Good governance means having great people at the top looking out for the company. But how much should a company pay for a good director? In this TV show Caroline Newsholme discusses pay vs performance.

Good governance comes at a price

You should certainly pay for talent.  And good directors come at a price.  But there’s a feeling that directors remuneration is slightly out of kilter with the real world.  It’s certainly being increasing, notwithstanding the fact that we are in a recession, there’s been a quite substantial upwards trend

And obviously a lot of companies have struggled and may not have performed as well.  So there there’s an inconsistency between actually the wellbeing of the company and what the directors are being paid.

But I think certainly directors are alive to the concerns that have been voiced by investors and the business world generally.  I don’t think they are blasé about the position, they recognise that there has to be a proper link between pay and performance and we can’t continue to see excess packages which are not really justified.  Whether we’ll get change at the rate we need change is another question.

But there’s a lot of impetus in the corporate world to increase transparency and to change what’s gone before.

If you are interested in discussions around good governance take a look at our briefings on director's remuneration and board effectiveness.

 

Corporate governance issues arising from boardroom structure includes how much each member should be paid for what they are expected to do, as Rob Wirszycz discusses in this TV show.

Corporate governance issues - Defining roles

Remuneration is a really sticky area in a sense.  Actually, if I’m a Non-Executive Director I don’t expect to own any shares.  My belief is that a Non-Executive Director is there to be completely objective.  And I’ve been in many Board meetings where effectively the Board meeting is a meeting of the shareholders.  Self-interest always wins in those meetings.  So if I’m a Non-Executive Director in a meeting and I’m there, my job, I’ll accept a retain, a relatively small retainer, depending on what they want me to do.  If they do anything away, outside of the brief, my belief is that that should be paid for separately.  But so just to be a Non-Executive Director, I would like to be paid for the very clear, clearly-defined, but I don’t want, expect any shares. As a Chairman it’s different.  Now the Chairman, I’m acting on behalf of the shareholders, so I actually have to have alignment with them, so what I always ask for when I’m Chairman is again a retainer, which is a small amount of money, relatively small amount of money, but I want to be able to earn shares based on the achievement of the plan.  So if we achieve the plan, which I’m owning, then I believe that I should be aligned with the shareholders’ interests and I should be able to earn in shares into the business.

If you are interested corporate governance issues take a look at our briefings on director's remuneration and board effectiveness.

 

Business communication between company leaders, shareholders and the workforce explaining the reasoning of a director's pay could help satisfy everyone. Caroline Newsholme explains further in this TV show.

Business communication is vital

A lot of shareholders probably feel dissatisfied and feel that director’s remuneration is more and more out of kilter, in some instances, with reality. When you look at what some directors are being paid it does feel a very long way from the average wage of a shareholder or a member of the workforce of that particular organisation, so there is bound to be increasing focus on what directors are being paid and how they are being rewarded. I think people just want to understand that they’re worth it and that it is justified.  

For more about business communication and related issues, browse all Inside Finance videos.

Analysing data to show profit and loss is more complicated than it may first seem, and will be done best by a forensic accountant. Doug Hall of Smith and Williamson says it’s about presenting the right information in court.

Analysing data forensically

Probably the best way of illustrating that is a lot of cases that we get involved in, we get involved at a later stage, so the case has been running for some time. Because parties to litigation tend to focus because they’re guided by the lawyers, firstly on liability and quantum is left as a second stage. And we’re often involved in cases where the quantum has been estimated by the in house accountant, it’s the first time they’ve done it and may seem simple to actually work out that you’ve lost this much in sales and this is the profit on it, but there’s all kinds of nuances and techniques that are used and really what a good forensic accountant should be doing is to anticipate how, if you’re acting for a claimant, to anticipate how it would be defended.  For example you may say that my sales have been growing at 5% a year, year on year out, and if you hadn’t caused by business to fail then I would have got another 5% in growth, but that doesn’t necessarily follow, you need to look behind the headline evidence and to look at it from every angle. There is no single right answer and the key thing in my practice is whatever opinion I come up with I need to be thinking ‘There is a counter argument to this’, because ultimately the decision by the court or the tribunal is based on the balance of probability. There’s been some sort of breach, so therefore the claimant wants to be put back in the position they would have been, but for that breach and of course that position didn’t happen, so it’s what might have been. So the short answer is there’s lots of different ways of analysing the data and there’s lots of different ways of presenting it, there’s no single right answer but an experienced forensic accountant knows what works with a court and what doesn’t. And of course there is various conceptual issues, that you can be technically wrong in how you calculate damages and we’ve seen that many times.

If you enjoyed this video about analysing data, then why not watch more TV shows on Inside Finance?

There are business benefits to doing evaluations before making purchases, and there are also times when evaluations are necessary. In this TV show John Rugman explains why and when businesses need to be evaluated.

Business benefits from proper assessment

Evaluation is required for a number of different circumstances, it might be that you’re selling a business and you want to know what the value of that business is in advance of the process. It might be that you’re wanting to grant some share options or some shares to employees in that business, in which case you’re going to need evaluation for tax purposes. Or it could be that you need to report some fair values in your accounts and need some input into what those might be. So there can be substantial amounts of money at stake. I’m conscious of one client where we assisted them in relation to a potential purchase of that business and we managed to raise the initial offer for that business by 50%, so they achieved a price 50% higher than they would otherwise have achieved.

If you enjoyed this video about the business benefits of evaluations, why not browse more TV Shows on Inside Finance.

Financial reporting of pay is complicated. In this TV show Caroline Newsholme explains why it can be a good idea to seek advice.

Seeking advice on financial reporting

Well a lot of companies will have to think quite hard about how they put their pay policies together. And to get a sense for what is and what isn’t going to be accepted in the marketplace and the degree to which you need to call on external resources to help you in that thought process. I think certainly there will be a good deal of one company looking to see what the others are doing as the new legislation takes effect. I think trying to present, for example, director’s remuneration for one year as one single figure will probably prove quite challenging because, as I have said, it can be made up of many different components. The reporting element of it is still going to present some challenges.   Inside Finance TV will continue to bring you expert perspectives on issues like financial reporting.  

Financial reporting is a long procedure. In this TV show Sarah Hawes discusses complex process of disclosure for directors.

Financial reporting follows multiple legislations

It is complicated because of the number of places that company secretaries, directors, or other advisors need to look to, to find all of the various requirements. For example to prepare what needs to go in an annual report about directors you are going to need to look in, as a minimum, in the Companies Act 2006, the relevant secondary legislation made under that act, the corporate governance code and the institutional investor guidance. There isn’t an easy one place to look and these are all the things you need to put in and then it’s tick tick it’s done.   If you are interested in financial reporting look out for more Inside Finance TV shows from finance experts like Sarah Hawes.

Transaction services at Smith & Williamson is headed by Philip Quigley. He discusses his role in this TV show.

UK transaction services

I head up transaction services, that covers financial due diligence, reporting accountant and valuation services, which is not my particular area.  We have a team based in London and in Bristol and Southampton.  And we generally cover the marketplace in terms of those services.

If you found this video about transaction services informative, please browse more TV shows on Inside Finance TV

A finance advisor will help you understand what you need to do to comply with tax law. In this TV show Smith & Williamson's Chris Springett explains the best process to follow with your advisor.

Tax law for property

One is record keeping, record keeping absolutely vital, making sure that they retain the evidence that they were living at the property, when they were living at the property. Secondly, come to us early. There’s, under the legislation there’s an ability to make an election, if you own two or more properties and you want to decide which one is your main residence for the purpose of the relief, you can make an election. So again, if we can do that, there is a time limit on that, so if we do that earlier then that’s great. And then I suppose finally, when coming to sell the property, again let’s have a chat, see what’s happened, put together a timeline and perhaps there might be something to do at that stage. It’s a lot easier to do it at that stage than after the sale has happened and we’re looking to piece together stuff from perhaps 5/10, even 15 years ago. ______________________________________________________________________________ For more discussion on tax law, keep checking back on Inside Finance TV    

Business risk can be discovered by looking at finances of the past, present and future, as Philip Quigley explains in this TV show.

Business Risk - Past financials and future projections

There’s two basic elements.  I suppose the first is the review of historic financials. So are the targets numbers believable or are they properly prepared and been properly audited etc? And secondly, going forward what’s the combined business going to do? So we will look at both the historic numbers and the forward projections.  We’ll do that by discussing with you what you want, discussing with the target, how they run their business, and trying to pull together where the risks lie in terms of the business model. ___________________________________________________________ If you found this TV show about business risk interesting, why not browse more interviews and briefings on Inside Finance TV.