Dialogue: Corporate crown sits heavier on the head

By OLIVER SAINT*

Many thousands of words have been written and spoken recently about the Contact Energy proposal to increase the fees of its directors, so it is perhaps timely to set out the regime under which corporate structure operates.

It is part of a wider arrangement that has attracted the name "corporate governance."

Sadly, it is an area that even now receives minimal comment in annual reports.

To use the words in the Contact Energy annual report, "The board of directors has overall responsibility for the management of the company and all decision-making. The board is responsible for the appointment of management and sets the strategic direction of the company."

The duties and responsibilities of a director are set out in the Companies Act 1993 and at least one board member should be familiar with other legislation.

The responsibilities of directors are indeed very onerous. The days when it was considered a sinecure to be appointed are long gone and I would be prepared to wager that there is now no listed company director who is unaware of what is required of a board.

A table recording directors' meeting attendance is now usually shown in annual reports and this helps shareholders come to grips with the number of "official" days a year in which a director participates. However, the actual time involved is very much longer.

Each meeting will involve the receipt from the company of agenda papers that can often include detailed reports needing close scrutiny. There may be calls to fellow directors or management for clarification or further information.

Two or three extra days may be needed so that a director can be up with the play.

Fees for a non-executive director will depend on the responsibility and skills required and will be set at a rate that is reasonable in relation to the size and standing of the company.

Directors should not be expected to have their fees adjusted for performance. There should be a rate for the job and unless a company is prepared to pay a reasonable fee then it will fail to attract quality people.

There are accounting firms and specialist consulting organisations that provide benchmark guides for directors' fees.

One of the reasons that shareholders will see requests for what appear to be huge increases in fees is the habit of boards to postpone consideration of increases until a favourable climate is available.

Another reason is that overseas ownership brings with it overseas directors who have their own idea of perceived rewards.

Where does performance fit into this scenario?

Well, this is where the chairman and chief executive face the music. The chief executive is mainly responsible for company performance. But if performance is allowed to fall for a long time then the chairman must be held responsible for failing to take action in replacing the chief executive.

The ultimate weapon for the shareholder is in the re-election of directors. This agenda item is taken for granted by many shareholders but is the only way to express concern.

Cutting directors' fees may mean only that less-qualified directors are appointed.

If a company has a majority shareholder then the minority shareholders will find it more difficult and may have only one option after criticising the re-election of directors - sell the investment.

This is easy to say but more difficult to put into practice. But it can safeguard savings.

* Oliver Saint is an Auckland-based investment analyst.