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Room for growth in non-executive director remuneration

31 Oct 2023

KUALA LUMPUR: There is potential for upside in terms of remuneration fees for non-executive directors (NEDs) in Malaysia, according to Institute of Corporate Directors Malaysia (ICDM) chief executive officer Michele Lim.

Lim said there was a huge gap between the fees received by NEDs and executive directors (EDs).

“Whether it is right or wrong, companies need to be able to compare according to the responsibilities of the NEDs today,” she said during a briefing on the Malaysian Board and Senior Management Remuneration Practices Report yesterday.

She said it was important to remember that remuneration was not just financial compensation, but also packages that aligned with a company’s performance, objectives and market standards.

Lim added there were many factors involved in the remuneration amount, like affordability or what industries these companies are in.

“The important thing is to have a baseline so they are able to compare and pay enough to get and retain the right people that sit on these boards,” she said.

Willis Towers Watson Public Limited Company (WTW) managing director and global practice leader, Executive Compensation and Board Advisory, Shai Ganu concurred.

He said that according to the report, 78% of the companies surveyed felt that the current NED remuneration across all sectors of RM113,750 was fair from the lens of accountability and workload.

“However, if we are looking at it from a competitive aspect, companies with the same market cap and same industry in Singapore earn almost double. This means some NEDs might say it isn’t fair. But I do agree that from a global vantage point, Malaysia is on the lower-end right now,” he said.Shai added if companies were to increase their remuneration fees, this would only attract a different calibre group of professionals who want to sit on boards for various but good reasons.

“These professionals can help serve the boards’ mandate. It is something I call opportunity cost. Rather than have directors who want to serve on boards overseas because the pay is better, we want high-calibre people to sit on boards here. This will help Malaysia in the long run,” he said.

WTW managing director, head of work and rewards business, South Asia, Asean and Malaysia, Tan Juan Jim said in general, company NEDs are from the same network, but today, much of that has shifted.

“Companies are looking beyond that, they are seeking the professional element which translates into the younger generation that can provide these different skill sets because the disruptions are coming from here,” he said.

Lim then gave an example of how the banking sector today is looking for board members that are not within the sector.

She said this meant placing first-time directors in companies that could serve and move the needle because of the changing mindset in sectors.

“Now we have more diversity on boards, we have candidates that can do the job but are not sitting on boards just yet. We believe that refreshment of boards is critical today,” she said.

Furthermore, Lim explained that this was why disclosure and transparency was vital in today’s landscape. She said one size will definitely not fit all, however it was important for companies to know the range so that equitable remuneration can work.

“This covers benchmarking against peer group, time commitment, scope and complexity, company size and profitability, onerous responsibilities to the fit of the individual’s skills, experience, performance and qualification,” she said.

Meanwhile, the report summarised the review of 176 of Malaysia’s top 300 public-listed companies and 193 completed survey responses.

The review set out to identify three key factors which included the prevailing industry practices, remuneration levels by industry and company size, and quality of disclosure.

The survey stated financial services came out tops for highest director remuneration, while the technology sector had the lowest.

Separately, Lim said the lack of transparency in remuneration practices found were concerning because it not only erodes trust and confidence within the company, but also among the shareholders.

“This, in turn, may not align with the demands of stakeholders who want accountability, fair play, and ethical practices. Therefore, there is an imperative need for transparency and alignment with the company’s business strategy and long-term objectives,” she said.

Moving forward, Lim said some of the key actions that can be taken include conducting a board remuneration review regularly to enhance governance practices, having a robust and transparent board remuneration policy and procedure, and having more guidance and standardised reporting requirements among others.

“To address these challenges effectively, we need collaboration, consistency and a commitment to create a corporate environment where fairness and transparency are not just ideals but concrete realities,” she said.

Lim noted that this was not only an issue of numbers and policies, but about building a corporate culture that encourages and incentivises the right leadership, accountability and ethics.

This article was first published in The Star on 31 October 2023.