Firms need to strike a balance
With a steady increase in listings and the parallel adoption of international corporate governance standards, China faces a looming shortage of professionals. The number of suitably qualified individuals ready to act as independent non-executive directors (INEDS) may not meet growing demand, meaning that companies will have to compete harder and perhaps pay more to secure the requisite knowledge and expertise.
The issue is highlighted in Ernst & Young's 2011 report on executive compensation on the mainland and Hong Kong, which was released last month and suggests that listed A-share companies, in particular, must remain aware of the changing 'market' for INEDS.
'If you want to attract people to perform this role, who have limited time and other responsibilities, you should compensate them [accordingly],' says Vivian Li, executive director for China performance and reward at Ernst & Young. 'The talent pool is still very limited, but demand is rapidly increasing with more companies going for IPOs [initial public offerings] every year and even non-listed companies feeling they should meet the same requirements for non-executive directors.'
The report puts median fees for INEDS in China at 50,000 yuan a year (HK$61.037), without specifying the number of days or meetings that may be involved. Li notes, though, that performance expectations are becoming more clearly defined. Shareholders, auditors and potential investors are looking for evidence of active participation and constructive input in the boardrooms. And, especially in the better-run companies, INEDS are getting to grips with the concept of challenging, questioning and initiating - and not simply waving through a succession of board resolutions.
Regarding levels of compensation, Li describes the balance to be struck. If too low, companies simply won't attract good people ready to take on the risk, responsibility and work entailed. If too high, INEDS may be 'afraid' to raise a dissenting voice, unwilling to lose out on what amounts to easy money. Li says: 'Companies need to motivate non-executive directors to perform their role. But in my personal opinion, it is not fitting to [tie their rewards] to the company's financial targets.'
Andrew Weir, a partner with KPMG China, oversees governance matters and hosts the firm's quarterly forum for non-executive directors. He believes the proposed corporate governance code in Hong Kong, which should come into effect by the end of the year, is a move in the right direction. It spells out where INEDS should be making their mark - areas such as accountability, quality enhancement, involvement in committees, advising on leadership, and getting the company secretary to exert more influence on corporate governance issues.
'It is a step towards putting more accountability and responsibility on the shoulders of non-executive directors,' Weir says.
He notes, though, that relevant questions remain unresolved. For example, should there be a cap on the number of directorships an individual can hold and, if so, what should that be?
As a point of reference, Weir cites Britain's code of corporate governance which came out last year. This stresses the non-executive director's role in setting and challenging strategy, as an indication, across the corporate sector, people hold an average of two directorships involving 26 days' work a year.
'Obviously, it is not the same here,' Weir says. 'There is no cap here, although five directorships is a useful rule of thumb. The more important sign-off is that directors contribute enough time. In Hong Kong, fees may be a red herring; the key for non-execs is time, access to information, and independence.'
For the record, fees usually range from HK$100,000 to HK$400,000 per annum, which comes with the expectation of attendance at meetings. Unlike in Australia, where a corps of business people regard non-executive work as a main source of income, the majority of INEDS in Hong Kong are not doing it 'for the money'. Broadly speaking, the motivation is to share expertise and give something back to the business community.
However, Weir notes, the new code, bringing more accountability, involvement and expectations, may signal a shift in perceptions about the role and its rewards.
'The 'risk' is likely to increase, requiring adequate and appropriate insurance, as it moves from a best effort to a more structured role,' Weir says. 'So, I would not be surprised if there is pressure to increase remuneration.'
In this respect, Hugh Gozzard, principal, enterprise risk services for Deloitte China, sees the need to tread a careful line. In theory, higher compensation would mean two things.
More qualified people would be prepared to act as INEDS, and individuals would feel less pressure to take up too many positions.
'What is needed is education on the role and the value an INED can bring to an organisation. In fact, a key area they should focus on is [executive] director compensation. Though a highly sensitive issue, they should be prepared to scrutinise and challenge executive compensation plans,' Gozzard says.