Time to Tie Exec Comp to Sustainability Performance? Some Folks Think It Is Time -- and How to Do It




Time to Tie Exec Comp to Sustainability Performance? Some Folks Think It Is Time -- and How to Do It

For the past 25 and more years, the focus of the sustainable & responsible investment (SRI) community has been on matters related to corporate compensation, usually a corporate governance concern, as well as additional concerns on a range of other issues and topic areas (in environmental, social/societal, and other categories).

We'll often see "executive compensation" in the media headlines when a corporate crisis occurs -- often, the narrative will include descriptions of the underperformance of the company and the overly handsome compensation of the folks at the top of the pyramid -- the C-suite. It's a recurring theme.

Exec Comp has been a concern (particularly for investors) for several decades now. In the late-1980s things began to change quite dramatically in "exec comp," the salary plus a range of benefits allocated to the CEO and C-suite executives by the board of directors.  The ratio of perhaps 100-1 (CEO pay to rank & file) began to soar to 300-to-1, 400-to-1, and even more.  Today one expert sets the ratio at 373 times -- CEO to blue collar worker in the firm.

Reacting to public pressure, when the tax deductibility of the "cash" amount paid to the CEO was limited to just $1 million by the Congress of the United States in 1993.  (Congress enacted Section 162 of the Internal Revenue Code to put the cap in place for senior management.)

That, it was thought, would serve to rein in runaway CEO salaries.  And would help to create a better balance between workforce salaries and the C-suite.  And would create many more incentives for reward performance (stock grants, options, etc).  And would serve the rank & file of the enterprise by lifting their salaries.

Instead, we saw a takeoff, hockey-stick-style, of non-cash compensation to the senior management team.  As a Harvard Law School Forum on Corporate Governance commentator (Michael Doran, University of Virginia) observed in his commentary in February -- "More than two decades on, Section 162(m) has proven a spectacular policy failure."
So what adjustments might we make in addressing the issue?  These were explored by Professor Doran -- you can see them in the link here.

A new wrinkle that makes a lot of sense:  How about tying some exec comp to the company's sustainability performance? This is explored by Seymour Burchman and Barry Sullivan, both compensation consultants, in the Harvard Business Review (our Top Story).

They compare an analogous situation at an earlier time (the 1980s) when exec performance on improving "quality" in U.S. manufacturing firms began to be incorporated in considerations of compensation at the top.  This helped to focus executive attention on the firm's quality of initiatives and achievements (and linked that to compensation metrics). (Remember "Six-Sigma, Zero Defects" and other initiatives?)

And so today, they suggest, it is time to do the same thing for corporate sustainability. This may not happen in the broad universe of public companies immediately, but over time, they argue, clearly articulated business cases and specific plans for improvement will help to add sustainability considerations to the comp discussions and negotiations. 

The reasons "why" are important and the authors spell these out.  The concept is to avoid foggy, undefined goals and get to the details and well-defined sustainability metrics in the compensation discussions. 
How far do we have to travel?  The research showed only 2% of companies in the S&P 500(r) universe currently tie environmental metrics to exec comp, and only 2.6% had a diversity metric.

There are more powerful arguments set out for you in our Top Story this week.  This is a conversation that may gain significant traction as companies begin to trot out the required ratio between the CEO comp and the median pay level for the rest of the team members (the disclosures start in 2018 unless there are Federal policy changes). 

The earlier interesting February 2017 commentary by Professor Michael Doran is here: https://corpgov.law.harvard.edu/2017/03/03/uncapping-executive-pay/

Top Stories This Week...

It’s Time to Tie Executive Compensation to Sustainability
(Monday - August 21, 2017) 
Source: Harvard Business Review - Despite conflicting messages about climate change from U.S. government leaders, sustainability is getting more and more attention at American companies. Shareholders are ratcheting up their demands on environmental and social... 

About Sustainability: Progress Is Being Made - We See Forward Momentum!

New report outlines action for sustainable insurance
(Monday - August 21, 2017) 
Source: Climate Action Programme - A new report has been released by the global network of insurance supervisors and regulators Sustainable Insurance Forum (SIF) to outline the necessary action to tackle sustainability challenges within the insurance sector.  

6 Management Best Practices For Sustainability In A Changing Market
(Monday - August 21, 2017) 
Source: Open Minds - In my closing keynote session at the institute, Reinventing Your Organization In A Complex Market: A Guide To Building A Sustainable, Performance-Driven Organization, I discussed the six core management practices for... 

Shake Your Stakeholder: How Leading Firms Co-Create Sustainability Solutions
(Tuesday - August 22, 2017) 
Source: Huff Post - Shaking” stakeholders is used to describe this overlooked practice of bringing people out of complacency, plus aligning networks to advance actions to co-create solutions.  

Should Sustainable Investors Expect Worse Returns?
(Tuesday - August 22, 2017) 
Source: Seeking Alpha - et, there is a plethora of academic and industry research that suggests that ESG investing earned positive “alpha”, or riskless return, during prior decades. 

Through many NGO voices, Packard Foundation pushing sustainability agenda in Japan  
(Tuesday - August 22, 2017) 
Source: Seafood Source - However, due to the advocacy of several non-governmental organizations (NGOs), that's beginning to change. NGOs have seen an opportunity with the upcoming Tokyo Olympics in 2020, pushing the organizing committee to strengthen the..

Does 'Sustainability' Help The Environment Or Just Agriculture's Public Image?
(Wednesday - August 23, 2017) 
Source: NPR - The problems with nitrogen fertilizer start at its creation, which involves burning lots of fossil fuels. Then, when farmers spread it on their fields, it tends not to stay where it belongs. Rainfall washes some of it into... 

A Carrot-and-Stick Approach to Long-Term Sustainability
(Wednesday - August 23, 2017) 
Source: The Diplomat - n January 2016, the Singapore Exchange (SGX) announced that it would introduce sustainability reporting on a “comply or explain” basis for companies listed on the SGX. Sustainability reporting is a complement to financial..

Today’s Farmers Are Trying To Achieve ‘Sustainability,’ But It’s Easier Said Than Done
(Thursday - August 24, 2017) 
Source: The Federalist - They argue that many of our problems arise from the homogeneity of today’s commodity crops, and the way it wreaks havoc on soil, water, and animal life (not to mention farmers’ pocket books). 

The Demand For Sustainability Has Trickled Down To Data Centers 
(Thursday - August 24, 2017) 
Source: Bisnow - Sustainability is no longer a fad in commercial real estate development — it is standard practice throughout the industry. 

Sustainability in today’s business world
(Friday - August 25, 2017) 
Source: Today Online - Sustainability has long been synonymous with environmental protection, and waste management and reduction, but in recent years, the scope of what “sustainable practice” encompasses has changed drastically. 

Might Growth in Passive and Sustainability Investment Strategies Be Complementary?
(Friday - August 25, 2017) 
Source: Pamela Styles, Alpha-Sense - How can growth in passive and sustainability investment strategies affect a company’s relationship efforts and effectiveness with investors and buy-side and sell-side analysts? Should we also think about this in context with the...  


Our Focus This Week on A Range of ESG Topics & Issues -- Things to Think About..

 Diesel still needed to meet climate goals, Merkel says
(Monday - August 21, 2017) 
Source: Reuters - German Chancellor Angela Merkel warned on Sunday against a swift abandonment of diesel cars after a series of emissions scandals, saying the fuel is still needed if climate change targets are to be met. 

Why Renewable Energy Is Not As Clean As You Think
(Monday - August 21, 2017) 
Source: OZY -  Solar and wind combined account for barely a fifth of electricity generation defined as renewable. More than 70% comes from Hydropower...

A tax on carbon could be the answer to corporate tax reform
(Monday - August 21, 2017) 
Source: The Hill - ax reform may be the last big initiative we will see out of Washington this year. Republican leaders have laid out an ambitious mission to make taxes “simpler, fairer, and lower” for American families, while also lowering tax... 

Court ruling could broaden U.S. government environmental impact studies
(Wednesday - August 23, 2017) 
Source: Reuters - U.S. regulators assessing new gas pipelines must try to analyze their potential to increase greenhouse gas emissions before giving them the go-ahead, an appeals court ruled on Tuesday, in a decision that industry... 

Thirsty world must wake up to looming water crisis, expert says
(Friday - August 25, 2017)
 
Source: Reuters -The world needs to use water more efficiently rather than exhausting invisible underground supplies and blindly exporting “virtual water” to avert a global crisis that would undermine food and energy systems, a... 

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News for You From the Corporate Sector -Both Positive & Negative

Molson Coors Announces New Sustainability Goals, Aims for Zero Waste to Landfill by 2025
(Thursday - August 17, 2017) 
Source: BrewBound - Today, Molson Coors Brewing Company (NYSE: TAP;TSX: TPX) released its 2017 Our Beer Print Report, announcing a bold, new sustainability strategy and goals to guide the company through 2025.

Eastman Issues 2017 Sustainability Report
(Friday - August 18, 2017) 
Source: Greeneville Sun - Building on the company’s progress, the report provides a review of Eastman’s sustainability strategy and goals as well as highlights from the past year. 

Cooper Tire releases 2016 Global Sustainability Report
(Tuesday - August 15, 2017) 
Source: Traction - Cooper Tire & Rubber Company released its fifth annual Corporate Social Responsibility (CSR) and Sustainability report – “Responsibility the Cooper Way.”  

Schnitzer Announces Fiscal 2016 Sustainability Report
(Tuesday - August 15, 2017) 
Source: BusinessWire - Our third consecutive annual report summarizes our environmental footprint, safety performance, corporate governance and compliance, and community involvement, and provides key performance indicators (KPIs) which demonstrate the... 

Carnival Corporation Launches Sustainability Website, Releases 2016 Sustainability Report
(Wednesday - August 16, 2017) 
Source: Business Insider - Carnival Corporation & plc (NYSE/LSE: CCL; NYSE: CUK), the world's largest leisure travel company, today released its 2016 sustainability report as part of the launch of its new dedicated sustainability website. 

Wells Fargo Shakes Up Board After Second Scandal Reignites Criticism
(Wednesday - August 16, 2017) 
Source: The Street - The bank is "reacting to the investor expectations that things have to improve," Hank Boerner, chairman of Governance & Accountability Institute Inc., a New York-based consultancy, said in a telephone interview. "Bringing in new independent directors, moving tenured directors out and bringing in fresh blood, those are moves in the right direction."

Costco owes Tiffany more than $19 million for selling counterfeit rings
(Tuesday - August 15, 2017) 
Source: CNN - U.S. District Judge Laura Taylor Swain ruled on Monday that Tiffany (TIF) is entitled to $11.1 million in trebled profits -- triple the loss it incurred from Costco's actions -- plus interest, in addition to $8.25 million in... 

German green group to pursue diesel bans as agreed steps inadequate  
(Wednesday - August 16, 2017) 
Source: Reuters - German efforts to overcome a diesel scandal were dealt a blow on Tuesday after prosecutors widened a Volkswagen (VOWG_p.DE) probe and a key environmental group said steps proposed by automakers to cut pollution remained...  

UBER SETTLES WITH FTC AGAIN, THIS TIME OVER 2014 PRIVACY BREACH
(Wednesday - August 16, 2017) 
Source: Wired.com - UBER ON TUESDAY agreed to improve its privacy and security practices and to allow outsiders to monitor its progress for 20 years. 

Bayer-Backed Health Startup Medopad Raises Funds With UBS  
(Thursday - August 17, 2017) 
Source: Bloomberg - Medopad Ltd., backed by pharmaceuticals giant Bayer AG, is looking to raise new funds, joining the clutch of fast growing U.K. startups that are mixing artificial intelligence and health care.

Hyundai plans long-range premium electric car in strategic shift
(Thursday - August 17, 2017) 
Source: Reuters - Hyundai Motor Co said on Thursday it was placing electric vehicles at the center of its product strategy - one that includes plans for a premium long-distance electric car as it seeks to catch up to Tesla...  
 
Mylan, U.S. finalize $465 million EpiPen settlement  
(Friday - August 18, 2017) 
Source: Reuters - Mylan NV (MYL.O) has finalized a $465 million settlement resolving U.S. Justice Department claims it overcharged the government for its EpiPen emergency allergy treatment, which became the center of a firestorm over...

News & Opinion: Asset Managers, US Pension Funds, Sovereign Wealth Funds

CalPERS Flexes its Proxy Muscles
(Monday - August 21, 2017) 
Source: Chief Investment Officer - The California Public Employees’ Retirement System (CalPERS), with its $330 billion invested in more than 10,000 public companies, is again using its voting rights to effect changes that reflect its policies and principles during... 

Minerals-Backed SWFs Show Their Mettle as Coal, Copper Prices Plummet
(Wednesday - August 23, 2017) Associated Profiles : Pula Fund 
Source: sovereignwealthcenter.com - And from Botswana, with its $5.5 billion Pula Fund, to Mongolia's Fiscal Stability Fund with some $250 million in assets by a recent count. Most such vehicles, like that of Peru, fall under the category of so-called stabilization... 

Trump Administration News... Affecting Directions on Governance, Sustainability & Climate Change

Trump disbands federal advisory panel on climate change: report
(Monday - August 21, 2017) 
Source: The Hill - The Trump administration will push ahead with disbanding a federal advisory panel that reported on climate change, The Washington Post reported Sunday. 

New study finds that climate change costs will hit Trump country hardest
(Thursday - August 24, 2017) 
Source: The Guardian - Unmitigated climate change will be very expensive for huge regions of the United States. If we continue on the current path, our analysis indicates it may result in the largest transfer of wealth from the poor to the rich in the... 

U.S. lays groundwork for saving coal plants with grid report
 (Friday - August 25, 2017) 
Source: Denver Post - It stresses the critical need to preserve coal, nuclear and other “baseload” plants that continue to produce power when the wind isn’t blowing and sun isn’t shining. The report argues that even natural gas-fired generators, which... 

Energy and Environment Interior secretary recommends Trump alter at least three national monuments, including Bears Ears
(Friday - August 25, 2017) 
Source: Washington Post - Interior Secretary Ryan Zinke recommended Thursday that President Trump alter at least three national monuments established by his immediate predecessors, including two in Utah, a move expected to reshape federal land and water... 


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