London Stock Exchange webinar examines growth of sustainable performance measures in executive incentives and how to keep pace with the direction of travel
March 21, 2023
Last month, we foreshadowed participation by MM&K Director and Senior Partner, Paul Norris on the panel of a webinar produced by the London Stock Exchange Group (LSEG) on Aligning People, Pay and Planet – Executive Compensation and Sustainable Value Creation. We were delighted to have been invited to participate in this prestigious event.
The webinar was held on 28 February. It was moderated by Katya Gorbatiouk, Head of Investment Funds at LSEG. The original panel comprised Philippa Keith, CEO of corporate services group, MSP and Edna Frimpong, Director of Research at the Diligent Institute and Paul Norris. The panel discussed and answered questions on, the way executive incentives are continuing to evolve in the face of stakeholder and regulatory pressure to include sustainable, non-financial performance measures related to the impact of business on a range of topics, including the environment, climate, society and stakeholders.
Whilst MM&K has encountered examples of what might be termed “ESG fatigue” there is no doubt about the global increase of both short- and long-term incentives that include ESG measures. “The Staying Power of Sustainability” a report of research carried out by MM&K, in conjunction with our colleagues in the GECN*, contains verifiable evidence from the world’s largest companies. A free copy of the report can be obtained here. Sooner or later, what becomes established large-company practice has a habit of trickling down eventually to smaller companies, which may not have the resources in-house to match the additional administrative and regulatory burdens.
A recording of the webinar is on MM&K’s web-site and can be found here, so it is not necessary for this article to rehearse details of the discussions.
That said, the panel discussion and questions produced a number of thought-provoking moments. There is a four-stage process, which any company can adopt to design fit-for-purpose executive incentive plans incorporating sustainable, non-financial measures. But, it soon became clear from the panel’s wide-ranging experience of working with companies of all sizes, that the impact of a business on the climate, the environment, and the communities it serves and its ability to measure those impacts will differ from company to company. That makes it difficult to apply overarching quantitative regulatory standards as supported by some. One size cannot fit all.
Moreover, for many AIM-traded companies and SMEs, the costs of compliance and measurement could place a heavy strain on financial resources. We will watch with interest the development this year of the FRC’s plan to examine how the concept of materiality can be incorporated into regulatory reporting to ensure their stakeholders get clear and relevant decision-enabling information.
This is important, not simply to stem the burgeoning increase in the length of company reports. A company’s stakeholders include many more groups than its shareholders, each having their own requirements for information in company reports about a company’s policies and their impact on climate, the environment, communities (including employees) and governance framework. Stakeholder groups are becoming more active and the level of engagement between companies and, particularly, their employees and shareholders has increased as a result. That is a positive development but it requires companies to take care to ensure their reporting is relevant and strikes the right balance. There is now a greater risk of reputational (and, possibly, financial) damage from reporting that fails the transparency and relevance tests.
It would help if regulations were consistent and used a common language to describe requirements. The regulatory machine has many moving parts, some of which produce their own terms and conditions, codes or guidance, which makes it difficult for companies, particularly smaller companies, to know that they are doing the right thing. There is some good work being done and fed into the system, by the QCA and others on this.
There is no doubt about the increasing use in executive incentives of non-financial performance measures related for the most-part to climate, the environment and stakeholders. This is consistent with the current high and increasing levels of attention focused on those elements by stakeholders, including regulators. That is likely to continue. It affects all companies but not in the same way or to the same extent. As a result, their boards and board committees face decisions on how best to respond to this direction of travel and on how to report on the results arising from those decisions. Our recommendation is to embed the company’s ESG policies in its strategy, ensure that the CEO is fully behind those policies and in the driving seat and report on the outcomes of those policies, not aspirations.
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*Note: GECN is the Global Governance and Executive Compensation Group, comprising seven legally independent remuneration, performance and governance advisory firms located in the UK, Switzerland, South Africa, Singapore, Australia, the USA and Canada.