South African boards focus on purpose and trust – while fighting to retain their key talent: PwC report

The PwC Non-Executive Directors report for 2022 – which annually surveys boardroom trends in South Africa – is centred around three main themes: Purpose, Retention and Risk. With environmental, social and governance (ESG) themes continuing to dominate 2021, boards have responded by redefining organisational purpose, and ensuring ESG considerations are incorporated throughout all areas of business. These changes are considered vital to rebuild trust with stakeholders and deliver sustained outcomes. Key to this will be retaining – or in some instances, attracting – the talent that can drive the change.

These are some of the key highlights from PwC’s Non-executive directors: Practices and fees trends report 15th edition, 2022.

Redefining purpose

Leila Ebrahimi, PwC Reward Practice Co-Lead and Partner in PwC’s People and Organisation division, says listed companies are reassessing the definition of their purpose in light of global issues that dominate the world’s political and media agenda. “Climate change, inequality and the role of business in addressing these challenges are at the forefront of boardroom discussion. Every company has a social and environmental impact, and boards are carefully considering how strategic changes can affect their organisations’ impact.”

“Listed company board members have noticed that trust levels appear to be at an all-time low, undermining support for executive pay structures that are traditionally seen as key to retaining the talent that can successfully restructure and repurpose businesses,” says Ebrahimi.

Retaining talent is about more than salaries

This challenge overlaps with the current Great Resignation period, which has seen many skilled employees leave corporate structures to seek greater fulfilment in their work lives as free agents. Shareholders and media commentators appear to lack empathy for the ‘war for talent’ argument, the report finds, but trends reflecting increases of retention awards and sign-on bonuses show that companies are struggling to retain key talent even as executive pay remains a contentious issue – especially in the context of South Africa’s inequality.

“Companies are becoming innovative in retention arrangements, which are more sophisticated than cash alone, to compete in the talent war,” adds Ebrahimi.

Andreas Horak, PwC Reward Practice Co-Lead and Director in PwC’s People and Organisation division, says proposed amendments to the Companies Act, which seek to place more power in the hands of shareholders when voting on remuneration, could further jeopardise companies’ ability to retain talent. “We have seen support for executive remuneration decisions decreasing and shareholders pushing back on many issues. As a result, boards can feel hesitant about making decisions they believe will increase organisational agility and sustainability.”

Retention vs inequality isn’t going away

The executive pay question finds itself couched in conversation around the economic and social challenges exacerbated by Covid-19. “There is undoubtedly an expectation that the private sector needs to work with other role players in creating a stable, viable economy through robust responses to ESG matters,” says Horak.

The Just Transition – South Africa’s managed shift to a green, net-zero emission economy – must take account of the economic effects of lost jobs that could exacerbate inequality. “Embedding ESG issues is now core to business strategy and success, not a ‘reporting issue’ to fix. To get this right, boards that are confident, well-informed of present and future risks and that are prepared to take courageous action in line with a well-defined purpose are what will take business and our economy forward,” says Horak.

Cutting through the ESG fog

Makhosazana Mabaso, Director in PwC’s People and Organisation division, says the public is already fatigued by the buzzwords and rhetoric related to the integration of ESG concerns into executive remuneration and performance measurement – especially when nothing concrete can be observed at ground level. What is needed is clarity and honesty.

“Perhaps now is an appropriate time for companies and boards to take a step back and perform an honest assessment of where they are in respect of ESG, where they would like to be, and steps they can take to get there,” Mabaso says.

Concrete changes most South Africans would like to see relate to a living wage. The PwC NED report for 2022 reveals that in 2021 55.5% of South Africans were living below the upper-bound poverty line of R1335 per month. Covid-19’s impact demonstrated just how fragile and vulnerable our economy is.

“The World Bank reported that by the end of 2020, the number of people employed in South Africa had fallen by nearly 1.5 million and that the wages of those still employed had fallen by 10%–15%. By July 2021, only 40% of job losses had been recovered. Many companies are now rightly questioning whether they are remunerating their full-time employees sufficiently to ensure they do not live in poverty,” says Mabaso.

South Africa’s National Minimum Wage – currently R21.69 for every hour worked – results in a monthly salary of R3630, based on a 21-day work month of eight hours per day.

“Research shows that a worker earning this wage would have a shortfall of R1353 per month for three core household expenses of transport, electricity and food. This means earning the minimum wage is not enough to secure basic needs for a family. It is clear that companies can do more to balance job creation with improving the lives of workers by committing to paying wages that meet employees’ minimum needs, lifts them out of poverty and allows them to live a dignified life,” Mabaso adds.

Profile of a JSE non-executive director

This year’s report found that the total number of NEDs serving on the boards of active JSE-listed companies was 1955, which is 151 fewer than there were in 2021. The average tenure for NEDs remained unchanged at six years. The average NED only sits on a single board, with fewer than 50 NEDs sitting on four boards or more. The median age of chairpersons in South Africa is 64, while that of board members (excluding chairpersons) is 58. This demonstrates that South African boards tend to exhibit a reasonable experience base and tenure profile, although results from our NED survey indicate that lack of experience of other board members still remains an area of concern for some NEDs. However, while age diversity has not historically been a focal area, it is likely that boards will be seeking greater diversity in thinking and approach as the world continues to accelerate in digitalisation.

Racial and gender diversity continue to be themes for required change on South African boards. Of the South African non-executive directors (including chairpersons), most non-executive directors (50%) were White, with Black Africans making up 40%. The remaining two categories registered low levels of representation, with Indian/Asians at 6%, and Coloureds at 4%. The representation of Black Africans and Whites as non-executive chairpersons increased from 32% to 35% and 52% to 58% respectively, while the Indian/Asian and Coloured categories decreased to 4% (2020:11%) and 2% (2020:5%) respectively.

Male non-executive directors (68%) are still heavily favoured. This is a slight improvement on the report’s findings last year, which reflected a 71% male to 29% female split. We have also noted an improvement in companies of different sizes, with large caps having 64% (2020:68%) male non-executive directors, medium caps having 63% (2020:66%) and small caps having 72% male (2020: 74%) non-executive directors. In terms of industries, the trends are consistent with those of the overall JSE analysis with the exception of Basic Materials, Healthcare, Industrials and Real Estate, where the number of male non-executive directors has increased since 2020.

Fees paid to non-executive board members of JSE-listed companies

As of 31 October 2021, chairpersons were paid a median of R905 00. This is down from a median of R934 000 in 2020. However, the median remuneration of lead independent directors was up in 2021 from R723 000 to R811 000. Median remuneration of NEDs rose from R554 000 in 2020 to R620 000 in 2021.