Thursday, June 26, 2008

Remunerating NEDs - changed expectation

There is much greater "risk" associated with being a member of the Board than ever before. Role and expectations of the non-executive directors (NEDs) are evolving to be much more engaged with the company's culture, strategic direction, leadership development and compliance. These changes are driving the remuneration model for NEDs as well as the professional expertise required of NEDs.

Experienced, vigorous and genuinely independent non-executive directors, as one of the most important and effective safeguards against harm in a free-enterprise system. Investors will not have confidence in companies or the capital markets, unless they trust the governance structure and culture of companies and markets.

Given the integral role that independent non-executive directors play in corporate governance arrangements, it is essential that the office of a non-executive director remains attractive to experienced and skilled individuals. It is in the interests of companies, shareholders and the capital markets that non-executive directors are remunerated appropriately.

Although non-executive directors should clearly be accountable, the role should not be overburdened with excessive or unreasonable legal liabilities and other risks which discourage competent individuals from contributing to keeping corporate processes open, prudent and trustworthy.

Board remuneration is shifting away from "fixed term" fee to participate in meetings toward a pure retainer approach to compensate for involvement. Greater differentiation in compensation for committee service to recognize the unique qualifications and responsibilities associated with
certain roles, such as audit committee membership.

So the question is - how should the remuneration be structured to drive the expected outcomes from the boards of the future?

Some of the cool things that are working for several companies are:

- Less reliance on stock options and greater use of full-value equity
- Committee chair meeting fees as different from committee member fee
- Fee associated with a specific role - e.g. Driving the Leadership Philosophy or Setting the vision of succession management

Other best practices are welcomed

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