A. Explanation

This Provision sets out the remuneration of NEDs, and how it is linked to contribution.

The remuneration frameworks for EDs and NEDs are different.

EDs are part of management, and their remuneration should reflect what is needed to attract, retain and motivate talent for the day-to-day running of the company.

NEDs, on the other hand, provide a strategic oversight and governance function. They are remunerated according to the level of their contributions. How this should be measured is the question. The Provision suggests taking into account the time spent and the efforts expended by the NEDs as well as their responsibilities.

In this respect, directorship is remunerated like a profession. In practice, as NEDs would generally not keep record of their time, fees are determined by comparison to similar companies, as this best reflects levels of responsibility.

Practice Guidance 7 suggests that the RC should consider implementing schemes to encourage NEDs to hold shares in the company so as to align their interests with those of shareholders. However, NEDs should not be over-compensated to the extent that their independence may be compromised.

There is, however, a countervailing view that an NED’s interests should be above that of being an individual shareholder, and that owning shares could compromise his objectivity as he may be overly concerned with share price movements.

The SID’s view on this issue, which is comprehensively set out in its Statement of Good Practice 10, is:

• NEDs should be encouraged to hold some shares to align their interests with those of shareholders. Such shareholding, however, should not be so significant as to compromise their objectivity and independence.
• Where shares are provided as part of an NED’s remuneration, they should be provided as an alternative to paying all fees in cash, or as an additional grant to recognise particular achievements. One should exercise caution against the use of option plans, performance share plans, or other performance-related arrangements as these could compromise independence or judgement.
• Directors should be encouraged to hold shares for the long-term, and they should not make share trades based on short-term considerations. The best practice is for a NED not to sell the company’s shares while he is a director.

B. Practice Guidance

• Practice Guidance 7: Level and Mix of Remuneration.

C. Related Rules and Regulations

• Section 169(1) of the Companies Act: Provision and Improvement of Director’s Emoluments.
• MR Appendix 2.2(9)(c) and CR Appendix 4C(9)(c): Directors.

D. CG Guides

• RC Guide 3.1: Introduction [Non-Executive Director Fees].
• RC Guide 3.2: Non-Executive Director Fee Philosophy [Non-Executive Director Fees].
• RC Guide 3.4: Use of Equity [Non-Executive Director Fees].
• RC Guide 3.5: Determining Non-Executive Director Fees [Non-Executive Director Fees].
• RC Guide Appendix 3B-1: Non-Executive Director Fee Peer Group Determination for Companies of Small Market Capitalisation [Non-Executive Director Fees].
• RC Guide Appendix 3B-2: Non-Executive Director Fee Peer Group Determination for Companies of Large Market Capitalisation [Non-Executive Director Fees].
• RC Guide Appendix 3B-3: Non-Executive Director Fee Benchmarking and Basis for Comparison [Non-Executive Director Fees].
• RC Guide Appendix 3B-3: Non-Executive Director Fee Determination for a Non-Listed Company [Non-Executive Director Fees].
• RC Guide Appendix 3C: Sample Non-Executive Director Fee Framework for Boards of Subsidiary Companies [Non-Executive Director Fees].
• RC Guide Appendix 3D: Non-Executive Director Role Fees [Non-Executive Director Fees].

E. Related Articles

• “Should Non-Executive Directors own shares?” by Annabelle Yip. (457KB)
• “Compensating Independent Non-Executive Directors”. by SID. (142KB)
• “Managing the remuneration system” by Na Boon Chong. (85KB)
• “Non-Executive Directors fees” by Hay Group. (243KB)
• “The current state of play in director remuneration” Jon Robinson. (3.5MB)