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Increased demands placed on non-executive directors as corporate gatekeepers to ensure ESG issues are on the board’s agenda: PwC report

Worldwide, boards are under increasing pressure to evolve and meet new business challenges and shareholder demands. Directors continue to face scrutiny from all stakeholders, causing board practices to remain in the spotlight.  In response to new rules and regulations, institutional shareholders are now looking to non-financial metrics as a means to analyse and predict the long-term sustainability of a company.


“Globally, institutional investment policies have placed environmental, social and governance (ESG) issues firmly on their agendas,” says Gerald Seegers, PwC Head of Human Resource Services for Southern Africa. “Nearly every investment fund is seriously considering disinvestment in companies where ESG, or ‘impact investing’, is not clearly defined in their company’s strategy.


“Responsibility for ESG falls squarely on the board. The directors are deemed by the shareholders to be answerable for ESG and sustainability,” adds Seegers. “They need to demonstrate their moral and legal responsibility to discharge their fiduciary responsibilities to their shareholders”.


PwC’s eighth edition of the ‘Non-executive directors Practices and remuneration trends report,’ issued today, continues to look at the ever-changing corporate and regulatory landscape.


As companies progress toward the third decade of the 21st century, investors are scrutinising boardroom decisions for any cracks in the way companies view the environment and the society in which they operate.


Shaping the boards of the future

Today’s executives are more focused than ever in ensuring that their boards have the right expertise, experience and diversity to be effective. “Engagement with stakeholders is becoming increasingly critical to the sustainability of organisations,” adds Seegers. “Having a sense of ‘sense of purpose’ requires an organisation to re-evaluate its role with all its stakeholders.”


According to PwC’s 2014 US Annual Corporate Directors’ Survey, listed companies in particular are under intense scrutiny from shareholders in terms of how they structure their boards and how the board is diversified. According to the survey, female directors are far more likely to consider board diversity more important than their male counterparts. In South Africa there are a total of 422 female non-executive directors serving on the boards of JSE- listed companies.  In Europe 80% of directors are male, down from 83% in 2013. Norway, Sweden and Finland continue to lead the developed world in their percentage of women directors on the boards of listed companies, with 36.1%, 27% and 26.8% respectively.


Board priorities and practices

The average time commitment of public company directors continues to increase to around 219 hours.  Directors want to spend more time on strategic planning, with the majority wanting at least some additional boardroom time and focus. We share those areas that board leadership has identified for improvement.  The influence of emerging technologies and increasing cybersecurity breaches are the two main IT concerns. Boards are devoting more time and attention to the critical issue of appropriate compensation of executives. Directors’ communications with stakeholders has increased across all the constituencies. Although a number of organisations have identified issues like sustainability and climate change as societal imperatives, it is interesting to note that the majority of directors say they are not having substantial discussions about corporate social responsibility issues in their boardrooms.


Regulatory trends in the boardroom

The debate on the level of executive pay continues as it is still at the top of the regulatory, legislative and shareholder agenda. Minimum shareholding guidelines are on the rise among South African companies and many of the Top 40 JSE-listed companies increased their minimum shareholding guidelines for executives between 2012 and 2014, with the result that minimum shareholdings now range from 50% to 500% for CEOs, and 50% to 300% for other executives.


The CEO-to-median-worker pay ration (“internal equity”) remains an issue high on the boardroom agenda. While the US SEC has been heavily criticised, the EU have proposed their slightly different but essentially the same ratio.


Fees paid to non-executive board members

Compared to non-executive directors, board chairpersons are paid a premium for their services. The median chairperson fee across the entire JSE has risen by 6.4% to R449,000 (from R422,000 in 2013). Board chairpersons are paid a premium for their services being the person considered to be the most capable member serving on the board of directors. The increase at median level for all non-executive directors serving on the boards of all companies on the JSE was 5.6% (2013: 4.3%). This saw overall fees increase at the median level from R288,000 to R304,000.


Increases awarded to non-executive directors for total fees vary between sectors, as well as company size within sectors. With current CPI at 5.8%, most increases were above that level. The financial services sector has again shown much restraint in the wake of new regulation, in particular the review of finance risk transformation practices. Total fees paid to non-executive directors large-cap companies in this sector increased by 3.1% to R820,000 (2013: R795,000).


The large-cap basic resources sector saw a 13.5% increase at median level for chairpersons. Total fees paid to non-executive directors increased at the median level from R804,000 to R898,000.The industrial sector, which accounts for 41% of the listed companies on the JSE, showed marginal increases for both chairpersons and non-executive directors.


South African state-owned companies are subject to the Companies Act and expected to adhere to the King III rules. The median fees paid to directors of those companies analysed, shows the chairpersons earning R828,000 and the non-executive directors R348,000. Both are higher than their private-sector counterparts.


Fees paid  in other African countries

For the first time, the report analyses seven markets outside South Africa (Botswana, Ghana, Kenya, Namibia, Nigeria, Tanzania, and Uganda), which have an aggregate of 385 listed companies with 1,958 non-executive directors serving on their boards. Not all companies publish a breakdown of individual non-executive remuneration and available data was limited. Overall, the total fee paid to chairpersons at median level for the seven selected sub-Saharan African exchanges is $41,000. Total fees paid to non-executive directors at the median level for the seven exchanges are $22,000.


Profile of a non-executive director

There are currently 2,217 (2013: 2,204) non-executive directors serving on the boards of JSE-listed companies. In South Africa, older chairpersons are gradually making way for younger chairpersons than were historically employed. Non-executives follow a similar trend with younger directors filling the positions. Overall, companies tend to encourage non-executive directors to serve on other boards, as this gives them other experience and exposure to businesses outside of the company. Non-executive directors of JSE-listed companies show higher levels of education and, based on their age profiles, much if not vast experience. Depending on the industry sector, levels of tertiary education among non-executive directors range between 58% (basic resources) and 77% (financial).


“The responsibility of directing good corporate citizens in today’s environment is a daunting task with ever-increasing risk and responsibility being placed on the shoulders of directors. The building of a sustainable future requires accountability from both executive and non-executive directors.


“Although directors are under increasing scrutiny, we believe they should be measured against their will to make a better world from where they stand and to make brave and informed decisions,” concludes Seegers.

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