CEOs | Corporate Knights

Are CEOs gaming ESG bonuses?

Rick Spence — Mon, 15 Jan 2024 15:54:44 +0000

For years, shareholder activists have argued that the best way to get corporate executives to manage their assets for the public good is to pay them to do it – by linking their compensation to positive social and environmental activities, such as increasing diversity and reducing carbon emissions.

Today, 72% of S&P 500 companies include environmental, social and governance (ESG) metrics in determining executives’ pay, says the Semler Brossy Consulting Group. Of the 2024 Corporate Knights Global 100 companies, 79% have sustainability pay links.

But the ESG backlash south of the border continues to grow. In the U.S., a report from Pleiades Strategy finds that Republican lawmakers in 37 states introduced 165 pieces of legislation in 2023 to discourage companies and investors “from considering commonplace risk factors in making responsible, risk-adjusted investment decisions.” The good news, according to Pleiades: only 22 laws and six resolutions passed in 2023, and “the bills that became law were often heavily revised to weaken core provisions and minimize costs.”

Defenders of ESG metrics were put on the back foot again when the Financial Times quoted an asset manager calling companies’ ESG targets “fluffy.” The story charged that “investors are worried the [ESG] metrics are being gamed to increase payouts.” Its examples include Southwest Airlines, where a disastrous 2022 holiday season that saw cancellation of 16,000 flights didn’t stop senior executives from garnering bonuses, and CBRE, a real estate firm whose CEO failed to meet key financial objectives but still earned US$4 million in bonuses by achieving five other strategic goals, such as improving team diversity and boosting employee engagement.

One executive of Boston-based State Street Global Advisors told the Times they were skeptical of using ESG metrics to determine executive compensation: “Oftentimes they are very subjective, fluffy and easily gamed.”

So does tying compensation to ESG targets work? A study released last summer by researchers at Stanford University found that firms that link executive bonuses to emission-specific metrics do decrease their carbon dioxide emissions. They also tend to see improvements in their ESG performance, as measured by third-party ratings. The study found no evidence so far that this practice affects organizations’ financial performance or share price.

A similar study released in 2023 by two business professors at Concordia and Carleton universities took a bolder tack, asking whether ESG-based bonuses result in S&P 500 executives receiving excess pay. Using artificial intelligence to identify normal pay ranges and outliers, the researchers found that use of ESG-based bonuses produced a 32% reduction in excess annual cash bonuses, “implying ESG incentives are an effective corporate governance tool.”

However, they did spot sectors where boards and shareholders should remain on high alert: companies in environmentally sensitive industries such as mining or oil and gas, where management teams were determined to have greater influence on the board. They may “need to put additional checks and balances in place to better monitor, control and advise management on the use of these incentives, especially with respect to the selection of ESG performance metrics,” said Sprott School of Business’s Leanne Keddie and Concordia’s Michel Magnan.

A recent report from Harvard Law Review suggested some best practices for companies treading the ESG path: take time to develop meaningful performance data; adopt targets that are “material, durable, and auditable”; and test your ESG operating goals for a year or two before linking them to pay, to ensure their relevance and hone your methodology.

In Canada, the Institute of Corporate Directors has actively promoted ESG-linked executive pay for more than a decade. “Successful incentive programs require robust planning and metrics and verification systems,” says Gigi Dawe, the institute’s VP of policy and research. “There’s lots of new information out there to help set standards, so I think we are going to get better at it.”

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Ralph Nader shares the secrets to success of ‘rebel’ CEOs

CK Staff — Thu, 11 Jan 2024 14:00:37 +0000

Throughout much of his career, Ralph Nader has railed against those in the corporate world responsible for hurting people and the planet. The former Green Party candidate for U.S. president and legendary consumer advocate has spent decades holding various industries to account for malfeasance.

But in his latest book, Nader has taken a different tack. In The Rebellious CEO, he celebrates 12 executives who he says have a vision that extends past profits to social good. Nader hopes that the stories of these 12 CEOs, who include Yvon Chouinard of Patagonia and the Body Shop’s Anita Roddick, can inspire others to inject social purpose into their businesses.

Corporate Knights co-founder and CEO Toby Heaps spoke with his old boss (Heaps was Nader’s presidential campaign manager in the 2008 U.S. election) about his latest book. Here’s an edited and condensed excerpt from their conversation.

You’ve written a lot of books. Why this one now?

It’s long overdue. There’s a lot of exposés about how bad so many CEOs of major corporations are these days. How they operate in a very autocratic top-down manner, they suppress free speech in their companies, and engage in the mistreatment of workers and consumers and greenwashing of environmental issues. Now they’ve reached a new stage of decline – they’re pursuing their own personal interests at the expense of their companies. Instead of investing in R&D or expanding reserves for pension funds or raising salaries, they’re buying back their stock. In the last 10 years, they’ve bought back about $8 trillion in stock in the U.S., and mostly inappropriately. They’re not getting the stock at a low price and trying to create a profit out of it; they’re getting it at higher prices because it raises the metrics for their executive compensation.

So, how do we evaluate these CEOs? One way is to say that they have so much power, they’re terrible, and you don’t need yardsticks, it all speaks for itself. That doesn’t get us anywhere. What gets us somewhere is to show that there are CEOs who got it right. And they did it by reversing the business model. That’s true for most of the 12 executives that I profiled in the book. They start out with a vision that is predicated not on simply maximizing the profits; they’re predicated on the treatment of workers, consumers and the environment. These 12 CEOs elevate the expectations of the public so that they come back to [other] CEOs with demands that cannot be rebutted by free-market fundamentalism. These CEOs met the predicates for a market that works as our servant, not as our ruler or master.

And that’s what Ray Anderson [founder of Interface] did, starting in 1994 when he went to a lecture by Paul Hawken, who is also one of the CEOs in the book, and he was transfixed. He went back to Interface and said, “We’re reinventing this company so it’s going to be carbon neutral.” And, every year, he became more and more carbon neutral. And he reduced expenses and increased profits. Now they’re moving to carbon negativity.

You mention different characteristics of these real leader CEOs. Is there a kind of litmus test that you could boil it down to?

They had wildly different personalities. Some of them were real extroverts; some of them were just nose to the grindstone. Some of them proselytized, like Ray Anderson – he made hundreds of speeches. But they did have similar characteristics. Number one is they admitted their mistakes in public, which is very unusual. I think they wanted, in effect, pressure to come in on them to correct it. They weren’t secretive at all. Sol Price of the Price Club, he would actually invite people from the other companies that were starting these big-box stores and share all his ideas and successful business strategies.

Another common characteristic is they almost never complained about regulation. They’d say, “We’re way ahead of them.” Like when Anita Roddick opened up her shops in the U.S., she pestered the Food and Drug Administration for more rigorous regulation.

And of course, they were criticizing their own industry, which is very rare. After John Bogle, the founder of Vanguard, wrote a senior thesis on mutual funds at Princeton, he went into the industry. And what he saw was these mutual funds with shareholders taking short-term viewpoints, gouging their investors with relentless fees and being too amenable to the demands of Wall Street analysts that badgered them for higher quarterly earnings.

A common characteristic [of these CEOs] is they almost never complained about regulation. They’d say, ‘We’re way ahead of them.’

– Ralph Nader

These leaders you’ve written about to raise expectations and inspire, there aren’t a lot from recent decades. Does that indicate that these kinds of CEOs are a dying breed?

There were some old-fashioned virtues that you don’t see very often anymore. Some of these executives insisted on having unions before there was even a union organizing. That was [Bernard] Rapoport, [founder of] American Income Life. The younger CEOs today have a contempt for unions because they think they freeze innovation and agility.

Another common thing is they did not overpay themselves when they could have. At a time when the major airlines were losing money and going bankrupt, Herb Kelleher [co-founder of Southwest Airlines] was the lowest-paid CEO of the major U.S. airlines. He took about $750,000 a year – he had stock options, of course. He would chuckle and say, “I’m the lowest-paid guy in the shop, and I’m making more profits than any of the others.”
Those are some characteristics I don’t think you find so much today. When they start with a certain business model and they go public, they’re instant multimillionaires.

This book might come as a bit of a surprise given your record of holding corporations to account – coming out with more of a positive message. But these folks that you pro- filed, none of them are saints. What are some important ways these CEOs fell short?

I’m not saying that all their products were totally superb. Though it’s really hard to fault Yvon Chouinard [founder of Patagonia]; his products are so durable and reusable. They were the first company to change the farms to organic cotton. However, he had to buy from suppliers in Asia, and the suppliers in Asia are not going to adhere to his level of worker regard. He tried to get them to pay their workers more, and he actually succeeded compared to, say, Apple in China.

Anita and Gordon Roddick made what they admitted was their biggest mistake when they went public. Then they were bought up by a conglomerate. Roddick had a great deal of difficulty, before she died from hepatitis, in sustaining the corporate culture that she wanted. They were persuaded they’d have more resources to open up more shops to do more good in the community, and all that backfired.

There’s more impunity and more financialization and more short-termism. But in spite of that, clean energy investments over the last four years are growing six times faster than GDP at large. So, even with all these people trying to stop electric cars, trying to stop solar panels, it seems to be moving . . .

China did us a big favour in dropping solar energy prices [through subsidies and price interventions]. New companies going into solar energy are out-competing fossil fuels all over the world. But what if China didn’t reduce the price of solar? It would have taken longer for solar to do that. Then, we’re not cranking in all the distortions of free-market mythology. There is no free market, really, other than a lemonade stand by 10-year-olds on some rural road. Monopolistic practices detonate the free market. Corporate crime, subsidies and bailouts, deceptive advertising [all] detonate a free market. Tax loopholes disadvantage small business in favour of big business.

And yet, the biggest rebuttal by big business of criticism is “We’re just responding to market demand.” In other words, even though this market fundamentalism is riddled with mythologies, it still has a tremendous grip on the political and economic cultures in our country and the academic teaching. These executives in my book basically say, “That’s just a lot of BS.”

This will be coming out at the same time as our flagship ranking of the world’s 100 most sustainable companies. Those companies, on average, are making half their revenue from products or services that have a clear social or environmental benefit. They all have lots of room for improvement, too. What is your message to them?

Well, they’ve got to do more than what these 12 did. They’ve got to be proselytizers. They have to go out, connect with civic groups, consumer environmental groups, their own peers at business conventions. These 12 profiles were very outspoken, and they didn’t care about people who said, “You better be quiet, you’re going to lose business, you’re doing controversial things.”

Alfred North Whitehead once said that a society is great when its businesses think highly of their mission. They have to make time for their civic mission no matter how busy they are, if they really think that what they’re selling needs to reach more people and displace the part of the economy they think is harmful and wasteful and corrupting. Without the civil society, nothing works. And so, the question they all have to ask themselves is how do we nourish and invigorate and empower the civil society?

The post Ralph Nader shares the secrets to success of ‘rebel’ CEOs appeared first on Corporate Knights.

The pay gap between Canada’s CEOs and workers is widening fast

CK Staff — Tue, 09 Jan 2024 17:07:36 +0000

In 1998, the best-paid CEOs earned roughly 104 times what average workers did. In 2009, as the world lurched out of an economic recession, it was 155 times. In 2022, it was pushing 250.

That stark comparison is just one way to measure the growing gap between the incomes of corporate leaders and those of the people on whom they depend to generate revenue. By 9:47 a.m. on January 2, 2024 (the first day of work for many in the new year), Canada’s 100 best-paid CEOs would already have made roughly $60,600 – as much as the average Canadian worker will pull in for the entire year. The findings are contained in a new report on CEO pay released this month by the Canadian Centre for Policy Alternatives (CCPA).

The report tracked 234 companies on the S&P/TSX composite index and found that the average pay for the 100 best-paid CEOs jumped to $14.9 million in 2022 (the year the report measured), which is an increase of 4.4% from the previous year. The average highest-paid CEOs in 2022 made 246 times more than the average worker, or $7,162 an hour, the CCPA reports. That’s a new record and up slightly from the previous year, when it was 243 times. In 2022, the average worker in Canada got a raise of $1,800, or 3%, which was less than half of inflation and brought their salary to $60,600.

Other stark details: only four of the 100 CEOs were women (which matched the number of CEOs with the name Mark or Scott), while inflation, which is demolishing the purchasing power of most Canadians, has been fuelling companies’ profits and subsequently the swollen compensation of CEOs because of a shift in their pay structure. In 2022, the average Mark made $18.5 million and the average woman made $11.7 million. That translates into the top CEO who is a woman making 63 cents for every dollar that a CEO named Mark makes.

“While the wave of inflation has been crashing down hard on regular Canadians, Canada’s 100 highest-paid CEOs have been riding it to another record-smashing year,” the CCPA says. “Inflation presented a once-in-a-lifetime chance for corporate Canada to jack up prices and pad their profit margins.”

The highest-paid CEO in 2022, according to the report, was J. Patrick Doyle, the executive chairman of Restaurant Brands International Inc., which owns Tim Hortons, Burger King and Popeyes; he pulled in $151.8 million that year. Next was Matthew Proud of Dye and Durham Ltd., a legal-software and payments-technology company, at nearly $99 million, and Seetarama S. Kotagiri, of auto parts manufacturer Magna International Inc., at $36 million. The bottom of the list was also the most lucrative it has ever been, with the lowest-paid of the top 100 CEOs, Randy Smallwood, of Wheaton Precious Metals Corp., pulling in $6.7 million.

The Corporate Knights research team also tracks the ratio of CEO-to-average-worker pay as part of its annual ranking of the 50 most sustainable corporate citizens in Canada. The CEOs of the companies that made the list earned 108 times more than the average worker in 2022, up from the 74-to-1 ratio in 2021. Hydro One (27th on the list) and Transcontinental (26th), a printing company, fared the best on this key performance indicator in 2022. Hydro One’s CEO earned nearly nine times what the average worker did, while Transcontinental came in at 22 times. On the other end of the spectrum, the CEO of Gildan Activewear, which ranked 24th overall, earned 713 times the average worker’s wage. The Corporate Knights Best 50 ranking traces public and private Canadian companies as well as Crown corporations with more than $1 billion in revenues.

It’s inflation that’s been ultimately driving these bonuses, due to historic profits in the corporate sector.

– Canadian Centre for Policy Alternatives

Report author and economist David Macdonald notes that it’s important to understand the shifting compensation mechanisms that have fuelled the growth in CEO pay. Salaries account for an increasingly smaller share of CEO pay; the average CEO salary has been relatively constant at around $1 million a year, rising to $1.2 million in 2022. Bonuses tied to revenue, profit and stock prices are driving CEO pay now, he writes.

“It’s inflation that’s been ultimately driving these bonuses, due to historic profits in the corporate sector, which is interesting, given CEO pay is frequently claimed to be based on merit,” the report notes. In June 2022, after the height of the pandemic, annual inflation peaked at 8.1%. While corporations contended that their costs were going up and price increases were necessary to keep their businesses afloat, the CCPA reports that companies used inflation to “drive profits and margins way outside of historical norms.” That, in turn, has helped fuel the rise in CEO compensation.

The organization suggests some ways these earnings could be redistributed: by taxing the income of the highest earners more aggressively, reducing the tax deductions that corporations can claim related to CEO pay, and introducing a wealth tax.

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Time to move beyond the autocratic CEO

Shilpa Tiwari — Thu, 22 Jun 2023 17:08:40 +0000

Always one to march to the beat of his own drum, Elon Musk’s iron-fisted reign of Twitter has been one for the ages. Sweeping job cuts, heavily criticized platform changes, and a hostile relationship with the press have defined the tumultuous takeover.
While some Silicon Valley bosses have cheered on his merciless style, Musk’s tactics are the antithesis of what is required in the world we live in today. “It all went south,” former Twitter CEO Jack Dorsey said recently.

Complex overlapping forces, such as the pandemic, war, migration and energy scarcity, are transforming the world in as yet unknown ways. Today’s leaders need to be collaborative, communicative and agile to be effective in this landscape – soft skills are now essential skills to thrive.

But too many of today’s corporate leaders continue to cling to leadership practices from a bygone era, leaning into archetypes that are ill suited to addressing the world we live in today – highly networked, and rapidly evolving.

Henry Ford and John Rockefeller were influential figures in shaping modern management of big business in the 1910s. This first wave of corporate leaders operated their companies with an autocratic style, viewing lower-level managers and workers as extensions of their own will.

In today’s fast-changing world, the contributions of employees are indispensable, and relying predominantly on top-down decision-making processes results in long delays or inaction. Instead, there is a growing trend toward distributed leadership models that catalyze and empower collective action rather than control and direct it. These people are systems leaders and can drive change.

Systems leadership combines familiar skills such as subject expertise, strategy, program management, coalition-building and collaboration in new and different ways to create systemic transformation that leads to tangible change. It’s a leadership model that acknowledges the complexity of modern society and the interconnectedness of various systems. It allows leaders to identify the root causes of problems and work toward sustainable solutions that address multiple issues at once.

Take Kate Bingham, for example. She left her job as a venture capitalist in July 2020 to head the U.K.’s Vaccine Taskforce, realizing quickly that “we had one shot to get it right and no time.” Without a playbook to guide her, she ordered vaccines from seven developers instead of the EU’s vaccine-buying group, with no certainty that even one of them would work. Bypassing established contracting procedures, she struck “creative” deals, as the government later reported. She was, of course, criticized – but her approach enabled Britain to secure large vaccine supplies and get people vaccinated.

Under Satya Nadella’s leadership, Microsoft has undergone a transformation from a traditional software company to a cloud-based technology leader. One of the hallmarks of Nadella’s leadership style is his focus on empowering employees to take risks and innovate. He has emphasized the importance of creating a culture of learning, where employees are encouraged to experiment and learn from failure. This approach has led to the development of innovative products and services, such as Microsoft Teams, which became a vital tool for remote work during the COVID-19 pandemic. Microsoft has achieved record growth and profitability, with the company’s stock price increasing more than 500% since Nadella became CEO in 2014.

Too many of today’s corporate leaders continue to cling to leadership practices from a bygone era, leaning into archetypes that are ill suited to addressing the world we live in today.

In the past, business leaders focused solely on serving shareholders and the bottom line. Since they were often making up the rules for nascent industries that didn’t have them, the pioneering bosses relied on decisiveness and self-confidence to plot their course through uncharted waters. And, of course, they had an impact. Ford is credited with developing the modern assembly line and mass-production techniques. He is also known for his commitment to paying his workers a living wage, which he believed would increase their productivity and loyalty to the company. Rockefeller was able to dominate the oil industry and become one of the most powerful men in America. However, his ruthless tactics were controversial and ultimately led to increased government regulation of business practices.

In the 1980s and 1990s, it was General Electric CEO Jack Welch who put his indelible stamp on how to lead. He took the company from one that only sold appliances and light bulbs to a booming multinational corporation with multiple product lines. Business schools were erected teaching the “Welch Way.” However, the toxic results-oriented culture he created at GE contributed to its eventual downfall. In recent years, many have questioned Welch’s strategy, leadership style and legacy. Was he really a CEO that today’s emerging business leaders should emulate?

Today, having a high-performing, profitable company isn’t enough. In the boardroom, there’s a broader set of concerns that includes sustainability; climate change; equity, diversity and inclusion; and an overall commitment to responsible leadership.

While there is recognition from global corporate leaders that many of the forces we are facing have far-reaching impacts, they continue to be viewed through a predominantly business-oriented lens. The environment, for example, continues to be treated like an external variable that has the potential to affect the bottom line, rather than a resource that has value beyond quarterly reports. The pyramid-style hierarchies with the Welches of the world at the top need to be replaced by leadership models that feature flexible, flatter hierarchies that revolve around shared leadership built on a clear mission and purpose.

Leaders who can navigate complex landscapes with flexibility and creativity are much more likely to succeed than those who cling to outdated models of leadership. Doing this sounds simple and obvious, yet most find it difficult. We are experts at denying or minimizing a new reality: it isn’t all that significant, we tell ourselves, or it isn’t new, and besides, it won’t last very long, and then the comfortable status quo will resume.

Leaders who can navigate complex landscapes with flexibility and creativity are much more likely to succeed.

In times of heightened uncertainty, “leaders that embrace a consistent application of values stand out,” says Narinder Dhami of New Power Labs, a platform to flow capital more equitably. We may not know what lies ahead, but a leader creates trust and a sense of safety by behaving fairly and consistently connecting their actions to values. And because they are confronting new realities, they are also open to pivots and detours if necessary.

Mike McInerney, a former HR executive in corporate Canada and now co-founder of Rapid Alignment, argues that principle-based leaders “create greater, more trusting and communicative relationships that are required to move organizations forward when they are facing turbulent times.”

Traditional models of leadership are no longer sufficient to navigate the rapidly changing world we live in. As such, we must continue to identify and learn from leaders who have moved us through chaos with humanity. Leaders like Jacinda Ardern, the former prime minister of New Zealand, who showed the world that leading with compassion can deliver results. Ardern’s leadership style played a critical role in promoting healing and unity after 51 people were killed by a white supremacist at two mosques. Her focus on compassion, inclusivity and decisive action helped to build trust and confidence in her leadership, and her response to the crisis has been widely praised, both domestically and internationally. Her leadership style also highlights the importance of transparency and communication in times of crisis.

Systems leaders apply an unusual combination of skills and attributes. Like many of today’s leaders, they are smart, ambitious visionaries, with highly developed management and execution skills. But what sets them apart is how they use their “soft skills,” such as compassion and communication, to create inclusive environments where innovation and creativity thrive. These leaders don’t try to place complex issues in silos but take a networked approach and play the long game, placing an emphasis on creating trust, because business moves at the speed of trust.

Shilpa Tiwari is the co-founder of Isenzo, a boutique firm that takes a systems approach to ESG.

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