NOMPU SIZIBA: PwC has released its 14th edition of its Non-executive Directors’ Practice and Fees Trends report. It’s found that JSE-listed companies continue to remain heavily dominated by men at this level, with the boardroom still remaining unreflective of the broader South African population.
To find out more about the trends that have come out of the report, I’m joined on the line by Leila Ebrahimi, a director in the people and organisation division of PwC. Thanks very much, Leila, for joining us. Now, from a company and board perspective, 2020 was certainly a year in which the only constant was change, and no doubt adapting was quite a challenge for a number of the companies that you look at.
LEILA EBRAHIMI: Yes. change was definitely the theme for 2020, and I think it will continue into 2021. A lot of us were hoping for a little bit of normality, but it seems like that won’t quite be the case. So certainly our report sets out how we can harness that change, and boards can really start being strategic and deliberate, I would say, about change and what that means for them and what changes they would like to invite into organisations to make themselves future-fit and basically more resilient and purpose-driven, rather than being reactive to change that was forced upon us in 2020.
NOMPU SIZIBA: Yes. Given the experience of 2020, and having to adapt in the way that you’ve just described, what do you see as some of the key themes that boards will be wanting to tackle in 2021?
LEILA EBRAHIMI: What we’ve outlined in our report, and what we think the key themes will be, are naturally ESG [environmental, social, and corporate governance] and diversity. We’ve been talking about these for a long time, but they’ve certainly taken on a greater urgency in light of everything that’s happened. Everything that happened in 2020 seemed to be drawn back to a people agenda; so we talked a lot about the transformative people agenda, and really looking at your people – one of your key assets – and how you really look after them. How do you take that forward? How do you unlock their full potential?
Obviously that links into board strategies and new strategies that we’re seeing in terms of driving performance, but also redefining performance so that it’s broader than just financial performance alone, and really looks at holistic performance, taking into account all of those factors that we’ve just mentioned.
Another thing that we’ve highlighted in our report is the need for boards to have more information than ever at their fingertips because of the quality of the decisions they’re expected to be making – the efficiency and the turnaround times, and really the complexity that they’re facing in light of current circumstances.
So we’ve played around a bit with what that could look like and the format that that could take – harnessing the power of data and technology in order to be able to put something in front of them that they’ve got access to, so that they could really make those decisions in light of all the contextual information which is relevant for them.
NOMPU SIZIBA: So what trends did you notice or observe in 2020 in terms of non-executive directors’ fees, as well as perhaps executive packages?
LEILA EBRAHIMI: In terms of non-executive directors’ fees, there was a trend to not increase these. And I think that quite linked to the trend for executive directors in a lot of instances. In terms of executive directors, we certainly saw a lot of change starting to happen in terms of the incentive structures. I think there was a recognition that perhaps what worked in the past isn’t going to work in the future. And, because of the change in direction that many organisations were bringing about, it was necessary to change the incentive structures to ensure that executives were guided towards fulfilling that new strategy obviously aligned with all the changes that we saw.
NOMPU SIZIBA: You’ve indicated that progressive movement, in terms of better representation of the South African society in our corporate boards, remains somewhat of a challenge. Why do you think that is?
LEILA EBRAHIMI: I think there are many reasons, and there’s no one thing. It is a complex issue. But I do think that feeding into it is the fact that there are no sanctions associated with not having a diverse board, or not having a diverse organisation, or not actually taking those issues seriously.
So, while we saw the JSE listing in 2017 – I couldn’t believe it was that long ago – being updated to say you must have a policy which sets out how you approach board diversity, there still isn’t a requirement to have targets. And they certainly aren’t sanctioning non-compliance – no explicit sanctions for non-compliance. And, if you do choose to set voluntary targets, no sanctions for not complying with those targets. So I think it’s a bit of a-stick-and-a-carrot. We’ve got the carrot at the moment, but certainly there isn’t the stick, and potentially that contributes to the lack of urgency.
NOMPU SIZIBA: Now, Leila, you touched on ESG a bit earlier but, with the Covid crisis making people more sensitive to matters of global longevity, including taking care of our environment, did we see companies become more conscientious in terms of their environmental, social and governance goals?
LEILA EBRAHIMI: Yes, we definitely noted in South Africa, much as we’ve seen all over the world, increased shareholder activism in terms of ESG – and that’s not limited to remuneration structures. That’s just wholesale.
But what we have seen increasing is an expectation that there is a link to ESG within executive remuneration structures. So that’s what we looked at in our report, finding that across the whole JSE only 95 [companies] actually disclosed performance-linked ESG measures in their central structures, which isn’t a lot. And we set out which of those are in short-term incentives and long-term incentives.
But what we’re stressing in the report is, it’s no good to just bring in ESG. There needs to be a clear strategy. You need to have identified what ESG means for your organisation, how material the different ESG risks and opportunities are that you guys identified, and really grapple with those issues in order to bring about a scorecard which you can then meaningfully input into your short-term and long-term incentives.
NOMPU SIZIBA: With the experience of the pandemic last year, and its economic and financial effects, and with this year still being so uncertain, as you’ve said, despite vaccine distribution having started already, what factors do you expect to drive remuneration committees as they work to fairly reward company executives going forward?
LEILA EBRAHIMI: I think remuneration committees are still struggling with defining performance. And that’s why we’ve seen, as I mentioned earlier, discussions around what performance is. Is it okay to keep on measuring financial performance alone? What about other measures of performance that actually contribute to the longer term?
If you look at a typical long-term incentive, we’re looking at a lifecycle of three years, in some instances up to five years, but not really much further than that. It’s really difficult to gaze into a crystal ball and say, “Okay, how do I expect my organisation to be doing financially in 2021 plus three years?” if they’re looking at this year. It’s so uncertain at the moment; vaccines are starting to be rolled out, but nobody really knows when this is going to be “over”.
So we’ve seen organisations grappling with that and boards and remcos really trying to find structures which still motivate executives to deliver on this new strategy, still keep them focused on the long term, but almost moving away from this granular link to outcomes, and looking rather at the quality of the inputs and how those outcomes are delivered. We explore that a little bit in our article in the report about KPIs and linking that to purpose-led organisations.
NOMPU SIZIBA: That was Leila Ebrahimi, a director in the people and organisation division of PwC.