The spotlight has been shining on an important board role recently. This was after CEO pay and allowances grabbed media headlines and the role of the board in overseeing them was under scrutiny.
But should this surprise us? Not really. The world is taking notice and everything points to more scrutiny about issues of fairness, good judgment, strong company culture and organisational sustainability. This isn't going to go away and neither should it. Our employees and our communities will be looking towards those in positions of responsibility to take that responsibility seriously.
This is why governance is important. And it will be increasingly important if we are to build a strong future for organisations, for New Zealand and if we are to be taken seriously in the global pecking order. And while there are undoubtedly cases where best practice may be in question, where things could and probably should have been done differently, I still believe we need the oversight that boards provide. And of course, we need to support directors to hone their skills. Their world is complex. The role is challenging. The scrutiny is valid. And it is important that we keep learning where situations arise.
The question is: Are boards on the money when considering CEO pay and benefits?
As the professional body for directors in New Zealand, the Institute of Directors spends a lot of time developing tools and insights for boards and directors. Our goal is to help them be on the money. Directors have oversight of every kind of organisation in New Zealand — from large corporates to not-for-profits, schools and fast growth start-ups. With good guidance, these organisations could transform our society for the better. On the flipside, not following best practice can result in enormous challenges and unforgiving public scrutiny.
Every board should be prepared to welcome scrutiny. We should anticipate it and recognise how important it is.
Research from Otago University suggests New Zealand CEOs are paid around 30 to 50 times more than the average employee. In the UK, new regulations have been introduced to improve executive pay transparency. The regulations apply to large UK-listed companies, requiring them to disclose the ratio of CEO pay to the median, lower and upper quartiles of their employee pay. Similar measures exist in the US, and in 2018, the Australian Labour Party pushed for enforcing a similar model for ASX100 companies.
In my day job, I am a CEO but I am also a Chair of a not-for-profit board so I am on both sides of the equation. Of course, I want to be remunerated fairly as a CEO and I understand the need for pay transparency and checks and balances.
As a Chair, I also want the CEO to be fairly remunerated. Of course, the rewards and motivations for any role are about more than just money, but in both my roles I understand our duties to stakeholders to account for remuneration decisions. And this is really the heart of it – we all want things to be fair and transparent. And we need those steering the ship to make that a reality.
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And to do that, those in positions of responsibility need to be asking some serious questions. Many are – but recent media reporting has been a timely reminder of how important it is to get this right. I admit this is a complex matter, don't get me wrong, but beneath the complexity, it is the board's role to grapple with important questions such as:
• Do we have clear remuneration and expense policies and guidelines in place?
• Are these policies consistent with our organisations' values and culture?
• What allowances, rewards and recognition are appropriate for our organisation?
• Have we disclosed our pay policies and practices? Should we?
• How can we gain our organisation's trust in these matters?
• Is our organisation having open and appropriate discussions with our employees about how we are setting our approach to payments and rewards?
• Are we setting the tone from the top?
Values and standards
Boards play a key role in setting the tone around values, standards and culture in the organisation. They ensure these values and standards are communicated, applied and followed throughout the organisation. And they hold management to account when behaviour does not align. Otherwise, they risk losing the trust and confidence of shareholders, the loyalty of customers and inevitably the sustainability of their business.
So we see boards have an important role here. They are in a position and have the influence to help create the type of cultures we want and need. One that is just, fair and that still drives performance and achievement for us all to prosper. But to do this boards need to be right on the money.