A series of events in the last few months, most notably at Enron and Marconi, has thrown the spotlight on the role of the non-executive director. In the present environment it is not surprising that we are beginning to hear stories of companies
finding it very difficult to recruit non-executive directors – especially in the US – and of individuals deciding it is not worth the risks any more, and resigning their portfolio of directorships en masse.
So what can be done about it? For one thing, we should stop trying to get effective corporate governance on the cheap – pay a fair rate for the job in terms of experience required and the responsibility carried, and then demand the highest levels of performance.
The non-executive's job carries identical legal and fiduciary responsibilities to that of the executive director. However, it is facile to claim that the pressure is as great. Certainly there can be great pressure, especially at times of corporate transactions or business problems, but the CEO and other executive directors are not only on call 24 hours a day and seven days a week (as is the non-executive), but they are much more likely to be called. I do not therefore claim that the non-executive should be paid at the same rate pro-rata as executives – but the gap should be narrowed.
Non-executive directors typically get somewhere between EU1,500 and EU2,000 per day worked. This has to cover all the non-executive's costs such as running an office, a car, pension provision and so on.
This daily rate is clearly out of line. It is less than the same people would charge on a consultancy basis – for which, incidentally, they would probably carry little or no legal responsibility.
The history of paying low fees for non-executives is rooted in the 'chairman's chum' method of selection, and the 'just come along for the lunch' method of carrying out the duties. It belongs in the past.
Another justification that is sometimes put forward for the low fees is that they must not be enough to compromise the independence of the non-executive. But can only the rich be trusted to resign on principle?
Some say that the way to address this disparity is to pay non-executives in shares, or grant them share options so as not to burden the company with higher fees. I have no problem using shares – so long as it is a fixed amount of money converted into shares at the current price. After all, the director could just use the fees to buy shares in the open market. I no longer believe it is appropriate for non-executive directors to be granted options. The rationale is to align the director's interests with those of the shareholders. But I do not accept that
non-executives only understand the shareholders' interests if they have a related financial benefit.
The non-executive also has a wider governance remit under which they must ensure that the share price reflects reality. Reward packages carry an implicit message as to what really matters, and they can influence behaviour. An option-based package carries the message that share price matters above all else. It is not many steps from here to the perfectly legal use of special purpose entities to flatter corporate results at Enron. In addition, the board needs people who will have no vested interest in supporting a certain revenue recognition policy. This kind of issue always makes a difference to option holders.
Above all, if we are serious about wanting non-executives to carry out the corporate governance role diligently and in the spirit of giving the shareholders a true and fair view of the company, then we should take the job seriously and pay a fair rate for it.