In our related article in this newsletter on the minimum shareholding requirements (MSR) a majority of ASX 100 companies (86%) have a policy or guidelines requiring their non-executive directors (NEDs) to maintain a minimum shareholding (see HERE). Such minimum shareholding requirement (MSR) policies are also becoming more prevalent among the smaller companies.

So, it remains puzzling as to why we are not seeing an increased level of companies implementing NED fee sacrifice arrangements. It makes sense for all companies to implement an elective fee sacrifice for equity program for their NEDs. It need not be a mandatory program (although that can be administratively easier), but simply a program under which NEDs can elect to sacrifice a portion of their annual fees in return for share rights that automatically convert shares on a quarterly, six-monthly or annual basis. Similar arrangements can be made for most off-shore directors with only slight adaptations for their domicile’s tax regimes.

Proxy advisers have indicated in our Director Briefings that they consider such arrangements to be in the interest of the directors and shareholders – there is an increased opportunity for alignment of interests.

Fee sacrifice arrangements are a tax-effective way for the directors to build their shareholding without having to purchase shares from their after-tax income. Acquiring shares on a pre-tax basis with the tax liability able to be deferred for up to 15 years makes a lot of cash flow sense. We previously explained how the tax implications of establishing a fee sacrifice plan can be readily addressed (see HERE).

With the increased call for greater diversity on boards (in particular, gender, age, geography and ethnicity), there will be first time directors of varying ages who need to build their shareholding as quickly as possible. A fee sacrifice for at least 25% of fees can see them reach a one times annual fee shareholding within 4 years – keeping most investor and proxy advisers happy!

So when the board is next considering fee increases, board renewal, investor engagement, or changes to the pool, consideration of a NED fee sacrifice plan may be worth a place on the agenda.

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