Is your CEO really worth it?

Click to find out more about OECD Integrity Week
Click to find out more about OECD Integrity Week

Who’d be a CEO? Back in the days when the legendary Jack Welch was leading General Electric – and increasing its market value by more than a third of a trillion dollars – chief executive officers were the heroes of capitalism. These days, they seem as likely to show up on top-ten lists of failure.

Consider Thorsten Heins, appointed CEO of smartphone maker Blackberry in January 2012 at a time when it was haemorrhaging market share to Apple and Samsung. Mr Heins struggled to turn things around, but by the time he was eased out 22 months later the company’s share price was down almost 60%. That, in turn, hurt Mr Heins’ own earnings, which were linked to the share price. However, considering that he walked away with a farewell package estimated at between $14 million and $16 million, there’s another question you’d have to ask: Given the chance, who wouldn’t be a CEO?

Whether their companies are winning or losing, the popular perception is that CEOs are always winning – showered with bonuses when business is booming, gently let down on golden parachutes when things are going badly.

The reality, of course, is more complicated. For every CEO with a $6,000 shower-curtain, there are others working long days in forgotten corners of desolate business parks. Still, there seems little doubt that as a class, CEOs are doing fairly well for themselves. The Financial Times reported figures from the International Labour Organisation showing that the average pay of top CEOs in Germany rose from 155 times average earnings in 2007 to 190 times in 2011. In the United States, the multiple is 508 times.

But if CEOs are overpaid (and some would argue that – compared to footballers like Wayne Rooney or Hollywood stars like Robert Downey Jr. –  they’re not) how should societies respond? One of the biggest trends in recent decades is “say on pay”, which provides company shareholders with some role in determining executive compensation. Does it work? Views differ, as was clear during a discussion earlier today at OECD Integrity Week.

One of the key advantages of “say on pay” – at least in theory – is that it should allow executive pay to be better linked to the company’s performance. But reporting on the experience of the United Kingdom, Martin Petrin of University College London cast doubt on whether that was really happening. According to data he presented, executive pay in leading UK companies has risen by an annual rate of 13.6% since 1998, while the share price of these companies has risen only by an annual average of 1.7%.

He also questioned another of the much-vaunted benefits of say on pay – namely, that by making executive-pay setting more transparent, it leads bosses to moderate their demands. By contrast, he said, it can lead to “ratcheting up”. This is where companies declare that since their executives are all above average (otherwise they wouldn’t have been hired), they must be paid above the median for their industry peers.

But despite the potential criticisms, the panellists generally accepted that say on pay is now an unstoppable tide. In some countries, such as the UK and Switzerland, say on pay is – to some extent – legally mandated. Others, such as France, have steered more towards self-regulation.

Denis Ranque, a leading French businessman and president of the High Committee on Business Governance, argued that hard law was not always the most effective approach. Speaking in French, he pointed out that “Enron had a system of governance where all the ethics boxes were ticked.” Rather than relying on hard law, he said, we should emphasise the role of transparency in executive-pay setting and in wider issues of corporate governance. “Just remember, whatever you do will be in the papers tomorrow. Think about your mother or your daughter’s reaction when they see it.”

But if say on pay is inevitable, it raises another question – who gets to have a say? Typically, it’s limited to shareholders, but the French academic Charley Hannoun said it may be an issue that’s of less concern to shareholders and more to stakeholders, most notably the company’s employees. After all, he argued, they were the ones most likely to be affected by the growing disparity in pay between the people at the bottom and the people at the top.

Useful links

OECD Integrity Week 2014 – a week of public events focused on integrity in business and government and the fight against corruption.

Corporate governance – OECD research and analysis

Board Practices: Incentives and Governing Risks (OECD, 2011)

Corporate governance: Lessons from the financial crisis (OECD Observer)

Getting Rid of “Responsible” from “Responsible Business Conduct”

Global Forum Business Conduct
Click to go to the Forum website

Today’s post is by Bhaskar Chakravorti Senior Associate Dean for International Business & Finance at The Fletcher School, Tufts University, and founding Executive Director of Fletcher’s Institute for Business in the Global Context. He is the author of “The Slow Pace of Fast Change.”

Today’s OECD Global Forum on Responsible Business Conduct comes not a minute too soon, with far too many recent examples of irresponsible – and, in many cases, criminal conduct – in international business. There is reason to worry that such problems will worsen as the center of gravity of the world’s economic activity moves towards the developing nations, since the necessary institutions and the context within which global business operates have not had the time to catch up with the rapid market changes. For this reason, business must take on a disproportionate share of responsibility to compensate for the missing institutions.

Of course, simply putting people together in a room will not resolve all issues. But we can make a start. I am particularly excited about the fact that I have the privilege of moderating a discussion with leaders representing multiple stakeholder groups during the opening plenary. We can help establish a tone for the Forum.

One of the themes I would like to explore is how to make the “responsible” adjective in the term “responsible business conduct” redundant. Responsibility is a rather loaded term. It suggests that decision-makers in the business world want to conduct themselves in one way, while responsible business conduct would require something quite different.

You cannot scold, regulate, punish and nag your way to responsible conduct. It has to become part and parcel of regular business practices. This means that everything that comes under the label of “responsibility” is compatible with the natural incentive systems that drive managerial conduct. I see four developments that might offer clues on how to make responsible conduct compatible with managerial incentives.

Environmental, Social and Governance Investing (ESG) Criteria and Shareholder Activism. To understand what drives business conduct, follow the money. What if money were not to follow you if you deviate from responsible conduct? ESG investing aims to do precisely that. Beginning with the churches in the 1920s that excluded “sin stocks”, ESG compliant portfolio managers screen companies that do not meet certain environmental, social and governance criteria. This can make a difference to the conduct of managers.

In addition, and perhaps even more significantly, such investors also engage in shareholder activism that has a significant impact on executive decisions. But this also requires a larger body of clients who demand such criteria from their portfolio managers.

At least $13.6 trillion of assets under management incorporate ESG concerns into their investment selection and management, according to the Global Sustainable Investment Review 2012, representing 21.8% of the total assets under management in the regions covered.  In addition to religious institutions, there are other major investors, such as state pension funds and corporations, who have an interest in growing this form of investing.

Creating Shared Value. This approach focuses on areas where responsible conduct can help in growing the pie rather than asking managers to consider a zero-sum situation between business interests and those of other stakeholders. Michael Porter of Harvard Business School argues that this can be accomplished by re-conceiving products and markets, reconfiguring value chains, enabling local cluster development. These notions take on a particularly crucial role in the emerging markets where many key institutions are missing or have not kept pace with market growth.

Tailored products and helping to fill gaps in the context can clearly contribute to longer-term value creation despite the near term costs, and provide incentives to managers who take a longer view. The challenge is that most managers have been schooled in Porter’s earlier framework of the Five Forces model, which places a high premium on playing in industries where managers can optimize on their negotiating power. This is based on a static concept of industries and markets and has more of a zero-sum connotation. So I am glad Professor Porter is taking the lead in dismantling a framework – ill-suited for dynamic market contexts – that he had originally created.

Rewards for Optimizing Needs of Multiple Stakeholders. Good managers inherently manage competing demands from several parties and take pride in setting priorities and making trade-offs. Many managers and executives often start out as entrepreneurs primarily motivated by a “purpose” that extends well beyond profit. These inherent traits of many managers tend to remain under-utilized and under-rewarded. Reminding managers of such inherently powerful motivators and reinforcing the mindset can prove to be a powerful incentive to look beyond the demands of shareholders or the analyst on Wall Street – and consider the needs of other stakeholders: employees, consumers, the environment, advocacy groups, the market ecosystem, etc.

It is extremely important to get enough of a community of peers to come together around such a notion to enhance managerial motivation. But most critically, such an initiative has to be led from the very top of the corporate hierarchy and must be consistently applied to the managerial rewards systems affecting decision-makers at every layer. It cannot work if the CEO says one thing in public and then goes back to the line management and simply rewards them for “making their quarterly numbers.”

CEOs can take comfort in the analysis by Raj Sisodia of Babson college that 18 such publicly traded companies out of the 28 he studied outperformed the S&P 500 index by a factor of 10.5 over 1996-2011. Sisodia and Whole Foods’ founder, John Mackey has now started encouraging a community of such peers to gather as “conscious capitalists”.

Legislating CSR. Finally, another way to align managerial incentives with responsible business conduct is by simply requiring it by law. India might become the first country to have mandatory CSR: a Bill in the Parliament requires companies above a certain size to ensure that they spend at least 2% of annual profits on CSR activities. It is hard to tell how productive such a measure might be, but it offers an opportunity for the wider international community to observe and learn from an experiment in taking a blunt instrument approach to the problem.

We are in effect coming to the realization that singling out responsible conduct can set it outside the realm of business-as-usual. Paradoxically, the way to ensure more responsible outcomes, may be to aspire to the day when we do away with the notion of responsible business conduct. For it to be a reality we must create mechanisms and incentives that produce a larger overlap between responsible business conduct and plain, unadorned business conduct.

Useful links

Inaugural Address by Her Excellency Dr. Dipu Moni, Foreign Minister of Bangladesh, at the OECD Global Forum on Responsible Business Conduct (pdf)

OECD Guidelines for Multinational Enterprises

OECD Policy Framework for Investment User’s Toolkit

You and me and eudaimonia

Click to download the report
Click to download the report

Be honest, if you had to pick one of Snow White’s Dwarfs to run your country, would Happy be your first choice? I mean, what’s so great about happiness that it gets enshrined in constitutions and even gets its own International Day today (even if it does have to share with Alien Abduction Day according to OECD sources)? When your economy is going to hell in a hand basket, Doc and the technocrats are called in.  And it’s Grumpy and the rest of the dissatisfied who stimulate progress. As Shimon Peres said during his visit here last week, the reason Israelis are so innovative is that they’re always complaining.

But even the glum old OECD is trying to cheer you up, or at least find out if you’re miserable. The title alone of our latest report, OECD Guidelines on Measuring Subjective Well-being, will probably bring a smile to your face, but just wait till you see what’s in it. You may think that subjective well-being is easier to recognise than to define, but that’s because you’re not a statistician.  The OECD definition “encompasses three elements: life evaluation (a reflective assessment on a person’s life or some specific aspect of it); affect (a person’s feelings or emotional states, typically measured with reference to a particular point in time); and eudaimonia (a sense of meaning and purpose in life, or good psychological functioning).

We’ll come back to eudaimonia below, but you may be wondering how you can actually measure these things. Since the report consists of guidelines, its main purpose is to help to design surveys – sample size, target population, survey frequency, that kind of thing. But it does provide examples of measures. My favourite is the Andrews and Withey scale that asks how you feel about your life as a whole and you have seven possible options ranging from (no, not “Sleepy” to “Dopey”) “Delighted” to “Terrible”.

Back to Eudaimonia. It’s defined here as “meaningfulness” or “purpose” to life, but Eudaimonia is often translated from the ancient Greek as “happiness”, our subject today. However, for philosophers from Socrates on who used the term, the meaning wasn’t really that implied by the OECD guidelines (if only they’d known!). It referred less to a pleasant feeling than to how you lived your life and whether your actions were moral – well-living and well-doing and not just well-being if you like. Less to do with how you feel than how you act.

So what’s that got to do with an organisation like the OECD? Everything, if you take our slogan “Better policies for better lives” seriously.

Eudaimonia meant taking the morally appropriate course of action in a given situation. A typical example would be how to react to fear, as discussed by Aristotle in his Nicomachean Ethics.  Too much fear can lead to cowardice and inaction. Too little fear may mean doing something stupid through over-confidence. Courage is the virtuous reaction in this case. Substitute “crisis” for “fear” and you’re not far from the kinds of choices a government has to make and the kind of advice the OECD gives.

Maybe you think that’s according too much credit to the continuing relevance to modern governance of ancient ideas of virtue. After all, these ideas refer to individual conduct rather than what a government (or company) is judged on – its actions, and whether they increase overall well-being and conform to certain standards.

At the same time, one of the main themes of this year’s OECD Forum is rebuilding trust. The latest Edelman Trust Barometer shows that the public puts a high price on individual ethics. Fewer than one in five respondents believes a business or governmental leader will actually tell the truth when confronted with a difficult issue, while unethical behaviour is one of the main reasons that banks and financial services remain the least trusted sectors .

Surveys like the Barometer also underline the fact that the people who are most trusted are those the respondents feel are most like them. There is a general impression that what is important to political and business leaders isn’t what counts to most citizens. Measuring Subjective Well-being is part of a broader OECD project, the Better Life Initiative, which tries to change that, at least as regards governments. The Initiative includes Your Better Life Index, an interactive tool that allows you to compare well-being across countries, based on 11 topics covering material living conditions and quality of life, according to how important you think each topic is. Try it, you’ll make a lot of statisticians happy.

Useful links

Better Life Initiative: Measuring Well-Being and Progress


OECD Forum 2010 Business ethics: restoring trust

Marilyn Achiron of the OECD’s Corporate Editorial Unit contributed this post

Should we read anything into the fact that the three panelists in the session on Business ethics: Restoring trust were all women?

In the face of what discussant Roland Schatz, president of Media Tenor, called a “trust meltdown”, the panelists and other discussants insisted that restoring trust and promoting ethics in business must be a universal issue, and one that must also involve the financial industry. As Amy Domini, founder and CEO of Domini Social Investments said, “The role of finance is pivotal to the success of the planet. If finance is working against the goals of human dignity and ecological sustainability, then governments and civil society will be incapable of achieving those goals.”

Anne-Catherine Husson-Traoré, CEO of Novethic, noted that there are already reams of rules and regulations on ethical business practices, the problem is that they are often not enforced and no sanctions are applied if they’re breached. Agnes Jongerius, president of the Dutch FNV labour union agreed, but argued that new regulations were also needed: “The G20 countries are not delivering what they promised in London and in Pittsburgh,” she said. “They have a very short time to deliver new rules for the financial world, for business ethics, for real corporate social responsibility.” She urged the OECD to strengthen its guidelines on multinational enterprises. “If you have good rules but none are applied, we won’t make the progress we need to make.”

Amy Domini stressed the tactical role that shareholders can play in influencing corporate behaviour. But first they have to assume their responsibility. “Nobody owns corporate America anymore,” she said, citing the preponderance of mutual funds in the US that have no real stake in the individual companies in which they invest. She suggested that European unions, which are far stronger than those in the US, and particularly their pension funds, could drive changes corporate behaviour. “Unions need to have a more robust opinion of their own influence,” she said.

But Edward F. Greene, partner at the law firm Cleary Gottlieb Steen & Hamilton, was not convinced. For him, it was governments and international organisations that could exert the most influence. “If we are going to manage financial institutions, we’re going to have to have much more sophisticated regulators in place and a broader regulatory system to identify and control risk.”

Carla Coletti, the director of Trade, Employment and Development at the International Metwalworkers’ Federation, was passionate: “There is no more time for unilateral good will. Enough public relations; enough window dressing; enough voluntary codes. They are dangerous because they give the impression that something is being done.” She urged ministers who will be meeting at the OECD ministerial council meeting later today and tomorrow to “take bold decisions” to require businesses to accept their ethical responsibilities.

Climate Change Ethics: where to start?

This post contributed by John Mutter, Professor of Earth and Environmental Sciences/Professor of International and Public Affairs and Director of PhD in Sustainable Development, Columbia University, NY.

Ethics is the subject of Moral Philosophy.  It concerns itself with what is good and bad, what is right and wrong, what is just and unjust, and what is virtuous.

Climate change per se cannot have an ethical position; only people can do things that are just and unjust, right or wrong.  Climate can’t do right or wrong any more than an earthquake can, even though it might cause enormous death and destruction, or an asteroid hurtling toward us about to wipe out all life as we know it can be said to be doing wrong.   It’s not the climate’s fault.  If there is a wrong being done here, we are doing it.

That being the case it is very tempting to find the wrong doers and chastise them — to name and shame (in the language of human rights advocates) hoping that those named will feel such remorse that they will start to act differently.  There is plenty of that going on; most of which I believe is a huge waste of energy.  None of the wrong doers seem to be listening — why would they, they haven’t listened to any arguments based on the best science or economics; why would they listen to an argument based on ethics.  Perhaps the greatest benefit to identifying the wrong doer is that we, by implication, identify ourselves as being the right-doers and establish a virtuous high ground from which to look down upon others.  Scientists (and I am one of them) tend to indulge in this a lot.  I don’t think this is going to get us anywhere and it is a morally dangerous place to stand.  It may have lead scientists at East Anglia to feel that had the right to suppress data and interfere with the publication of dissenting views – clearly they thought they had right on their side and were justified.  But what they did, in my view was unethical.  And it’s foolish.  Surely the very best way to show that someone doesn’t know what they’re talking about is to let them talk. (more…)