The KMP Report: Cost and Complexity of Governance ASX Top 200

You can download the report using this link.

Egan Associates has received 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.

Our last research report dealing with the cost of governance was published in July 2014.  Recent discussions arising from our advisory work and highlighted in Board responses from comments made by institutional investors and their advisers and issues recently arising in the Royal Commission into the financial services sector, have made several supplementary issues front and centre.

In addition to the above notations, emerging issues include:

  • the attributes and skills essential for Directors serving on an ASX 200 Board
  • the time commitment essential for Directors to meet their governance and stewardship accountabilities
  • the Board diversity in relation to several attributes including industry & international experience, gender and age
  • the nature of Board immersion in key governance issues including but not limited to:
  • adherence to corporate values & behaviours
  • ethical conduct, particularly in relation to the management of customers’ affairs
  • depth of knowledge of Directors in relation to remuneration practices well below the KMP

Recent published information, in part arising from the Royal Commission, APRA and AUSTRAC, reveals that many Boards have not been aware of corporate practices in relation to the structure of remuneration, the criteria for the payment of incentives and the relationship between those practices and related research revealing positive customer engagement and employee engagement.  Refer to our published article – Governance: Front & Centre

Comment on and evidence being presented to the Royal Commission and observations and engagement with institutional investors and proxy advisers, further reveal that Boards have placed a significant level of trust in their KMP who prepare reports or make presentations to Directors outlining the integrity of organisation processes and the ethical conduct which is enforced throughout the organisation over which they have stewardship.

Boards have increasingly relied upon advice coming from management in response to questions arising or concern generally which has percolated into the community and increased awareness of shareholder expectations and, in part, the reliance in many organisations and therefore Directors on research undertaken by management’s principal advisers.

These circumstances may well have highlighted the necessity in several major corporate entities for Boards to have a small cadre of highly skilled staff, independent of management and the KMP in the organisation, undertaking investigations on behalf of the Board.  Such initiatives should ensure that there is no prejudice which either advantages or disadvantages KMP and senior management in relation to their reward and their continuing employment. This approach may not be entirely dissimilar to the intent of the support provided by Ministers’ staff in government where they are not employees of the organisations or the Departments reporting through to the Minister and Cabinet/the Parliament, but rather undertake an independent assessment of matters of concern to the Cabinet.

As we reflect on discussions with a select number of major company Boards, 20 or more years prior, I recall both positive and negative feedback from management in relation to what I would have then described as deep hands engagement in the operation and stewardship of leading enterprises by Directors who wished to have a first-hand understanding of the organisation’s contractual obligations, the nurturing and mentoring of talent in order to ensure succession and the oversight of either unintended or unidentified weaknesses in contracts entered into with third parties.

There appears to be emerging evidence that issues of this nature which have in part arisen from Board commitments to not interfere and therefore not engage in a forensic manner have led to concerns expressed by both customers and shareholders.

As a consequence, detailed oversight among Australia’s ASX 200 and certainly the ASX 100, may involve the establishment of an Office of the Board (OTB) which is modest in scale though appropriately staffed by individuals with the relevant authority to investigate matters on behalf of the Board and as a consequence shareholders, customers and suppliers in ensuring that a company’s operations were being conducted in accordance with directions, in accordance with appropriate practice and absent of conflict of interest, particularly third party interests.

OTB staff would need to be highly skilled, independent of management and have the necessary authority to undertake any enquiry on behalf of the Board and to report to the Board independently of management, though in the spirit of transparency inform management of the outcome of their enquiries or investigations.

The cost of establishing an office of the Board would represent a cost of governance.  Accordingly, in this report, rather than solely addressing the relationship of the remuneration payable to Directors as a proportion of the remuneration paid to a Chief Executive, we are also reporting on the total reward of a Chief Executive compared to Directors’ costs highlighting what may represent an unanticipated and less widely published observation where six or more Directors, in aggregate, receive a modest proportion of the Chief Executive’s annual reward.

This outcome, from a governance perspective and a reward management perspective, may well highlight matters which it is not intended to address in this research.  This report does not address the number of Directors required to provide appropriate stewardship of organisations of varying size, of varying operational diversity/complexity including the number of regions of the world in which the company does business and deploys significant numbers of staff.

  • We do however comment briefly in our research on the way Boards are describing the skills and capabilities of their membership and comment on the appropriateness of Director attributes to the needs of the organisation in providing the necessary oversight of the enterprises operations on whose Board they serve in representing the interests of all stakeholders. refer to our article- Criticality of Board Capability

You can download the report using this link.