Investor Roundtable November 2018: A World of Opportunity to Fulfil your ESG Promises

By Corinne Carr, Founder of PeopleNet Ltd, remuneration consultant specialising in responsible pay.

I recently hosted an investor roundtable event in London attended by leaders in the industry. The theme was A World of Opportunity to Fulfil your ESG Promises.

Right now, the facts make for stark reading:

  • We used our planet’s resources for the year by 1st August;
  • No country is on track towards achieving all SDGs;
  • Warming of 5° or higher increases the risk associated with long-lasting and irreversible changes.

However, in a world of risks also lies a world of opportunities.

During the event, we discussed executive pay through an ESG (environmental, social and governance) lens in relation to:

  • What do we mean by “wider societal impact’?
  • How is it embedded in investment strategies, policies and guidelines?
  • Who’s accountable?

What do we mean by “wider societal impact’?

I kicked off the meeting by sharing my views on the ‘wider societal impact’ of an organisation as related to:

  • In part, the alignment of external expectations placed upon investee companies by investors to their own internal practices;
  • The longevity of a firm’s purpose once the current leadership has moved

Determining the purpose of an organisation is very much embedded in the resvised corporate governance regulations and is integral to a firm’s values.

At another recent investment event, it was mentioned that while 75% of firms make a statement on having a wider purpose, only 5% actually follow through these statements in their strategy and everyday practices. This huge disconnection raises a question on the linkage between business strategy to environmental and social factors and, in turn, to executive pay outcomes.

Investors want to have strategic engagement conversations with their investee companies on executive pay taking into account this wider cultural context. Yet, whilst executive pay is the primary engagement topic between investors and investee companies, a lot of time is spent on discussing the minutiae of pay decisions. This is probably due to the plethora of rules and regulations placed upon Chairs of Remuneration Committees to do exactly that – focus on the details. Rather than risking being stigmatised for not sharing certain information, firms choose to share all changes to executive pay decisions with shareholders.

How is it embedded in your investment strategies, policies and guidelines?

Despite a recent and sharp increase, shockingly, only around 1/3 of FTSE companies make some kind of linkage between extra-financial measures and executive pay, be it through a people, customer, safety or risk metric into their short or long-term incentive pay plans.

Yet, it is widely accepted that ESG can really create value and represents a great opportunity for both investors and investees. Some firms already incorporate it to some extent (eg. gender balance agenda) into their strategy as they understand how important it is to their survival. Conversations with fund managers and engagement meetings with investee companies need to be different and include the wider societal purpose of a company.

Corporates must understand that if they don’t make a positive societal impact and have a sense of philanthropy, they are not going to survive as the wider society is waking up to this now.

Remuneration structures exist to attract and retain talent be it at the executive level or, just as importantly, at the employee level, which makes up a much larger proportion of the workforce. We must ensure that employees receive, at least, a living wage. The retention risk exists at all levels within an organisation, not just at the top.

We also need to better understand the power of intrinsic and extrinsic motivation. There is an intangible value of “recognition” in business; it’s not just about money. It would be helpful to explore this concept further bearing in mind there is evidence that financial incentives drive behaviours – good and bad.

Will CEOs stay motivated if they’re not incentivised? Pay simplification is a hot topic with diverging views while EPS and TSR are still very much the financial measures used to reward leaders and senior managers. Should we be heading towards the same pay structures across the entire company from top to bottom? This is one school of thought.

So, what needs to change?

Regulations:

There is a misalignment between marketing collateral and prospectuses that focus on a fund’s long- term life whilst its financial performance is reported on a quarterly basis to fund managers and clients. Would reporting performance less frequently be criticised as a lack of transparency though? Investors could raise this anomaly with the regulator.

Collaboration:

Investors need to collaborate together better to share a more unified voice with investee companies and understand their purpose, structure and reputational risks. Diverging investor points of view and priorities create confusion and division which is not helpful to anyone. Standardisation and alignment of expectations, especially in the remuneration arena, would lead to more impactful engagement.

Data:

The lack of consistency also applies to the proliferation of data providers. Fragmented and unstandardised data is not conducive to investors making holistic decisions on pay. The introduction of standard calculations such as the Gender Pay Gap or the CEO: employee pay ratio will provide a level playing field although investee firms question whether and how investors will use that information.

Smaller investors:

Non-majority shareholders must not be put off taking the lead if they want to see change and progress happen. Social media amplifies their voice, and, in any case, their votes count.

Who’s accountable?

The board has overwhelming accountability for determining the wider societal impact of the firm. The Remuneration Committee, on behalf of the board, is responsible for justifying executive pay decisions and RemCo’s remit is broadening to include some aspects of pay for the wider workforce. When it comes to implementation, senior leaders have a crucial role to play too.

When awarding mandates and during the engagement process, asset owners and asset managers must also find out how ESG is integral to a firm’s business and remuneration strategies. When something goes wrong from an environmental, social or governance point of view, a firm is accountable to all its stakeholders: its employees, its suppliers, its customers and its owners, that means us, the men and women on the street.

Access your free copy of my report, “Responsible reward: Fulfil your ESG promises through performance and payhttps://www.peoplenet.ltd.uk/download-the-responsible-reward-report/ created in collaboration with Cass Business School, London.

Corinne Carr is the founder of PeopleNet Ltd  www.peoplenet.ltd.uk, an independent remuneration consultancy, specialising in responsible pay – a leading trend in executive pay. Sitting at the intersection of sustainability and remuneration by integrating ESG factors into variable pay plans, it incentivises investees to align their business strategy with their wider societal purpose. It also allows responsible investors to find sustainable investment opportunities. Ultimately, responsible pay supports the UN SDGs through the design and assessment of responsible incentives.