Understanding the complexities involved in corporate governance and the critical roles that directors play in the management of companies is essential. This article explores the differences between voluntary and remunerated director roles, the advantages and disadvantages of each, compensation expectations for paid directors, the responsibility for payment, and relevant legal frameworks.
Differences Between Voluntary and Remunerated Director Roles
Voluntary Directors
Voluntary directors serve without compensation. They typically take on these roles out of a sense of duty, passion for the company’s mission, or personal interest in the governance of an organisation. This arrangement is common in non-profit or smaller enterprises with limited financial resources.
Remunerated Directors
Remunerated directors, on the other hand, are compensated for their services. This payment can take various forms, including fixed retainer fees, bonuses, or shares. Remunerated positions are prevalent in larger corporations and organisations with the financial capacity to provide competitive remuneration packages.
Advantages and Disadvantages
Voluntary Directors
Advantages:
- Cost-Effective: Organisations save on payroll costs, making allocating funds to other areas easier.
- Passion-Driven: Voluntary directors often have a strong commitment to the organisation’s mission, which can enhance governance quality.
Disadvantages:
- Limited Availability: These directors may have less time to dedicate due to other commitments, leading to potential governance challenges.
- Lack of Professional Incentives: Without financial compensation, the motivation for performance may not be as strong.
Remunerated Directors
Advantages:
- Attracting Talent: Competitive compensation packages can attract skilled and experienced professionals who can drive the company’s success.
- Incentivised Performance: Financial rewards can align directors’ interests with the company’s performance, fostering a culture of accountability.
Disadvantages:
- Cost Implications: Higher remuneration can strain an organisation’s budget, especially for smaller companies.
- Potential for Conflicts of Interest: The possibility of directors prioritising personal financial gain over the company’s best interests may arise.
Compensation for Paid Directors
According to the Companies Act 71 of 2008 (as amended) (“the Companies Act”), specifically Section 66(8), companies are permitted to remunerate their directors for services rendered, unless otherwise stipulated in the Memorandum of Incorporation (“MOI”). Consequently, if a company’s MOI allows for such compensation, directors are entitled to be remunerated for the time, expertise, and responsibilities they perform. This includes:
1. Board Meetings: Compensation for attending regular board meetings, which may include a per-meeting fee or an annual retainer.
2. Committee Meetings: Payment for participating in board committee meetings, recognising the additional responsibilities and time commitment involved.
3. Ad Hoc Activities: Compensation for involvement in special projects or initiatives that fall outside regular board duties, such as strategic planning sessions or crisis management.
4. Training and Development: Reimbursement for attending relevant training programs, seminars, or conferences that enhance board effectiveness.
5. Travel Expenses: Compensation for necessary travel expenses incurred while fulfilling board duties, including transportation, lodging, and meals.
6. Consultation and Advisory Roles: Payment for providing expertise or advice in specific areas relevant to the organisation’s mission or operations.
However, these compensation practices can vary widely based on the organisation’s MOI, policies, industry standards, and regulatory requirements.
State-Owned Entities
For State-Owned Entities (SOEs), remuneration is governed by the National Treasury Regulations, which outline that directors’ remuneration must be articulated in a shareholder compact. This compact serves as a guiding document that specifies the terms of payment and accountability for the performance of the SOE.
Responsibility for Payment
The responsibility for compensating directors typically lies with the company itself. Section 66(8) of the Act allows the company to set a remuneration policy that outlines how directors will be compensated. This policy requires approval from the shareholders at the Annual General Meeting (AGM). Section 66(9) which must be read with Section 66 (8), specifies that for any remuneration to be paid, shareholders must pass a special resolution in this regard, within the preceding two years.
Governance Best Practices
The King IV Report on Corporate Governance, 2016 (“King IV”) emphasises the importance of transparency and accountability in director remuneration. Principle 14 recommends that the governing body ensure that the organisation’s remuneration practices are fair, justified, and aligned with the company’s strategic objectives and positive outcomes in the short, medium, and long term.
SOEs and Public companies may establish a Remuneration Committee to oversee remuneration at both board and executive management levels. This committee plays a crucial role in ensuring that remuneration practices align with the organisation’s strategic goals and comply with legal requirements.
Conclusion
Understanding the nuances between voluntary and remunerated director roles is essential for effective corporate governance. At Rasiluma TD Attorneys Inc., we offer comprehensive legal services in corporate governance, including advice on director roles, compliance with the Companies Act, alignment with King IV principles, and assistance with developing and implementing remuneration policies. We aim to support organisations in establishing robust governance frameworks that promote transparency, accountability, and ethical leadership.
