Governance insights from the Directors’ Fees Report 2024/25
Directors’ fees have not been keeping pace with inflation, even after recent years of low (or no) increases.
The 2024 Directors’ Fees Report, produced by The Institute of Directors (IoD) and EY, is a key source of information on directors’ remuneration in the New Zealand market.
Few would dispute that the role of a director — be it on a private or public sector board or not-for-profit organisation — is increasingly complex. During the Covid-19 pandemic we lamented the ongoing uncertainty and craved a sense of normality.
Business as usual has since returned, but not as we remembered or wanted it. It has returned as a state of permacrisis. A portmanteau of ‘permanent’ and ‘crisis’, permacrisis captures the volatility, uncertainty, complexity and ambiguity created by the overlapping, and continual, nature of unprecedented events being experienced.
Similarly, what were once described as black swan events — a metaphor for unforeseen yet consequential events — in 2024 it’s hard to suggest that anything is, or should be, low-probability or unexpected anymore. Even the Covid-19 pandemic was foreseeable. In 2005 junior Democratic senator Barack Obama advocated for pandemic preparedness having analysed past pandemics and factoring in the impact of global air travel on disease spread.
Similarly, the July global IT outage which affected nearly 8.5 million devices and caused disruption to airlines, health and emergency services, banking and business probably should have been foreseeable. For example, in 2020 Google services including Gmail, Google Drive, YouTube and Google Maps experienced a short but widespread outage due to an internal storage quota issue; and in June 2021 thousands of companies were impacted due to a bad software update by US-based cloud company Fastly.
What’s known is that the business world and economy continue to change dramatically, bringing new challenges and new crises from geopolitics to generative AI and global IT outages. In an uncertain world, there isn’t one future or outcome to plan towards, but a range of scenarios. And even what used to be business as usual has changed, so it’s all just additive, and the board not only needs to add value, but to be a catalyst for rapid change.
To embrace not only uncertainty but to drive change, boards need to ensure that they have the skills, succession planning and structures in place to best respond to the organisation’s needs. Whether change is due to a crisis, or permacrisis, change is needed, and directors need to be aware of the risks and opportunities within their business and industry and innovate to mitigate risks and create opportunities.
With increasing complexity and workload, there is much to consider when setting or reviewing director remuneration.
Keeping pace or setting pace
High interest rates, high inflation and cost-of-living pressures have continued to stymie consumer and investor confidence. Inflation has had a significant impact on wage bills as well as supply expenses; but the tide is turning.
The Labour Cost Index for the year ended March 2024 shows private sector wage growth was 3.8 per cent, down from 4.5 per cent for the year to March 2023. Inflation for the same period was 4.0 per cent, down from 6.7 per cent for the year to March 2023. For the public sector (central and local government) the wage growth for the year to March 2024 was 5.4 per cent, up from 4.2 per cent for the year to March 2023, driven in part by a pay-equity settlement for nurses.
Despite continuing inflationary pressures, the drop-off in private sector wage movements aligns with slower job growth, fewer vacancies, rising unemployment and a weaker business outlook. Further, to date, there have been 6,247 public sector job cuts which adds to this picture. The unemployment rate rose to 4.3 per cent to end March 2024 up from 4.0 per cent in the previous quarter, the highest since mid-2021, with economists expecting it to surpass 5.0 per cent by December 2024 according to Treasury’s July economic review.
While the median annual fee movement for non-executive directors of minus 3.8 per cent reflects this contraction (with a median fee of $50,000), this follows an increase of only 0.9 per cent in 2023. Directors’ fees have not been keeping pace with inflation, even after recent years of low (or no) increases.
Once again, the largest fee movement was for trustees (13.8 per cent in 2024 and 9.2 per cent in 2023), followed by advisory board members (11.1 per cent). For trustees however, this followed no increases from 2020 to 2022 and, for both, it reflects that they were the lowest two base rates moving from $13,100 to $14,912 and from $18,000 to $20,000 respectively.
Nonetheless, there were some marked industry variations. For example, the construction and retail trades experienced the largest average fee increases of 12.8 per cent and 11.7 per cent respectively, well ahead of the average CEO and executive movement for the same period (1.4 per cent and 5.0 per cent respectively). Despite this apparent incongruity, he reverse was seen in 2023 with directors receiving an average fee increase of 0.2 per cent in the construction industry in comparison with CEO and executives receiving 13.0 per cent, and an 0.9 per cent increase for directors in the retail trade industry with CEO and executives receiving 6.7 per cent.
Despite some claims that directors are overpaid, non-executive director fees rarely increase in line with general employee increases or inflation. The Financial Markets Authority recommends that boards should have a clear remuneration policy for setting fees, and that fees should be “fair and reasonable and competitive in the market for the skills, knowledge and experience required”. Similarly, the NZX Corporate Governance Code states that “the remuneration of directors and executives should be transparent, fair and reasonable”.
Directors recognise that the dynamics for setting remuneration are different to wage movements and despite increased complexity and responsibility and ongoing crises and challenges, consider factors such as economic outlook and shareholder and investor sentiment. In fact, only 8.0 per cent of boards used inflation as their means for assessing fee movements. Further, this comes off the back of a substantial increase in the median number of hours non-executive directors are spending in their roles, 178 hours up from 132 hours in 2023. Of this, 60 hours are spent in meetings and the remainder is spent on other directorial duties such as meeting preparation and reading, discussions with other board members outside of formal meetings, conference calls, health and safety visits, coaching of the CEO or other senior managers, attending relevant training, functions and events, and travel time.
Having a remuneration policy in place and a robust, transparent and, ideally, independent process for reviewing directors’ fees provides analysis and evidence to support decision-making or for presenting to shareholders.
Almost half of boards (46.6 per cent) used some form of benchmarking to determine fee movements, but there are a lot of variables that need to be taken into account, even when using benchmarking, including complexity, size and performance.
Gender differences remain
Ensuring robust, objective and transparent review processes, seeking independent advice, and reporting on gender pay gaps can help to build trust and confidence in governance and close pay equity gaps. Understanding the data and knowing what is happening within your own organisation is critical for all decisions, and the gender pay gap is no different. Gender pay gap reporting is not mandatory in New Zealand, unlike Australia, UK and Canada, however, voluntary reporting still adds value and without the transparency of reporting it can be difficult to understand the full picture in the business and governance community.
Of the 4,077 individual directors assessed, only 33.8 per cent were women, albeit an increase of 4.8 per cent from 2020. Despite the latest stocktake report from the Ministry for Women showing that women make up 53.9 per cent of public sector boards (a majority for the fourth year running), as well as increases in ethnic diversity on public sector boards, this trend is yet to be seen across the private sector. For the year ended 31 July 2022, only 36.5 per cent of NZX50 directors were women, despite all of these boards having a diversity policy in place. Further, it reduces to only 31 per cent women directors for all listed companies.
In the Fees Survey, women were more likely to be in trustee (54.4 per cent) or executive committee/council (69.2 per cent) member roles. They were least likely to be in executive chair (12.5 per cent), advisory board chair (20.7 per cent), executive deputy chair (22.4 per cent) or non-executive chair (22.6 per cent) roles. While these are roles that typically pay less, they are no less important in their contribution to society and the economy, and they still face high levels of complexity, regulation, transparency and stakeholder scrutiny.
With the contraction in median fees for non-executive directors this year, the variance between fees for men and women has opened up again somewhat. Last year there was a 7.1 per cent gap between non-executive directors with women receiving $50,000 and men $53,800, however this year it has increased to a 10.0 per cent gap with women receiving $45,000 and men $50,000. The gap for non-executive chairs has increased to 17.9 per cent, up from zero per cent in 2023, albeit due in part to the increased sample size of women non-executive chairs reinforcing the gender pay gap. According to the Ministry for Women, the gender pay gap for wages currently sits at 8.6 per cent.
The pathway to directorships is most commonly through CEO and senior management roles. Under-representation of women at the C-suite level means that they will continue to be under-represented at the board level. The same applies for ethnic diversity.
Not-for-profit challenges
Governance of not-for-profit (NFP) organisations is increasingly important. As a society, we rely heavily on the vital work of the NFP sector across all facets of our lives — health, housing, education, transport, energy, social services, environment, arts, culture, sport and more. We also, sometimes unknowingly, rely heavily on the oft-invisible boards that govern these organisations. The size and scale of these organisations and the impact of their work is similarly variable, from small social clubs to school boards of trustees and multi-million-dollar national enterprises.
The complexity of governing an NFP organisation should not be underestimated. They are facing mounting funding challenges, increased transparency and reporting requirements, and amplified stakeholder scrutiny including by the public at large and government, against the backdrop of inflationary and cost-of-living pressures. But their risk and operating environment is the same as for-profit organisations. NFP boards need to navigate cyber risk, AI, climate change, health and safety, stakeholder pressures, compliance and more, more often than not, with less capacity and resourcing than for-profits.
With more than 115,000 NFP organisations in New Zealand, it is not surprising that 42.9 per cent of directors who completed the survey served on one or more Trusts and/or were on the governing body of one or more NFP organisation (39.9 per cent). For some, this was their only role, but for the majority it was an opportunity to support an important cause (37.0 per cent) or give back to the community (36.7 per cent), with many serving on multiple NFP governing bodies. Increasingly, despite requiring the same skills, knowledge and dedication as any other board, being on a NFP governing body is considered an opportunity to build governance experience (26.3 per cent).
The NFP sector has undergone some significant legislative changes in the past few years that impact directly on their governance. The new Trusts Act 2019 introduced mandatory and default duties for trustees with the specific aim of improving the governance of trusts and clarifying trustee duties. The Incorporated Societies Act 2022 provided perhaps the most significant changes including minimum requirements for committees, six specific duties of officers (reflecting common law), new qualification and disqualification criteria for officers, and the need for societies to re-register by 5 October 2028. Among other changes, the Charities Amendment Act 2023 broadened the definition of who is an officer, clarified rules on disqualification of officers, and introduced a three-yearly review of governance procedures to ensure they are fit for purpose, and to assist the organisation to achieve its charitable purpose and the requirements of the Act.
While these changes have impacted the governance landscape for most NFP organisations and present a number of challenges, they also brought opportunities to consider their governing rules, structures and processes as well as underlying purpose. What worked 10 or 20 years ago, or in the case of the Incorporated Societies Act 1908 itself, 116 years ago, won’t necessarily be relevant today, or support your delivery of the organisation’s purpose.
Along with the often underestimated and essential role NFP organisations play in society, the role of NFP boards can be nearly invisible. Despite the largest fee rise by role this year, the median fee for trustees remains significantly lower than all other classes of directors, and the 13.8 per cent fee rise for trustees similarly reflects the low base — $13,100 in 2023 increasing to a median of $14,912 in 2024. Of note, 60.6 per cent of trustee roles were unpaid.
By organisation type however, the median fee rise for NFP organisations (incorporated societies, charitable trusts, and unincorporated societies and trusts) was 9.0 per cent with the median fee paid similar to that of directors of crown entities, state owned enterprises and statutory boards whose fees include a ‘discount for public service’. While the ‘discount’ is part of the Public Sector Fees Framework it is nearly an unspoken rule within the NFP sector. Many donors and funders have traditionally wanted all of their funds applied ‘directly’ to the cause, with little regard for operational and administrative costs including staffing or board remuneration, which are critical for the delivery of services.
For those NFP organisations that do pay fees (15.0 per cent), half undertake an internal fee review, and only 5.3 per cent review in line with inflation. NFP organisations were most likely to pay using a fixed fee, with nearly a quarter (23.4 per cent) of the NFP directors who were paid receiving less than $10,000 per annum. For those directors in paid NFP governance roles, 65.9 per cent were satisfied with their remuneration and, for those in unpaid roles, only 43.7 per cent were satisfied.
The discussion/debate as to whether governing members should be paid fees or not is increasing alongside increases in their duties, responsibilities, accountability and the complexity of governing NFP organisations. While some NFP organisations’ rules/trust deeds don’t allow for payment of fees, where they do, ultimately it is up to the board themselves to either make this decision or to recommend remuneration to their members for approval. With current funding and cost-of-living challenges the timing may not be right, but equally, some would agree that this is the exact time that the board is at its most valuable and that lifting the standard of governance will have far-reaching benefits, but perception is still a critical hurdle to overcome.
Satisfaction not always guaranteed
Succession planning is becoming an issue for some prominent New Zealand companies with a number of private and public sector boards announcing resignations and retirements of sometimes multiple board members at once, as well as the CEO. There are many reasons why directors may leave their roles, but boards need to be prepared.
Warren Buffett, chairperson and CEO of Berkshire Hathaway, announced his eventual successor, Greg Abel, in 2021, removing some of the uncertainty and concerns that can destabilise a company when a long-standing chair leaves. Similarly, when Sir John Key stepped down as chair of ANZ NZ in March 2024 out of cycle, despite the timing, the board were already prepared with Scott St John waiting in the wings.
Boards subject to elections do not always have that luxury but nonetheless can prepare through a range of measures including building a talent pipeline, reviewing the governance structure and tenure length, updating the skills matrix and adopting a diversity policy. Engaging and communicating with members and shareholders so that they share a similar understanding of the future needs of the organisation is another important aspect of succession planning.
Similarly, family companies need to plan for the future, acknowledging that it may be a sensitive topic and take a number of years to develop a succession plan. Research by Dr Thomas Zellwegger, a professor of family business at the University of St Gallen, Switzerland, says that succession planning needs to be organised sequentially, preparing the ground for the next generation and providing for overlapping periods.
In the 2023 Director Sentiment Survey 64.2 per cent of directors said their boards discussed board composition, skills and experience and identified CEO/board succession as one of their key focus areas for 2024. In the 2024 Fees Survey, 33.7 per cent of directors had declined a director role, with the main reason being time commitment (45.5 per cent) followed by fee amount (18.5 per cent) and misalignment with values (14.2 per cent).
While most directors (65.0 per cent) were satisfied with their remuneration, directors from NZX/ASX listed companies were most likely to be satisfied (85.7 per cent) followed by directors on unlisted (private) companies (73.9 per cent). At the other end of the spectrum, directors on Crown entities were least satisfied on zero per cent, well down from the 26.7 per cent of Crown entity directors who were satisfied with their remuneration last year. Crown entities also had the lowest fee movement by organisation type this year of only 3.4 per cent.
The 2024/25 Directors’ Fees Report was drawn from a survey of 4,077 directorships, held by 1,148 directors, across 1,752 organisations. The full report can be purchased here.