IT is always sensitive when it comes to discussing non-executive directors’ remuneration. Sometimes the board and major shareholders will have different ideas as to what is fair remuneration compared to minority shareholders.
There have been cases where the board and the major shareholder did not see eye to eye when it comes to increases in directors’ remuneration. The major shareholder defeated the resolution for the increase in remuneration.
Even different groups of minority shareholders may have opposing views as to what is fair remuneration.
This is because we are traversing an area laden with much subjectivity. Effort and hard work must be recognised – and it is no different when it comes to directors’ efforts and hard work. Workmen should be rewarded a fair remuneration for an honest day’s work.
No one should begrudge that entitlement. A particular distinction that needs to be drawn is the role of the non-executive directors and executive directors. The former does not do a full-time job like the latter.
Thus, increases in remuneration of the former will often come under greater scrutiny. Amid the inflationary environment which follows closely on the heels of the COVID-19 pandemic onslaught, it comes as no surprise that everyone is feeling the pinch. Many have lost jobs or taken substantial pay cuts.
At times like these, increasing fees and remuneration substantially without a valid reason will incur the wrath of many. It will be viewed as not being empathetic with the sufferings of minority shareholders and other stakeholders.
The board is expected to be empathetic regardless of what their human resources functions and consultants may opine or recommend. After all, these are only opinions and recommendations. The board is expected to exercise good judgement.
Factors to look at
The remuneration of the non-executive directors should correlate to parameters which are within their control. Non-executive directors (including boards) and management should be evaluated on how effective they are, how efficient they are, and how economic they are as compared to their sector peers.
These are the measures that should be used to justify remuneration increases. Market capitalisation has little correlation to performance and is not a just basis to increase remuneration. Effectiveness and efficiency matter. Cost control matters.
Bottom line improvements per se should not be a factor to justify remuneration increases. This is because bottom line improvements arise from two factors; one that is within the control of the board and management and the other which is outside their control such as macroeconomic factors.
Examples of the latter are higher CPO prices for plantation companies (substantially due to the Ukraine-Russia war and the Indonesian policy to curb exports), increase in average selling prices for glove companies (due to supply-demand mismatch at the height of the COVID-19 pandemic), and rising chip prices (due to global chip shortages) for semi-conductor companies.
For the board and management to take credit for the increased profits arising from these external factors is not right. The price increases do not arise from their doing.
When the improvement of bottom line is due to factors beyond the board’s control, directors should not take credit. Likewise, they should not be penalised when the bottom line is affected due to external headwinds that are out of their hands.
The increases in directors’ remuneration should correlate to how they perform concerning matters within their control. For oil palm planters, these include the productivity and efficiency of the estate/company, eg. the yield of fresh fruit bunch (FFB), oil extraction rate, mill utilisation and re-planting progress.
If they are in the upper quartile, then they are entitled to enjoy remuneration like their peers in the upper quartile.
Fair deal
Also, aspects such as complying with the Malaysian Sustainable Palm Oil (MSPO) and Roundtable on Sustainable Palm Oil (RSPO) as well as resolution of the Withhold Release Order (WRO) issued by the US Customs and Border Protection (CBP) should be part of the KPI of both the board and management. The same goes to the glove companies and semiconductor companies.
Boards should also play their role in ensuring the right strategies are in place to ensure the company remains competitive against its peers. These include things such as the application of automation and mechanisation to address labour shortages and improved working conditions.
Other important elements to consider in today’s business environment would be the incorporation of material sustainability risks and opportunities in performance evaluation of the board and management.
Lastly, large firms are inherently more complex and complicated, thus their executives and directors face greater issues and problems. As their responsibilities and risk are greater, their remuneration must be commensurate with the commitments and responsibilities of these directors.
These factors are used to evaluate where a company sits relative to its peers in the sector. If the company finds itself in the upper quartile when compared to its peers, it is legitimate for the board to expect remuneration like its peers.
Generally, minority shareholders do not begrudge the increases in directors’ remuneration. They reckon that quality comes at a price. Minority shareholders expect the basis used to
increase remuneration be fair and just. They expect boards to enlighten them what it is that the board had achieved to justify the remuneration increases. – July 4, 2022
Devanesan Evanson is the CEO of the Minority Shareholders Watch Group.
The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.
