Shareholders are paying the fees of non-executive directors (NEDs) and therefore, as part of an active ownership agenda, we need to be able to evaluate whether that money is being spent wisely and that there is sufficient time being devoted to the role.
Broadly, the methodology used by proxy voting advisers is that a NED, or executive director, can have a maximum of ‘five points’. If this is surpassed, they are deemed to be over-boarded and there is a concern they are spreading themselves too thinly and cannot devote sufficient time to the positions they hold.
The number of points they have will depend on the position(s) they hold, for example:
NED position = 1 point
Non-executive chair = 2 points
Executive position = 3 points
Executive position + non-executive chair at another company = over-boarded
While a points system is a helpful calculator, it can be a blunt tool and assigning ‘points’ based on the positions held is not a fool-proof approach. In reality, it is rarely this straightforward.
Often, not enough thought is given to differing workloads, time commitments and demands of the various types of positions. There can be a real difference between the workload for an investment company versus an operational company; and within investment companies there will also tend to be variations.
For example, being a NED on an equity investment trust usually has a less intense workload than the same role for an infrastructure focused investment trust – this is reflected in the number of meetings, as well as the fees paid to NEDs in recognition of the time commitment, regulatory risk and responsibility.
Within operational companies there are also differences. Being a NED on the board of a global bank will bring higher level complexity in comparison to the same position for a more UK-focused bank. Indeed, if we take the example of two UK listed banks that meet these criteria, the former pays the chair double the salary of the latter.
What’s more, NEDs are usually not just on the board, but are also members of committees. Being a member of a committee is usually less onerous than being the chair of a committee, and not all committees are equal. The number of meetings and the workload associated with committees will vary.
Usually, only positions in publicly listed companies count towards the points system that proxy voting advisers and some investors use. ‘Day jobs’ are not counted unless they are an executive position, and positions in private companies, not-for-profit boards and pension scheme trusteeships are not calculated.
The responsibilities at a private company will mimic elements of a listed company and may even require a NED to be more hands on. The Pensions Regulator, for example, states that “boards should meet often enough to maintain effective oversight and control. In most cases this will be at least quarterly”.
With regards to the not-for-profit sector, if we consider a typical meeting schedule for a large charity it will typically involve around four board meetings a year, each taking half a day, plus an off-site strategy day. On top of this, trustees usually have committee responsibilities, which might mean an additional four or more meetings a year. Being the chair of the board or one of the committees adds to the responsibilities and workload, and in some instances even more time will be required, with some positions advertised with an expectation of two to three days a month dedicated to the role.
The time spent travelling to fulfil these roles also needs to be added into the calculations. While many boards will conduct some of their meetings virtually, many will now ensure that a good proportion are conducted in person.
So, how do we judge all of this?
Comparison of investment trusts:
|Infrastructure fund 1
|Infrastructure fund 2
|Equity fund 1
|Equity fund 2
Comparison of operational companies across different sectors (all are in large-cap UK benchmarks):
The current points system is a helpful starting point and a foundation to build upon, but a qualitative assessment would be a useful addition as it would help shareholders undertake more informed evaluations, and therefore voting decisions.
We would suggest best practice would be to consider what type of company it is, as well as what the other non-listed company responsibilities are. For all positions held, including those at non-listed companies, consideration should also be given to what the board calendar looks like, whether there are additional committee chair responsibilities, and what fees are being paid for each non pro bono and/or pro bono position based on the time required to fulfil the role to ensure a robust assessment can be made.