Governing Body and Executive Remuneration: Is there Sustainability in this Important Factor in the Business in general? Part 3

In our last article, we continued the discussion on governing bodies and executive remunerations. We discussed how Boards and executive remuneration can be linked to value creation and aligned to shareholders’ and stakeholders’ impactful interests. We also noted how value is defined in the context of a specific organisation and how it is measured. We highlighted the importance of appreciating the difference between the value and value drivers. We outlined the guideline steps in designing the strategy remuneration chain structure. The article also noted that executive remunerations have been trending as a subject of controversial scrutiny within the corridors of power at many levels including international governments. It was further noted that executive remunerations’ pace of growth is reaching the quantum levels despite the correlative inverse relationship characterised by dwindling productivity levels of those positions’ appointees

Principle 14 of the King IV Report provides guidance on the subjects of value creation and pay- for- performance as follows: “The governing body should ensure that the organisation remunerates fairly, responsibly, and transparently so as to promote the achievement of strategic objectives and positive outcomes in the short, medium and long- term,” Principle 4 Recommended Practice 1, states that “The governing body should assume the responsibility for organisational performance by steering and setting the direction for the realisation of the organisation’s core purpose and values through its strategy.” Principle 14, Practice 28 recommends the remuneration Policy as guidance for remuneration committees.

In taking the responsibility for the oversight of a strategy to create value in the short- term, medium, and long- term, the Board should set objectives for value creation for the purposes of continuous monitoring and evaluation of business investments. Based on that, value creation objectives and measures are then developed for both value outcomes and drivers. Following the determination of the choice of the desired outcomes, the value drivers can be established as a value driver analysis ( IoDSA Guidance for Remuneration Committees, 2020).

The value outcomes represent the results of previous activities and actions; in other words, they represent the value already created or destroyed. They are said to be “lag” metrics. In the case of response, the organisation cannot tamper with the value outcomes. Instead, it should only act on the value drivers of the outcomes. The question then is, what may cause the reaction to the outcomes? It could be prompted by unexpected value outcomes due to either poor performance or strange growth of the outcomes, these could be resulting from organisational poor performance.

Before getting to the next thought process, it is worth reminding the reader that governance is mainstreamed in all aspects of leadership and the approaches and processes of production. What then matters is the strategic level of governance impactful interventions. For instance, let us say, the value addition to the business is brought about by the profitability, the profit may be low or strangely high due to ineffectiveness of the wrong approach to accounting computations, probably, even out of financial manipulation. It could be low or high because of a lack of mindful value for money procurement; in other words, caused by impulse purchases without care for economical prices.

Profit lows or highs also occur because of inefficient processes. The following is a computational example: ABC ( Pty) Limited and DEF limited record the following similar data in scenario 1 – turnover P2 000 000; Purchases P1 200 000, opening stocks of P40 000 000 and closing stocks of P50 000. In scenario 2, the two companies record similar figures, except that DEF ( Pty) Limited has a closing stock of P70 000 parts which is worth P30 000 and is obsolete with undisclosed obsolescence.

What is the gross profit of each company in both scenarios? In scenario 1 both companies record profits of P810 000.00 each. In scenario 2, ABC ( Pty) Limited realises a gross profit of P810 000 while due to a higher figure of stock, DEF ( Pty) Limited records a gross profit of P830 000 which could have risen to P860 000 if the obsolete stock was disclosed and subtracted. The conclusion is that businesses with higher closing stocks realise higher gross profits and these profits can have many colours. Therefore, when profits are declared, they should be exposed to integrity tests to ensure their genuineness.

Despite being not profit- oriented, State- Owned Enterprises ( SOEs) are also amenable to setting metrics and measures in alignment their mandates and industry- specific ( IoDSA, Guidance for Remuneration Committees, 2020. A typical example is that Botswana Power Corporation ( BPC) is expected to supply the country with electricity in an efficient and sustainable manner. Therefore, BPC is a strategic contributor to the Botswana government’s goal of security of electricity supply together with economic and industrial development growth for prosperity.

In the next article, we will be continuing where we ended in these issues. We are very grateful to our readers and therefore extend our gratitude for their feedback.