Investors should be worried – sourcing qualified board directors is the next big challenge, as a part-time duty fast becomes a full-time commitment

Non executive directors may become a thing of the past. The workload is building up so that at some time in the near future a part-time job will become full-time, and so effectively “executive”.

Hector Sants, chief executive of the UK’s Financial Services Authority (FSA), has elaborated further on the standards he expects from key participants in the governance of FSA regulated firms.

In a speech (see HERE) delivered on 12 March 2009, in which he outlined the FSA’s new “intensive supervisory model”, Mr Sants considered the role of non-executive directors. He stated:

“The greater engagement of shareholders and non-executives will be central to this improved regulatory proposition…..Non-executives will need to commit more time and raise their technical skills to exercise rigorous oversight. These changes will no doubt warrant more support and indeed compensation for these individuals. They will also however, need to be more willing to challenge executives. All of this suggests that non-executive directors, as others have already observed, will need to become more like full-time ‘Independent Directors’.”

Alas, we have to agree with Mr. Sants.

The FSA remuneration principles, and the likely implication of APRA’s prudential standards to be released in the week of 18 May will, in effect, require remuneration committee directors to become extensively engaged in the development of remuneration policy for all employees and, further, oversee the robustness of performance and performance measurement both before and after the fact. In the larger banks and insurers this may be interpreted as an additional layer of audit, but this time on managerial accounting measures incorporating risk, rather than regularly audited statutory financial accounts.

With the very significant increase in NED workload, liability implications of the decision of Mr Justice Gzell in the James Hardie case (Australian Securities & Investments Commission v Macdonald (No 11) [2009] NSWSC 287), and an unknown but most likely shallow qualifications pool required for comfortable compliance with the new APRA regulation (and the likelihood that some aspects of this will be adopted in the non-financial sectors), it is becoming a very tough task to source the right people for NED vacancies.

If Mr. Sants is right, who among our current major company NEDs wants to take on the job full-time? Most have already had their dose of full-time executive jobs. Been there, done that. They did not sign up for what is coming. So, if they call it quits, where will Australia source its new generation of NEDs? What will boards have to pay individuals who, as full time executives, probably earned at least double the full-time equivalent of NED pay now?

In addition, what will be the implications for management structures and remuneration? Will CEOs become even more engaged on board than on operational matters, as NEDs become required to delve into their traditional operational patches of staff pay policies and practices?

The grouchy CEO having to “suffer” occasional and “invasive” queries from part-time NEDs and monthly board meetings is also fast becoming a dinosaur him/herself. They will need replacement by engaged, diplomatic, responsive CEOs properly attentive to directors’ concerns on governance, succession and strategy.

And the on-going operations of the company? Perhaps we may see more chief operating officers, much like the US model. The outcome will be much higher costs.

But even more worrying is the sourcing of NEDs willing to be more full-time than part-time. One of the attractions of a NED job is precisely its part-time nature. Large increases in NED pay may not be enough.

© Guerdon Associates 2024
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