While the media focuses on Telstra shareholders’ stunning rejection of its remuneration package, the AFR reported yesterday that more than “20 companies on the S&P/ASX 100 Index are asking shareholders to approve increases” for non-executive director fees. The increases range from 25% for ASX to an 89% requested increase for successful services company WorleyParsons.
Charles Macek, Telstra remuneration committee chairman and the man who allegedly “wrote the book on corporate governance” claimed that:
There is, I think, a bit of a misperception in the community that directors are getting paid multimillions of dollars. That’s true of executives at the top. It’s not true of non-executives. When you think of the risks of litigation, the risk of loss of reputation, the attractive alternative in the private equity space, you can understand why there is upwards pressure.
The only problem with Macek’s reasoning is that it bears little resemblance to reality. First, there are very few instances of non-executive directors being sued in relation to their actions. Second, while the Corporations Act proscribes various director’s duties and the NSW Court of Appeal in the leading Daniels case back in 1995 required directors have a minimum level of familiarity with the company, virtually all directors have insurance – paid for by the company. For example, Telstra’s Annual Report notes:
Telstra maintains a directors’ and officers’ insurance policy that, subject to some exceptions, provides worldwide insurance to cover past, present or future directors, secretaries or executive officers of … Telstra.
As for the loss of reputation, Macek shouldn’t be too concerned. Leo Tutt was chairman of MIM which was sold to Xstrata for billions less than it was worth. That didn’t stop Leo from becoming the inaugural Chairman of Promina (and then a director of Suncorp) and the Chairman of the Crane Group. Nor did the reputational damage from the BHP’s dud investments in Magma Copper and HBI or Pacific Dunlop’s follies in the 1990s prevent Margaret Jackson from becoming chairperson at Qantas as well as a director at ANZ and Billabong. API Chairman Peter Robinson and deputy chair Barry Frost have remained on the board despite the company losing millions on computer systems and stock write-offs.
In fact, there would be few occupations which have as little accountability as non-exec directors, whose blame can be spread across a board of nine or twelve. CEOs, while far more generously remunerated, are at least highly accountable.
The AFR also noted that “several companies argue that they need ‘make up’ increases to the fee pool to bring them into line with the broader market and ensure they can retain high-calibre directors.” Wesfarmers even claimed that an “external consultant” showed that Wesfarmers’ fees were less than comparable companies. It is somewhat surprising that Wesfarmers had to pay a consultant to effectively read a couple of Annual Reports.
Another solution, instead of increasing director pay, would be to reduce the number of directors. That way, not only do shareholders fork out less money, but directors may even become accountable for their actions.
As Warren Buffett noted:
I believe the directors ought to be relatively few in number – say, ten or less – and ought to come mostly from the outside … The requisites for board membership should be business savvy, interest in the job, and owner-orientation. Too often, directors are selected simply because they are prominent or add diversity to the board. That practice is a mistake.