A general principle of governance, at least as applied to public companies or regulated businesses, is that there should be a strong and independent element on the board. A board would then usually consist of three types of directors; the executives whose principle job is to manage the company day-to-say, non-executive directors who would typically represent the interests of major shareholders and directors who are independent of both management and major shareholders and by definition must be non-executive. In this article we have considered fee practices for both types of non-executive directors and referred to them as “NEDs”.
The roles and responsibilities of NED’s are quite distinct from executive directors; their duties should be primarily oversight of their company’s affairs and their commitment would be part-time. As such, the level and structure of their remuneration should be expected to be different from executive directors. Indeed, owing to the fact that NEDs are not employees of the company, their compensation is often referred to as fees, rather than remuneration.
In establishing the level and structure of NED fees, the following principles can be applied irrespective of the country:
- Fees should reflect the time spent by directors. If fees do not, then directors will find better things to do with their time. Larger, more complex, companies would be expected to need more time from their directors.
- Fees should reflect the level of responsibility that a director has. Directors of public companies have wider responsibilities. Regulated industries, especially financial services, place a lot more responsibilities on directors.
- The fees should not compromise the independence of the directors. Fee levels should not be so high that independent NEDs would be hesitant to challenge major shareholders or, in exceptional circumstances, be prepared to resign. The fees paid by one company should not be the primary source of income for an NED. Further, the manner in which fees are paid should not compromise, or even be perceived as compromising, their independent oversight and judgement.