and Crown Research Institutes are set under the Crown Company Fees Methodology. The Treasury advises the Shareholding Ministers on appropriate fees in accordance with the Crown Company Fees Methodology, and a fees pool is set for each board. Each board then determines how to allocate this pool of fees.
Members of an independent Crown entity, independent statutory officers, and elected members are remunerated in accordance with determinations set by the Remuneration Authority. When reviewing remuneration, the Remuneration Authority is required to consider:
Of interest, however, the Remuneration Authority has no mandate to take performance into account.
For council-controlled organisations and council- controlled trading organisations, the local authority is required to adopt a policy that sets out an objective and transparent process for appointing and remunerating directors. Councillor-directors normally receive board remuneration in addition to their remuneration as councillors as it is considered that they were appointed for their skills/suitability to the role and that it is work in addition to that of being an elected member.
Fees for most Crown entities including Crown agents, tertiary education institutions, trust boards and statutory tribunals are set under the Cabinet Fees Framework, which was last revised October 2022. The framework is designed to provide a consistent approach to remuneration review and setting across all statutory and Crown bodies. In reviewing and setting fees, the guidance includes that “fees will continue to be set on a fair but conservative basis to reflect a discount for the element of public service involved”.
Once again this year, directors of Crown entities, statutory boards and state-owned enterprises were least satisfied with their remuneration. In the Report, 73.3% of Crown entity directors, 72.7% of state-owned enterprises directors and 62.5% of statutory board members did not consider that their remuneration was adequate.
The “fairness” of applying a discount for Crown entities has been challenged due to the complexity and public scrutiny of the public sector, the uncertainty and relatively fixed tenure of these roles, and the need to retain and recruit strong governance talent. In addition to government-appointed roles, the consideration of a “discount for public service” is most usually seen in council-controlled organisations or not-for-profit boards, which frequently provide reimbursement of expenses only. Some organisations’ constitutions, guiding legislation or organisational agreements (such as funding contracts) do not allow payment.
In the Trusts Act 2019, one of the default duties of trustees is that they must not take any reward for acting as a trustee. Despite this, there are no regulations restricting payment of board members. If the board decides to pay their trustees, however, they must have a clause within their rules stating this.
Non-remuneration of not-for-profit board members has been challenged with some studies showing a majority of respondents consider board members should be paid. While affordability and the perception of “purpose over payment” are the main reasons against remuneration, some of the reasons given for remunerating board members are to:
Despite this, philosophical opposition and public perception concerns prevail.
Nonetheless, good governance is required regardless of the size, nature or industry of your organisation or the amount of remuneration.
The Trusts Act 2019 and Incorporated Societies Act 2022 and proposed changes to the Charities Act 2005 to align with the director duties in the Companies Act 1993 highlight the responsibilities and obligations of all governing body members.
Further, the risk environment is very much the same. Not-for-profit boards have to manage climate change, health and safety, inflationary pressures, operating environment changes, stakeholder pressures, cyber risk, loss of significant funding, turnover of key personnel, increased compliance, and more, like all other organisations.
Some argue that with less money and more public accountability, not-for-profit organisations cannot afford to have anything less than good governance.
Nonetheless, for a lot of directors, being part of the governance of a not-for-profit organisation is considered a way to give back to their community and/or contribute to causes that they care deeply about. 15.6% of respondents were in a not-for- profit governance role, with 46.4% indicating that it was due to their desire to give back to the community (up from 41% last year). In addition, 40% reported that it was due to their interest in the organisation/cause (up from 36%), and 14% had taken on a not-for-profit role to build their governance experience (well down on 23% last year).
Good governance practice demands open and meaningful reporting that goes beyond ‘tick box’ compliance. Communicating effectively about remuneration with shareholders and the public helps build trust and confidence in organisations.
The NZX Corporate Governance Code 2023 advocates that there should be a publicly-available remuneration policy which clearly specifies the different components of non-executive director remuneration. It goes further to state, if advice from a remuneration consultant has been used, then a summary of this information should also be made publicly available. The actual director remuneration is then to be clearly disclosed in the company’s annual report.
Tier 1 and Tier 2 public benefit entities are also required to disclose related-party transactions including remuneration of key management personnel, which incorporates members of the governing body and key advisors, within their annual reports (PBE IPSAS 20). All related-party transactions are required to be disclosed, including those to “key management personnel and close members of the family of key management personnel”. Where no remuneration is provided, entities need to state this also.
Transparency is important to the market, shareholders and stakeholders and helps build trust and confidence. Good governance practice means transparency and accountability around remuneration, supported by meaningful reporting and disclosure. Reporting may include:
Of the 386 annual reports assessed, 87% had disclosed their fees in their annual report.
A topical remuneration issue this year has been GST on director or board member fees. Taxation of directors’ fees can be challenging, but they were made somewhat more challenging in March when Inland Revenue published updated guidance regarding the GST treatment of directors’ fees.
The guidance came with the surprise addition that some directors may not be entitled to be registered for GST and may need to de-register. The guidance applied to professional directors and companies that pay directors a fee that is a GST inclusive amount.
Designed to replace an old ruling issued in 2015, it unnecessarily complicated the matter of what is a “taxable activity”. Broadly, the GST rules provide that a director should only charge GST on director services if those services are supplied as part of a director’s “taxable activity”. The statutory definition of “taxable activity” contains specific provisions relating to payments for directors’ services and whether those services form part of a taxable activity.
The Inland Revenue Commissioner originally concluded that a professional director (a person holding multiple directorships or board memberships) without any other associated taxable activity (such as a legal or accounting or consulting practice) does not carry on a taxable activity just by virtue of holding multiple offices and therefore was unable to register for GST.
However, questions were then raised about the applicability of these rulings to directors who provide “director services” through their own personal service company (PSC).
Following consultation on a further exposure draft in June specifically looking at the GST treatment of directors’ fees for directors operating through a PSC, Inland Revenue published a further ruling 21 July 2023, GST – Directors and board members providing their services through a personal services company. The guidance clarifies that if the PSC contracts with the company requiring a director and supplies the services of the director under that contract, those supplies of directorship services are not excluded from the definition of “taxable activity”.