This newsletter’s Table of Contents is as follows:
- Boards And Inflation: 5 Immediate Director To-Dos
- “Plastic straws?”: Companies add environmental, social targets to bonuses
- The Board Imperative: Is now the time to reframe risk as an opportunity?
- CEO “Bro Bad Behavior” is infectious!
1. Boards And Inflation: 5 Immediate Director To-Dos
It’s no small thing: Nearly two generations of managers have literally no idea what it’s like to operate in an inflationary environment.
To help current directors and managers, we’ve been spending time working up a playbook for the C-Suite and directors.
Here are our TOP 5 TIPS.:
i. A board meeting with the CEO devoted exclusively and solely to a discussion of how inflation and recession will affect the company is mandatory.
ii. Consider a retreat for the board to have management show you various scenarios of the inflation for your sector—not the whole economy—because there are certain sectors that are going to be affected more negatively than others.
iii. What’s important: The inflation rate will vary sector by sector, subsector by subsector. Don’t get caught up by one single number for the whole U.S. or the whole world. Granularity will make the difference here.
iv. The most critical task for the board is to approve the right short-term goals out one to two years for management to achieve. The CFO, CHRO and CEO need to put in front of the board scenarios for what could be coming in the next eight quarters and a budget for how they’ll adapt. They also need to educate the board on what inflation can do, and has done before.
v. Directors should ask sharp questions, such as: If the inflation rate goes from X to Y, what would that do to our cash position and competitive position? If inflation continues, what are the risks to liquidity, if any?
To help current directors and managers, we’ve been spending time working up a playbook for the C-Suite and directors.
Here are our TOP 5 TIPS.:
i. A board meeting with the CEO devoted exclusively and solely to a discussion of how inflation and recession will affect the company is mandatory.
ii. Consider a retreat for the board to have management show you various scenarios of the inflation for your sector—not the whole economy—because there are certain sectors that are going to be affected more negatively than others.
iii. What’s important: The inflation rate will vary sector by sector, subsector by subsector. Don’t get caught up by one single number for the whole U.S. or the whole world. Granularity will make the difference here.
iv. The most critical task for the board is to approve the right short-term goals out one to two years for management to achieve. The CFO, CHRO and CEO need to put in front of the board scenarios for what could be coming in the next eight quarters and a budget for how they’ll adapt. They also need to educate the board on what inflation can do, and has done before.
v. Directors should ask sharp questions, such as: If the inflation rate goes from X to Y, what would that do to our cash position and competitive position? If inflation continues, what are the risks to liquidity, if any?
More to come in future issues of this Newsletter.
Source: Corporate Board Member
2.“Plastic straws?”: Companies add environmental, social targets to bonuses
Kevin Johnson, Starbucks’s chief executive, earned a slice of his 2021 bonus by slashing plastic straws and methane emissions – an example of a trend by US companies to add environmental and social targets to bonus packages.
Starbucks joined Apple and Disney in adding new environmental and workplace targets to 2021 pay, according to an analysis by Sentieo, a data provider. Shareholders will get to vote on these provisions in March when the companies hold annual meetings.
Pay tied to corporate social responsibility has jumped above 20 percent at Russell 3000 companies, up from 7 percent in 2018, according to Institutional Shareholder Services ESG, the proxy adviser’s responsible investment arm. Pay provisions tied to workplace diversity hit 11 percent in 2021, from 2.5 percent in 2018, the proxy adviser said.
In 2021, Starbucks failed to win investor support for its executive bonuses for the previous year, in part because of a $US50 million ($69 million) retention bonus offered to Mr. Johnson. As a result, the coffee chain revamped its bonus packages and added new environmental and human-rights criteria.
For Mr. Johnson, 10 percent of his annual bonus was tied to environmental provisions, including efforts to “eliminate plastic straws” and “farm-level methane reduction” among other things. Starbucks said it rolled out natural, biodegradable straws in September 2021 and that a sustainable dairy initiative is starting this year.
Another 10 percent of pay was tied to retaining minority workers, and other workplace goals, Starbucks said.
Mr. Johnson achieved all his annual bonus targets and his total 2021 pay jumped to $US20.4 million from $US14.7 million in 2020 and $US19.2 million in 2019.
As bonuses tied to environmental, social, and governance (ESG) issues increase, shareholders are skeptical. Investors have grown frustrated with big bonuses awarded with little accountability. A record number of S&P 500 companies failed to win investor support for bonuses in 2021.
ESG pay provisions tend to be vague, and asset managers expressed concerns that if ESG pay replaces bonus targets tied to share price performance, then executives could be insulating bonuses during a turbulent stock market this year.
“There is definitely a concern that you look at [stock] market valuation, and you look at pay packages, and they can anticipate where we are in the cycle,” said John Hoeppner, head of US stewardship at Legal and General Investment Management America. “That is absolutely a concern of all long-term investors.”
ESG metrics in the pay “are either incredibly broad and high level and almost always – at least in the US – coming into the short-term [pay] program”, said Caitlin McSherry, a vice-president, and director of investment stewardship at Neuberger Berman.
“It is fair to be skeptical of what truly is at risk in performance-based pay, particularly around the more qualitative elements being brought in,” such as ESG, she said.
Apple in 2021 incorporated an ESG provision to executives’ annual cash bonuses that can increase pay by 10 percent based on “Apple values and other key community initiatives,” according to ISS. But because executives at the company hit bonus targets for sales and income, the ESG element was not added to the bonus, the company said.
ISS recommended Apple shareholders vote against pay for chief executive Tim Cook and other executives at the tech group earlier this month.
Meanwhile, Disney incorporated diversity and inclusion targets, making these criteria the highest-weighted non-financial metric in the company’s 2021 bonus plan.”
Starbucks joined Apple and Disney in adding new environmental and workplace targets to 2021 pay, according to an analysis by Sentieo, a data provider. Shareholders will get to vote on these provisions in March when the companies hold annual meetings.
Pay tied to corporate social responsibility has jumped above 20 percent at Russell 3000 companies, up from 7 percent in 2018, according to Institutional Shareholder Services ESG, the proxy adviser’s responsible investment arm. Pay provisions tied to workplace diversity hit 11 percent in 2021, from 2.5 percent in 2018, the proxy adviser said.
In 2021, Starbucks failed to win investor support for its executive bonuses for the previous year, in part because of a $US50 million ($69 million) retention bonus offered to Mr. Johnson. As a result, the coffee chain revamped its bonus packages and added new environmental and human-rights criteria.
For Mr. Johnson, 10 percent of his annual bonus was tied to environmental provisions, including efforts to “eliminate plastic straws” and “farm-level methane reduction” among other things. Starbucks said it rolled out natural, biodegradable straws in September 2021 and that a sustainable dairy initiative is starting this year.
Another 10 percent of pay was tied to retaining minority workers, and other workplace goals, Starbucks said.
Mr. Johnson achieved all his annual bonus targets and his total 2021 pay jumped to $US20.4 million from $US14.7 million in 2020 and $US19.2 million in 2019.
As bonuses tied to environmental, social, and governance (ESG) issues increase, shareholders are skeptical. Investors have grown frustrated with big bonuses awarded with little accountability. A record number of S&P 500 companies failed to win investor support for bonuses in 2021.
ESG pay provisions tend to be vague, and asset managers expressed concerns that if ESG pay replaces bonus targets tied to share price performance, then executives could be insulating bonuses during a turbulent stock market this year.
“There is definitely a concern that you look at [stock] market valuation, and you look at pay packages, and they can anticipate where we are in the cycle,” said John Hoeppner, head of US stewardship at Legal and General Investment Management America. “That is absolutely a concern of all long-term investors.”
ESG metrics in the pay “are either incredibly broad and high level and almost always – at least in the US – coming into the short-term [pay] program”, said Caitlin McSherry, a vice-president, and director of investment stewardship at Neuberger Berman.
“It is fair to be skeptical of what truly is at risk in performance-based pay, particularly around the more qualitative elements being brought in,” such as ESG, she said.
Apple in 2021 incorporated an ESG provision to executives’ annual cash bonuses that can increase pay by 10 percent based on “Apple values and other key community initiatives,” according to ISS. But because executives at the company hit bonus targets for sales and income, the ESG element was not added to the bonus, the company said.
ISS recommended Apple shareholders vote against pay for chief executive Tim Cook and other executives at the tech group earlier this month.
Meanwhile, Disney incorporated diversity and inclusion targets, making these criteria the highest-weighted non-financial metric in the company’s 2021 bonus plan.”
Source: Financial Review
3. The Board Imperative: Is now the time to reframe risk as an opportunity?
A new EY survey of more than 500 global board members reveals that risk management today typically lacks focus on emerging and atypical risks, is not always aligned with business strategy, and is too entrenched in the here and now.
EY asserts that the most effective ways for board directors to bolster risk management are to:
- Rethink how the board operates, its composition, and its role in setting an organizational purpose that extends beyond maximizing returns for shareholders.
- Work with management to define, implement and measure a corporate culture that is inspired by purpose and aligned with the organization’s strategy.
- Ensure that the organization adopts a data- and technology-driven approach to risk management and reports on the threats that matter most.
The hallmarks of effective risk management examining the common traits of those in the survey deemed to be “risk management leaders” revealed three behaviors that align with more effective risk management:
- Risk, with few exceptions, is viewed through a long-term horizon
- Risk management priorities are aligned with business strategy
- Focus is sharpened on emerging risks, atypical risks, and external risks
In summary:
In the current uncertain environment, effective and 21st-century risk oversight by the board has become essential to strengthen resilience and create sustainable value. Boards have an opportunity to reframe their organization’s approach to risk management, but first, they need to reconsider how the board itself thinks and acts.
Source: EY
4. CEO “Bro Bad Behavior” is infectious!
In 2022, the business world is regrettably replete with examples of poor CEO behaviour, and the #MeToo movement is both widespread and widely known. So why do these situations persist? More to the point, why do boards seem to be constantly surprised by such egregious conduct?
Corporate governance focuses a lot on “tone at the top.”
So how can a board best ensure it discharges its responsibilities to corporate culture in an ethical, responsible and credible manner? How can boards best ensure, observe and embody the culture they desire for their organization?
We suggest three key strategies:
Corporate governance focuses a lot on “tone at the top.”
So how can a board best ensure it discharges its responsibilities to corporate culture in an ethical, responsible and credible manner? How can boards best ensure, observe and embody the culture they desire for their organization?
We suggest three key strategies:
- CEO selection
The board sets culture through its selection of the CEO. Boards are fascinating organisms inasmuch as they are a group that has only one employee — the CEO. Finding, recruiting, retaining and eventually replacing the organization’s chief executive is the board’s solemn function.
The CEO defines and leads the organization’s strategy. Through their behaviour and expressed beliefs, they come to define and perpetuate the organization’s culture. As such, when considering the organization’s succession plan, the board needs to be explicit about the values they’re seeking in a CEO — and test for those values not only through interviews with candidates but through interviews with people they have worked with, as well as with clients and suppliers.
It also goes without saying that vetting includes a thorough background check. Past behaviour is one of the best predictors of future behaviour. If an aspiring CEO has inappropriate behaviour in their past, a thorough, confidential investigation before they are hired will likely reveal some of it.
The CEO defines and leads the organization’s strategy. Through their behaviour and expressed beliefs, they come to define and perpetuate the organization’s culture. As such, when considering the organization’s succession plan, the board needs to be explicit about the values they’re seeking in a CEO — and test for those values not only through interviews with candidates but through interviews with people they have worked with, as well as with clients and suppliers.
It also goes without saying that vetting includes a thorough background check. Past behaviour is one of the best predictors of future behaviour. If an aspiring CEO has inappropriate behaviour in their past, a thorough, confidential investigation before they are hired will likely reveal some of it.
- Compensation schemes
Once the CEO has been selected, the board negotiates a comprehensive compensation package. This package is based on a number of short, medium and long-term incentives and is composed of both cash and shares or options.
Compensation research is clear in concluding that executives are remarkable in their ability to discern which behaviour is being compensated, and in turn, engaging in that very behaviour.
In developing compensation schemes, boards should include behaviour targets (such as employee engagement and net promoter scores) in addition to more traditional performance-based metrics. They may even include a morals clause.
In evaluating the CEO’s performance annually, the board should keep checking on the CEO’s behaviour through both interviews and observation. The board should also anticipate and plan for involuntary dismissal of the CEO and include clawback mechanisms or even phased payouts in severance provisions.
Compensation research is clear in concluding that executives are remarkable in their ability to discern which behaviour is being compensated, and in turn, engaging in that very behaviour.
In developing compensation schemes, boards should include behaviour targets (such as employee engagement and net promoter scores) in addition to more traditional performance-based metrics. They may even include a morals clause.
In evaluating the CEO’s performance annually, the board should keep checking on the CEO’s behaviour through both interviews and observation. The board should also anticipate and plan for involuntary dismissal of the CEO and include clawback mechanisms or even phased payouts in severance provisions.
- Get out of the boardroom
Many boards hold at least one meeting per year offsite. This has the effect of familiarizing directors with the organization’s operations, as well as signalling to the organization’s employees and other stakeholders the board’s engagement with the entire organization, no matter where. Unfortunately, these off-site meetings are all too often highly scripted and co-ordinated affairs, more reminiscent of a theatre performance than a genuine pulse check.
Directors, individually and collectively, must make it a priority to see the organization’s operations from all perspectives. They should interact with employees, suppliers, customers and all stakeholders on a regular, unscripted and perhaps even unplanned basis. Only by doing so will they get a thorough idea of the company’s culture.
One highly successful director we know bases their decision to join a board partly by trying the organization’s products or services as a customer and witnessing first-hand how frontline employees perform. Another CEO provides every director with an all-access security pass and keycard to all of the organization’s workplaces, encouraging these directors to drop in unannounced to see operations firsthand.
Most situations of CEO misbehaviour do not arise spontaneously or suddenly. There are suggestions that it also extends beyond the CEO. There is an old adage that says “the fish rots from the head down.” Accordingly, do not fail in your duty to create, nurture, monitor and sustain a positive, healthy organizational culture.
Directors, individually and collectively, must make it a priority to see the organization’s operations from all perspectives. They should interact with employees, suppliers, customers and all stakeholders on a regular, unscripted and perhaps even unplanned basis. Only by doing so will they get a thorough idea of the company’s culture.
One highly successful director we know bases their decision to join a board partly by trying the organization’s products or services as a customer and witnessing first-hand how frontline employees perform. Another CEO provides every director with an all-access security pass and keycard to all of the organization’s workplaces, encouraging these directors to drop in unannounced to see operations firsthand.
Most situations of CEO misbehaviour do not arise spontaneously or suddenly. There are suggestions that it also extends beyond the CEO. There is an old adage that says “the fish rots from the head down.” Accordingly, do not fail in your duty to create, nurture, monitor and sustain a positive, healthy organizational culture.
Source: The Conversation
