KMP Report No. 11 : Board Cost of Governance

Egan Associates has published a KMP report on the cost of governance, following many and varied requests from clients to advise on:

  • the structure of Non-Executive Directors’ (NEDs’) fees;
  • the level of fees paid to Chairmen and members of the Board and its committees; and
  • the fee pools of companies regarded as comparable.

It would be our observation that Boards are meeting more frequently and are dealing increasingly with multi-jurisdictional risks and business operations. They are also engaged more fully in governance and compliance as well as strategy and enterprise development.

Cost of governance

Many Directors serving on major company Boards have previously held positions as CEOs or senior executives in listed public companies, professional organisations or substantial international subsidiaries. This experience is generally a prerequisite to effectively discharge their duties on the Board.

Yet, despite the time commitment required to fulfil their Director role and the complexity of issues brought to Boards for review and consideration, many Directors are serving on Boards for a fee substantially less than they may have received in their prior roles.

Significant investors and proxy advisors monitor Directors they consider to be serving on too many Boards. Although we do not advocate a strict limit on the number of Boards a Director can serve, it is clear that Directors can only provide the necessary commitment to a certain number of Board roles.
Given this, it would appear inadvisable if not impossible for Non-Executive Directors to attempt to maintain prior pay levels once leaving the C-suite, especially if incentives are considered.

Notwithstanding, if Boards are to retain the level of talent and commitment necessary to protect shareholder interests, it will be necessary to address any misalignment between the remuneration of executives and Directors. Examining this question may, however, lead to the conclusion that current C-suite pay levels are not an appropriate benchmark given the Board’s role in setting executive remuneration and the magnitude of that remuneration.

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