Getting executives to do the right thing
Profits aren't the be-all and end-all of business, according to the CEOs of Coca-Cola and General Motors and other members of the Business Roundtable group of US bosses.
Their statement last year disavowing the primacy of shareholders and emphasising that businesses should be run for the benefit of all stakeholders -including customers, staff, communities and suppliers — left at least one big question unanswered: don't executives need to be incentivised to do more than just increase profit?
Perhaps it's time that these topics are given greater emphasis in executive compensation plans. If you think that sounds borderline Marxist, I'll remind you that Klaus Schwab, founder of the World Economic Forum — a mountainside schmoozefest for the 1% that takes place this week — has proposed something similar.
Two examples illustrate why executive pay is ripe for reform. In the UK the former boss of home builder Persimmon was paid £85m (R1.6bn) for two years' work, mainly because generous government home-purchase subsidies helped inflate his company's sales, dividends and stock price. A damning independent review subsequently exposed the company's shoddy construction practices.
Meanwhile, Boeing executives were richly rewarded for increasing earnings, cash flow and the share price, but that appears to have come at the cost of a rotten corporate culture that browbeat regulators, squeezed suppliers, devalued engineering and hurried an unsafe aircraft into production without adequate pilot training.
Plenty of companies already set non-financial strategic targets to align executive compensation with important corporate initiatives and customer satisfaction. Some airline bosses get paid less if planes are consistently late. In mining and oil it's common to cut rewards if there are fatal accidents or serious injuries.
Elsewhere, though, it's pretty rare for executives to be offered incentives to achieve environmental, social and corporate governance (ESG) targets, such as cutting carbon emissions. About a quarter of S&P 500 companies link director compensation to ESG achievements. For the natural-resource-heavy FTSE 100 the proportion is about a third. Even these pioneers tend to link only a small portion of total pay to ESG goals — typically a chunk of the annual bonus.
Some companies are getting ahead of the curve. At life and material sciences group Royal DSM, 50% of long-term pay incentives are linked to energy efficiency and greenhouse gas emissions improvements. Royal Dutch Shell, BHP and Siemens plan to bolster the link between pay and cutting emissions.
Unless ESG-related pay metrics are clear and quantifiable, it might be difficult to hold executives to account.
But the climate crisis demands that a company makes investments now that might impair short-term profitability but which will position the business to thrive in the difficult decades ahead. The same goes for paying workers a decent wage, which will enable a thriving middle class.
Executives shouldn't be penalised for doing the right thing, just as they shouldn't reap rewards for neglecting their non-investor stakeholders such as customers, staff and the public.
Of course, if the Business Roundtable's conversion to stakeholder capitalism is to be more than just good PR, the quantum of executive pay might need rethinking too. Would an executive who treats employees, shareholders and communities equally accept pay that's more than 100 times that of the typical worker? Or would they settle for less?