I’ve got a strong opinion that a lot of ASX directors don’t get paid enough for the risks they confront. Why is this the case?
Compensation is rarely the primary motivator
Many directors have had very successful commercial careers prior to taking on their position - they've been CEOs, CFOs and in the C-suite of large corporates. They have an enormous amount of knowledge to share and they're willing to put their reputation, and themselves financially, at risk by sitting on a board.
Most people will do substantial due diligence before joining a board. They’ll want to know a lot about the company, where it's heading and what the risks are. Remuneration is normally the last piece, it won’t even be discussed until the business has passed their due diligence. By this stage there’s already a reasonable degree of emotional commitment to the organisation, regardless of compensation.
The risks are not always obvious
Even though they’re fully committed to the organisation and the management, many new NEDs don’t realise the full extent of the risks that they take on personally as a director of a public company. There’s a conceptual understanding of personal liability, but it isn’t until something goes wrong that they realise what they’re really exposed to.
When a new director is sitting at home and they've got a writ on their desk, a class action to face, or they're being harassed by a regulator because the company is undergoing an enquiry - then it becomes a reality. At this point they may consider whether the remuneration they are receiving is commensurate with the thousands of hours they are expected to put in and the risks they’re taking. Of course, many will choose to put up with the stress if they believe they are being fairly rewarded for their effort.
Essentially it comes down to a risk reward trade-off. Too often, when the crisis hits and directors realise the true nature of the equation, many directors find that it’s not in balance and they walk. That’s why it’s not uncommon for directors to exit companies very quickly after a difficult time has passed. Sadly many don’t choose to sit on another board.
The role of a director is not easy
I’ve seen a number of newly listed companies recruit some really talented aspiring directors onto their boards. As the businesses struggled through their first few years the directors start to realise that the job isn’t as easy and glamorous as they thought it would be.
The penny usually drops at about the second or third conversation after a crisis. At this point the company perhaps hasn't achieved its forecast, the shareholders are angry or they can't raise the money they need. It’s then that the directors realise just how tough the role is. The crisis is not going to be resolved easily, and if it doesn’t get resolved they may be personally exposed. It may not be financial, but certainly their reputation is at stake.
The kudos, remuneration and sense of fulfilment isn’t always enough to compensate for those risks. While directors on the top 50 ASX companies are generally remunerated well, it’s not uncommon for a director outside the ASX100 to be paid less than $100,000 for their role.
Of course the company must also strike a balance. If a potential director is just focused on their income, then they’re in it for the wrong reasons. They're all about themselves and the income they're earning, not about the contribution that's being made and why they're actually being considered for the board role.
In the end, companies want directors to be committed. They want people who are in it for the long term and able to contribute to the business. In order to achieve this they need to fairly remunerate them for the risks they’re taking.
This article was first published on The Resolution.