Council wrong to reject directors' fees

20:11, Nov 28 2013

The Christchurch City Council has made a very interesting decision.

Any councillors appointed as directors to the holdings company are to "donate" their fees to the Mayoral Welfare Fund.

Although most ratepayers will welcome this move, as it will be seen as admirable and as a magnanimous gesture from the new council, it does raise some very interesting issues.

Across the planet fees for directors vary wildly, ranging from very modest amounts through to millions of dollars and generous stock options.

There is generally some correlation between the size of the company's assets, the risk that the director has to manage and the level of their payment, and here in New Zealand the common practice is to seek advice from a professional organisation, such as the Institute of Directors, to assist in setting appropriate director's fees.

The role of company director should not be confused with the trustees of a trust or members of a community board or incorporated society.


These organisations, often charitable and voluntary, generally operate on very tiny budgets with which to cover the costs of their governance.

Many professional directors also commit to such organisations but the skill requirements are quite different, as is the exposure.

Responsible directors will understand the recent trends in accountability and will be lifting their game significantly in terms of health and safety.

The Pike River report, and other recent findings, have shown clearly that directors should have much greater culpability for what is happening in terms of the safety of their employees or customers than is currently the case.

It is anticipated that legislation will be passed by the end of year that will hold directors more directly accountable for health and safety matters within the organisations that they govern.

This has led to many boards rearranging the way directors take on portfolios.

It should now be commonplace for a dedicated governance role to be put in place to oversee health and safety matters on behalf of the organisation.

One of the tragedies of Pike River is that in the old environment all of the directors seem to have been able to walk away from an operation that was negligently governed and there appears to be no recourse for the victims.

This should not be allowed to happen again.

There was also a time when many directors believed that their liability was diminished as long as they took advice from professionals in good faith.

This has also proven to be incorrect and has highlighted the importance of a thorough approach to due diligence when taking on such roles and being confident that you understand the business, have absolute faith in the ability and integrity of the management and believe the full complement of necessary skills sits alongside you at the board table.

Christchurch City Holdings has $2.5 billion worth of assets under management and $1.5b of that is council equity.

This is a serious, big-boy company that has all sorts of financial exposure and oversees many businesses that have potentially high health and safety risks.

One only needs to consider what happened at Lyttelton this week to understand that there is much more to the role than swanning about at board meetings drawing down fees.

One assumes the move to eradicate councillor directors' fees is politically motivated and it will hearten many in the constituency who are feeling the pinch, but it is the wrong move.

The first question that should have been asked is whether or not councillors are the best people to be overseeing $2.5b in assets if they have no previous governance experience at that level.

The second concern I have is the wisdom of sending in a politically appointed individual to fulfil such a role but give the very clear message that they actually don't carry any more responsibility than the other Christchurch City councillors and are not as responsible as their fellow holdings company directors.

One might argue that the current compensation paid to a councillor is adequate and there is truth in that when you are only considering what is a fair income for hours worked.

But this is not a matter of fees alone.

It is about excellence at a governance level and recognising that there is great value in good appointments.

Despite popular belief, creating value for shareholders is not something that happens because fat cats sit around and line each other's pockets.

There are dozens and dozens of New Zealand companies that have ignored governance best practice to the utter detriment of thousands of shareholders, employees and communities.

If I were one of the councillor directors I would certainly be seeking legal advice about my exposure and looking for some agreement that the shareholder holds me less accountable for any loss of value, mistaken declarations or health and safety events than the other, paid directors.

The Press