While 2020 was a year of fluctuations and novel challenges, the remuneration of nonexecutive directors continues to be increasingly linked to the performance of businesses, as well as their ability to adapt to new challenges and new demands from stakeholders and shareholders, says professional services and advisory multinational PwC South Africa Reward team, People and Organisation division, Tax, Legal and Governance leader, associate director and co-lead Leila Ebrahimi.
Ebrahimi is the editor of the PwC '2021 Nonexecutive Directors Practices And Fees Trends' report, released on January 19.
"Pay linked to business performance was a change that had to happen. During the past year, we also saw suppression of pay in certain companies, while other companies had to pay more ad hoc remuneration to nonexecutive directors for holding additional meetings to grapple with challenges faced by companies. Boards often had to deal with unprecedented complexity," she says.
Nonexecutive remuneration practices and policies are evolving and there was broad support for turnaround incentives as part of remuneration, which saw companies review remuneration linked to new strategies that had to be developed to weather Covid-19 restrictions and business interruptions.
"In 2021, we anticipate that businesses will want to bring about changes on their own terms, and this is directly linked to the advice and strategies developed by the board. Additionally, there was an unprecedented focus during the year on the employee, which included remote working, health, mental health and performance."
This focus on people is also reflected in growing calls from, and activism by, shareholders that companies develop an effective environmental, social and governance (ESG) strategy and embed it within organisations.
Developing an effective ESG policy requires that companies define their purpose - beyond only the simplistic maximising of profit - and in line with the real risks and threats presented by degradation of the environment and inequality in societies, emphasises Ebrahimi.
"ESG is tricky to embed into organisations, as it is a diverse, multifaceted and complex concept with far-reaching implications. It is vital that organisations start by considering how their organisational purpose reflects and incorporates ESG and, beyond this, how their remuneration strategy and policies give effect to this.
"This link, and an honest assessment of which ESG risks and opportunities are material for the organisation, will form the basis for incorporating ESG metrics into executive pay structures," explains Ebrahimi.
"There is a real appetite for change and investors and stakeholders are demanding that companies move beyond what had been perceived to have worked in the past and to look to the future, and how value is created or destroyed over a longer time frame.
"While some ESG objectives are short term, most environmental and social objectives will not be met over three years, but over longer timeframes," she says.
To effect such complex short-, medium- and long-term objectives requires that nonexecutive directors be measured on the progress made, strategies developed and actions taken with regard to ESG.
"What gets measured, gets done, and incorporating ESG measures into variable pay demonstrates a clear commitment to ESG impact, ensures buy-in from the management team and drives the right behaviours to common, agreed goals," says Ebrahimi.
Diversity and integrating ESG into company strategy underpins one of the key themes of the PwC report. Boards and nonexecutive directors are central to this, and impact on what a business looks like and reflects what its organisational purpose is.
"Evaluating ESG measures used by JSE-listed entities, we found that 95 entities have disclosed clear performance links to ESG, of which 68 have integrated ESG metrics into short-term incentives, with 27 integrating ESG into long-term incentives."
Further, board diversity remains a highly relevant topic. Increased diversity is associated with better performance and is linked to more developed boardroom views on ESG, says Ebrahimi.
"2020 has shown continued development in this area by proxy advisers and institutional investors, though our experience suggests that South African organisations need to outline a strong business case for a more diverse board, and adopt robust diversity policies for real, meaningful change.
"The JSE listing requirements provide for the introduction of voluntary diversity targets and the publishing of a board diversity policy, but seem to provide no consequences for noncompliance. Our analysis suggests that, where voluntary diversity targets are set, they are gaining traction slowly but perhaps too slowly," she notes.
Meanwhile, PwC proposes in the report that nonexecutive directors be empowered with company information and data that is relevant to their roles.
"To effectively fulfil their roles, nonexecutive directors need access to quality, up-to-date and relevant information. Remuneration committee members often feel that they do not have quick and easy access to the relevant data analysis and insights which would help make decisions and effectively discharge their responsibilities."
Executive dashboards - software programmes that provide overviews and analyses of company data - provide a summary of relevant people and financial data, and improve the efficiency of decision-making. PwC proposes that these principles be applied to the data remuneration committees need to consider in the form of a dashboard for board members.
"The risks and responsibilities of a nonexecutive director are significant and decisions on executive pay are becoming more complex. Similarly, board discussions are increasingly complex, yet must address the issues with limited time. They often feel inadequately equipped with data."
While nonexecutive directors are not typically involved in the daily running of the organisations, they nevertheless must make overarching decisions that will impact on the companies, stakeholders and shareholders, she emphasises.
"Effectively interrogating the complex range of issues facing companies can be achieved by using technology and data to give non-executive directors a tool. This empowers them with information and allows them to make informed decisions to discharge their responsibilities more effectively."