The directors' cut

by Linda Sanders / 10 January, 2013
Company directors may be losing their mana, but they perform a valuable service.
The director's cut
photo Getty Images

Directors don’t sit highly in the most-trusted ratings – the top spots are usually filled by the likes of nurses and firefighters. Although directors often aren’t specifically identified, those termed business executives sit alongside politicians, car and real estate salespeople – and, yes, journalists – near the bottom of the rankings. There are variations between countries but broad trends tend to transcend boundaries.

In New Zealand for many years, directors travelled under the radar. They operated like a secret society and few people had any idea of what they did. Their role is still a mystery to many.

More recently, they have lost significant mana for two key reasons: the high – some say excessive – pay that a small proportion of (mostly managing) directors receive, and the failure of finance companies, including fraudulent behaviour by directors. It’s fair to say the sins of a few have been visited on the reputations of many.

The other criticism boards of directors face comes when they propose fee increases despite a poor profit performance. New Zealand’s top 45 companies pay an average $1.6 million to their top executives, though for all company CEOs it’s a far more modest $70,000-450,000. Public-sector chief executives average $340,000. In the boardroom, pay rates reflect the part-time nature of roles of these directors. The average rate for a non-executive director of a New Zealand company is just under $29,000, according to a survey by the Institute of Directors.

Non-executive directors of state-owned enterprises get just over $35,000 on average, and those of overseas-owned companies fare best – a median of $63,000. Last year, the average increase in director pay was less than 3%. Australian directors’ fees are roughly considered to be about 50% higher than here.

Non-executive directors are exactly that – they are not managers of companies. They provide oversight of an entity’s strategic direction, and need to balance the interests of shareholders, stakeholders and the company.

Even though many people have the idea it’s pretty much a walk in the park, directors have heavy burdens. The most important one is always acting in the best interests of the company. That’s where the term fiduciary comes in. It means trust – and directors hold a position of trust on behalf of the company for its owners, the shareholders.

Looking after the company’s interests doesn’t always have to have a profit motive, but it must include ensuring the company operates in good financial health.

One challenge of being a director is balancing the demands of different individuals and groups with an interest, such as shareholders, staff, communities and customers. Profit can’t always be the main motive, but it is an important consideration because without it a company won’t survive.

Balancing short- and long-term profit potential is another tricky dilemma. You might make better profits by not investing in infrastructure, for example, but all you are doing is delaying the inevitable. It’s the equivalent of not spending money on maintaining your house or car – you can put it off for only so long.

To make these decisions, directors invest a lot of time learning about how their enterprise operates and understanding the wider context – the economy, the political landscape, the communities in which they operate, the environmental impacts, the concerns of staff – and the expectation of shareholders for a return on the money they have invested.

It’s not an easy job and the money most directors receive is hard-earned payment for a lot of risk and careful judgment. They put their reputations on the line. Directors are sued – or prosecuted – if they screw up. Despite all this, competition for these roles is intense. With the noise and bad mouthing that goes on, some ask whether it’s worth the hassle. And that’s a worry, because we need the best possible people to lead our companies if we are to succeed as a society.

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