Non-executive directors pay up more than 50% in the last 2 years
Ways to improve
Management interaction outside board meetings
Better understanding of the business
Seeking views of all stakeholders
Reader-friendly communication before board meetings
Mumbai, Dec. 18 The remuneration of non-executive directors of Indian companies increased more than 50 per cent during the last two years. But a survey among directors reveals that such increase in compensation may have the least impact on the effective working of company boards.
The survey, which covered 100 companies, said: “There was consensus among directors that an increase in director compensation would have the least impact on improving the board’s effectiveness.” It said despite an increase in the number of non-executive or independent directors, “the effect of their value-add” remains difficult to ascertain.
The results of the survey released on Tuesday showed that the annual compensation of a non-executive directors increased in the range of Rs 63,000 — Rs 18.71 lakh in 2005-06 from Rs 16,000 —Rs 13.87 lakh in the previous year. The average annual compensation increased from Rs 3.97 lakh in 2004-05 to Rs 6.06 lakh in 2005-06, an increase of 52.5 per cent.
The annual compensation includes sitting fees, consultancy fees, commission, profit share and fee for committee membership. The average annual sitting fee for non-executive director, which was in the range of Rs 16,000 to Rs 2.86 lakh in 2004-05 increased to Rs 47,500 — Rs 4 lakh in 2005-06. The average annual sitting fee increased by 39 per cent from Rs 1.12 lakh in 2004-2005 to Rs 1.55 lakh in 2005-06.
Of the companies surveyed, 27 per cent paid a part of the total remuneration by way of commission; nine per cent by way of consultancy and 32 per cent paid a share of the profit. Average profit share given to non-executive directors increased by 47.4 per cent to Rs 8.96 lakh from Rs 4.71 lakh.
The compensations would have further gone up over the last one-year, as there is shortage of qualified independent directors, said Mr Sunit Mehra, Managing Partner, Hunt Partners. Fifty per cent of the companies paid additional remuneration to non-executive director for being members to committees, which increased by 55.56 per cent in 2005-06. The pay varies from committee to committee and the highest amount was paid to members in the audit committee.
The report said some of the directors interviewed in the survey suggested that besides higher remuneration, interaction with management outside board meetings, better understanding of the business of the company and seeking the views of all stakeholders are other ways to improve the effectiveness of the boards.
The survey, prepared jointly by Consults A.T. Kearney, Solicitors AZB and the executive search firm Hunt Partners, basically looks at the composition of the boards and evaluating their effectiveness in executing their duties and responsibilities.
According to the report, 55 per cent of directors felt that the communication sent to them before the board meeting need to be more “useful and reader friendly.”
Non-executive directors often do not have the technical knowledge about the business or the industry in which the company is operating.
So one can imagine their contribution at the board decisions when they do not even get proper communication from the company in advance, said Mr Vivek Gupta, Managing Director, AT Kearney.