Directors' fee setting needs reform: NZSA

NZSA doesn't oppose fee increases per se, but is battling for better disclosure. 123rf

The way directors' fees are set needs to be reformed to overcome "the obvious conflicts of interest" of directors deciding how much to pay themselves, according to New Zealand Shareholders' Association director Martin Watson.

There is "a clear conflict of interest when directors themselves select and arrange payment for a remuneration consultant to advise on the level of fees that the directors will be paid," Watson wrote in the latest edition of NZSA's newsletter, The Scrip.

"Currently, many of these reports are not made available to shareholders, despite shareholders being asked to approve the fee increases, having to bear the cost of the reports and the new fee levels that arise from them," he said.

"From the reports that are released, it could be concluded that no boards perform below average and that directors' fees should generally be set at the 75th percentile. The mathematical flaws are obvious.

"The outcomes are escalating fees and fees that, in some instances, do not accurately reflect performance."

NZSA continued to face resistance from some companies to releasing remuneration consultants' reports.

Last year, the retail shareholders' organisation took ASX-listed Xero to task for failing to provide adequate transparency in seeking shareholder approval of an increase in directors' fees but praised Infratil for its fulsome disclosure of the reasons for requesting a fee increase.

NZSA has made it clear that it doesn't oppose fee increases per se, but is battling for better disclosure.

"It is in investors' best interests that directors are appropriately paid. Shareholders need ethical and capable directors with the right mix of skills to sit on the boards of the companies they invest in," Watson said.

"To attract the right people, the remuneration offered must be appealing and there should be an expectation that good performance will be recognised and rewarded."

Watson said that, typically, objections raised to providing consultants' reports include other companies aren't doing it, overseas companies don't do it, the consultant won't authorise it or that the report contains the consultant's intellectual property which is commercially sensitive.

However, the NZSA recently met the principal of a major New Zealand-based remuneration consultancy to test these claims and found such arguments hold little water.

"Releasing consultants' reports is common enough offshore, and the release improves the quality of the debate," he said.

"The remuneration consultant's database may be IP but, beyond this, there is little to support the IP argument."

In many cases, directors sitting on remuneration committees "have inadequate experience and knowledge" and need to upskill, Watson said

He dismissed the argument that increased disclosure would push up remuneration. "This argument doesn't have merit, given that directors' fees are required to be disclosed anyway."

Watson also took issue with the failure of some consultants to make recommendations, leaving it to boards to make their own decisions.

"There is a strong argument for the remuneration consultant to make a recommendation as part of the process."

Benefits of disclosure include providing shareholders with the ability to check comparability across periods and whether the criteria used are relevant and consistent.

The NZSA would like to see an independent external party appointing remuneration consultants – Watson suggests the NZX could take on this role, charging the company for the resulting report, in a similar fashion to how the Takeovers Panel engages independent experts to prepare reports on takeovers.

"NZX could establish a panel of reputable independent remuneration consultants that it could draw from for this work," he said.