KEY POINTS:
The current furore raging around NZX and its chief executive overlooks an important issue which has only partially surfaced in the discussion to date.
The debate really has less to do with Mr Weldon's remuneration and much more to do with the perceived independence of market regulation.
As a market regulator, NZX must take the utmost care to set an exemplary standard of conformance with regulation and good governance practices.
The proposed package contemplates a possible 10 per cent shareholding in NZX by Mr Weldon over a three year period.
If not unprecedented for similar companies worldwide, this is certainly extremely unusual.
A 10 per cent stake can be hugely significant. Any cap on shareholdings can be lifted in future years and this would certainly endow Mr Weldon with great influence under current takeover legislation.
Is it desirable that a likelihood exists for a market regulator to be owned or materially influenced by a private individual, much less its CEO? CEOs of regulators can be dismissed. Owners of regulators cannot. Are there the seeds here for constructing a massive conflict of interest?
When a board sets director remuneration it must be permitted to do so by the company's constitution and be "fair" to the company. Remuneration of directors of listed companies requires shareholder approval.
New Zealand best practice states that director remuneration needs to be fair, reasonable and transparent.
What has this to do with the debate over Mark Weldon's proposed compensation package, approved by both the remuneration committee and full board of the New Zealand Exchange Limited (NZX)?
Not much at first glance, because Weldon is being remunerated as the CEO of NZX and not in his capacity as an executive director and board member, for which I am informed by NZX he is paid nothing. (His director status under the Listing Rules and the issue of shares to him is driving the requirement for shareholder approval.).
CEO remuneration is usually a matter of commercial negotiation between the board and the CEO and shareholders typically can do nothing about these settings except complain, especially when company performance slips and CEO compensation does not, or when a CEO leaves a poorly performing company with a large severance.
However, the question can be asked that if director remuneration must be fair to the company then surely so should the CEO's remuneration (including all share packages and other components), and it is the board's job to assess fairness to the company. As a matter of general governance several questions that any board needs to consider in this situation can be mentioned:
* Boards which approach CEO remuneration in a rigorously independent fashion know that no one is truly indispensable and that, if necessary, a capable replacement can be found. The risk is that sometimes, unknowingly, boards can lose this independence of thought. Boards need to ensure that any homogeneity of business background and connections does not interfere with clear eyed independence.
* Remuneration must relate to the company's size, profitability and nature of its business. Relevant considerations here could be that NZX is a monopoly and does not produce large profits. A useful comparison would be between the proposed package and those made available to CEOs of comparable exchanges worldwide or similar sized listed New Zealand companies. What independent reports have been produced to substantiate the proposal?
* Ideally remuneration packages should contain a variety of measures designed to gauge performance across a range of relevant company dimensions. Using only one measure, total shareholder returns, which is driven by share price and dividend data (themselves sometimes susceptible to external influences) can be a risky approach. Is a 10.5 per cent compounding annual return, while above average, the correct measure?
* Effective CEOs create high performing teams and superior corporate performance is usually the result of the efforts of many. CEOs deservedly get much credit for this, however to ascribe all returns to individual CEO actions can be a risky approach.
* Boards must pay heed to shareholder concerns and if the chorus of disapproval is loud, soundly articulated and widely expressed a board of directors needs to take that on board and think long and hard before proceeding.
One trusts that the board of NZX will do just that.
* Dr Nicki Crauford is the CEO of the Institute of Directors
