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Send  Share  RSS  Twitter  26 Jan 2012

GOVERNANCE: SAÂ’s Non-Executive Directors Set Tone for Good Governance


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South AfricaÂ’s non executive directors have heeded to the call of good corporate governance in the wake of the global economic recession, according to a report issued by Professional Services Firm PwC today.

Despite the increasing levels of regulation and legislation, such as the new Companies Act and Consumer Protection Act, including additional risk placing greater demands on non-executive directors, the role still remains fulfilling and challenging for a large number of South AfricaÂ’s non-executive directors, says the Fifth Edition of the PwC Annual Review of Non-Executive DirectorsÂ’ Practices and Fees Trends Report.

Gerald Seegers, Director for Human Resources Services at PwC, says: “More prominent business people are now sitting on boards and are keen to improve the quality of corporate governance in South Africa. The global financial crisis of 2008 has also forced directors to re-examine their roles and adhere to more stringent corporate governance practice. South Africa’s non-executive directors have raised the bar for good governance in that they have adhered to the principles in performing their duties efficiently and diligently, he says.

Seegers says that the talent pool in South Africa is plagued with a shortage of non-executive directors. In 2010, the number of non-executive directors in South Africa decreased significantly for the first time, by 7% or from 2159 to 2002. “However, we are pleased to report in this year’s report that the numbers have increased by 13% to 2,267.”

The PwC report examined the boards of 377 companies listed on the Johannesburg Securities Exchange (JSE) and was based on information publicly available as at 30 November 2011. The total market capitalisation value at that date was R6,486 trillion.

Seegers says that the increase in the number of non-executive directors sitting on boards can also be attributed to a rise in the proportion of non-resident non-executive directors, to just over 9% from 6,24% from last year. The largest percentage of foreign non-executives comes from the UK (2,4%), followed by Australia (1,28%) and the US (1%). It is interesting to note that there has also an increase in the number of Chinese nationals and nationals from African countries, now serving on South African boards.

Lead Independent Directors Provide Good Corporate Governance

Paul Shaw, Manager: Executive Reward at PwC, points out that the appointments of lead independent directors in South Africa are becoming more prevalent in the South African market, particularly in small-cap and AltX companies. The concept of a lead independent director was introduced by the King Report on Corporate Governance. Shaw says that lead independent directors have been under criticism in the South African market, particularly around whether some directors can truly be considered independent. The King Report contains a detailed list of which non-executives are considered independent.

Boards can expect to be increasingly scrutinised and challenged for the amounts they pay their non-executive directors in the light of the new Companies Act. The legislation states that all remuneration received by directors and prescribed officers be disclosed. Similarly, the King 3 Report requires full disclosure of each individual non-executive directorsÂ’ remuneration.

Despite the additional time commitment and reputational risk associated with the role, the current fee levels of South African non-executives are significantly lower than that of their international counterparts, particularly in the UK and US. The median fee for non-executive directors in the 2011 report is shown to be R242,000 (prior year R240,000). In the UK, the median fee for non-executive directors for FTSE 250 companies is ÂŁ43,000 per annum. However, Seegers says that the increase in executive pay varies considerably from industry to industry and across large, medium and small-cap companies.

The most significant increase in the basic resources sector is seen in the small-cap group, where the median total guaranteed pay increased from R165,000 to R189,000, an increase of 15%.

Within the financial services industry, the most notable movements in non-executive directorsÂ’ fees have been moderate to strong increases found within the medium-cap group at R276,000, a considerable rise from R208,000.

Within the industrial group, the median non-executive directorsÂ’ fee for large-cap companies has increased to R505,000, a 9% movement over the 2010 figure. The median non-executive director fee in the services sector increased by 17% to R405,000.

The overall median chairperson fee of R354,000 (prior year (R364,000) has tended to follow the global trend in that such fees have either remained constant or shown a negligible drop in some instances.

The median chairperson fee on the AltX Exchange continued to decline from R227,000 to R203,000 in 2011, having already declined significantly in 2010 from the 2009 observation of R312,000. The median fee for non-executive directors on AltX has increased marginally last year to R92,000.

Women Non-Executive Directors Crucial to Good Governance

During the past year, the debate around board diversity has intensified, particularly with regard to gender equality. Seegers that the number of women presently in executive positions in corporate South Africa is relatively low. He points out that some jurisdictions, such as the UK, require companies to disclose the number of women sitting on the board and working in the wider organisation.

Transformation continues to be a priority for boards. At 36%, the number of black directors is still short of a demographically representative figure, says Seegers.

The ongoing development of corporate governance principles, such as the King 3 Report, has not only resulted in increased responsibility for non-executive directors, but has also been accompanied by an increase in accountability and reputational risk. “It is therefore not surprising that during this reporting period, it was found that non-executive directors have, in certain instances taken on additional positions in other companies, while retaining their present position,” Seegers says. During the reporting period, 59 non-executive directors sit on more than three boards.

The issue of multiple directorships remains a thorny one, with 77% of responses indicating a clear preference to managing the number of directorships held by non-executive directors. The number of directors who hold more than five listed company mandates, has remained the same (15). The number of directors holding two or three directorships has risen by 13,2% and 12,5% respectively.

The age of non-executive directors appears to have stabilised at 48 and the median age for chairpersons remains at 51.

“Non-executive directors will be required to take on more responsibilities during the course of the year in the light of ongoing developments in regulations and an increased focus on good corporate governance,” says Seegers.


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