Never a good time - increasing directors' fees

There are some things for which it's never the right time: closing a major highway intersection for repairs, refurbishing the company's head office, and testing the office fire evacuation procedures, for example. And raising directors' fees.

Last week we saw another classic case of an unpopular motion to raise directors' fees in a large public company, Contact Energy Limited. I'm the first to argue that directors need to be adequately rewarded: Contact is one of the two largest listed companies in New Zealand and its independent directors currently receive about $100,000 per annum in fees (read details in the annual report). While this may sound a lot, I believe it's actually quite reasonable, even modest, given the calibre of people Contact would hope to attract, and the demands and responsibilities placed on directors in large public companies. For the record, I have great respect for the technical abilities and professional achievements of Contact's Board members, which is not to say that some of them haven't made some big mistakes in the past.

Besides this, the fees have not been adjusted since 2004 - and I don't know many senior executives who would have accepted zero adjustment to their salaries for the last four years.

And that's where it seems to have gone all wrong. The rational case for an increase seems strong. But I believe the way the Board has gone about seeking this increase has smacked of either insensitivity to the company's small shareholders and customers (many of whom, including your blogger, are both), or an arrogance that tends not to go down well in this country.

As I say, it's never a good time to raise directors' fees - someone will always get upset, if only through pure envy. Now put yourself into the Board's shoes and consider the following - none of which is a secret:

• The world's economy seems in danger of stalling, if not of going into a flat spin;
• We're two weeks away from a general election, so everything is political fair game; and
• On the actual day of the Annual General Meeting, many of Contact's customers (yes, me too) received a letter from the company telling us that our power bills were going up by about ten percent.

When I was learning to fly, many years ago, my instructor gave me his definition of a superior pilot - "a pilot who uses their superior judgment to avoid situations that would require their superior skill." If the directors of Contact had applied superior judgment, I suspect they could have seen the fight they were buying for themselves. Instead of ignominiously retreating at the AGM, and handing a moral victory to a shareholders' representative in a Viking helmet, the directors might have modified their proposal: rather than asking for a doubling of the approved fees (which they hadn't intended to use in full), perhaps they could have argued and gained greater support for a smaller increase, based on the long period since the last pay rise.

It's not the increase itself which is so significant, but broader questions that this issue (not the first) raises about the Company's attitude to its large base of small (and definitely minority) shareholders - and whether the Board is too far removed from the real world to appreciate that the Company doesn't operate in a vacuum. Telecom has paid the price for such arrogance (or corporate myopia); it would be pity if our next largest listed company also fell victim to its own hubris.

Social responsibility, however you define it, is not an optional add-on to a director's role. It is an integral part of governing a company that operates in a real world of people who pay their power bills, read the papers, vote at elections and try to make the best living they can. No company can afford to ignore this for long.