Animesh Joshi
Introduction
Appointment and remuneration of non-executive directors (‘NED’) is always a matter of concern. Practices adopted by companies in remunerating NEDs has always been the talk of the town. Hence it becomes necessary to understand concerns raised by proxy advisors in remunerating NEDs. In this article we will explore various governance concerns raised by proxy advisors related to the remuneration of the NEDs.
A. Governance Concerns related to the remuneration of the non-executive directors:
1. Skewed Remuneration Practices
| Sr. No. | Concern Type | Description | Example |
| 1 | Skewed remuneration favouring promoter directors | Promoter directors receive disproportionate remuneration compared to others. | The company seeks to continue a director’s term as NED, but the proxy advisor raises concerns that his commission is skewed—nearly four times that of other NEDs and even exceeding the MD’s fixed pay. This, they argue, blurs the line between executive and non-executive roles. |
| 2 | Disproportionate compensation for the Non-Executive Chairman | The Chairman’s pay significantly exceeds that of other directors. | The Non-Executive Chairman of a company received over ten times the average pay of other non-executive directors, accounting for 58% of the total commission. Proxy advisors highlighted this excessive remuneration and suggested that the policy is disproportionately favourable to the chairman. |
| 3 | Inadequate Justification | Frequent issues arise where companies provide insufficient explanation for high or skewed commission structures, leading to governance concerns. | A company proposed substantial commission for a Non-Executive Director, which is equivalent to that of an Executive Director, with inadequate justification and no similar compensation for other NEDs. |
2. Cap On remuneration (Amount and Period):
| Sr. No. | Concern Type | Description | Example |
| 1 | No Absolute Cap | Many companies seek approval for non-executive director remuneration calculated as a percentage of profits without establishing an absolute cap, leading to uncertainty for shareholders. | Multiple companies have been noted for proposing commissions for NEDs without an absolute cap, raising concerns about the total commission that could be payable. |
| 2 | Perpetual Approval | Recurring concern about approvals being sought for perpetuity without a specified duration, making them effectively indefinite. | A company sought approval for a commission to NEDs not exceeding 1% per annum, without a fixed cap or specified period for these payments. |
3. Other:
| Sr. No. | Concern Type | Description | Example |
| 1 | Gender bias in remuneration favouring male directors | Male directors receive higher pay than female counterparts, indicating bias. | At one company, male promoter directors were awarded substantial pay packages, while a female director with similar qualifications received a fraction of the amount. This disparity suggested an underlying gender bias in the company’s remuneration practices, as noted by proxy advisors. |
Conclusion:
The governance concerns raised by proxy advisors regarding Non-Executive Director (NED) remuneration highlight the need for transparent and balanced remuneration policies. Key issues include the absence of a cooling-off period for transitioning from Independent Director (ID) to NED roles, skewed pay structures favouring promoter directors with limited experience, and significant pay disparities between the Non-Executive Chairman and other directors. Additionally, gender bias in remuneration and recurring issues with promoter director pay policies reveal systemic imbalances. Shareholders should scrutinize NED compensation structures to ensure they align with principles of fairness and good governance, fostering a more equitable approach to director remuneration and maintaining corporate governance integrity.
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