What Business Leaders Need to Achieve
Paid to Perform? What do we Want
our Business Leaders to Achieve?
Luke Hildyard
16 January 2013
2
PAID TO PERFORM?
What do we want our business
leaders to achieve?
Prem Sikka (prems@essex.ac.uk) Professor of
Accounting, Essex Business School, UK
and
Director, Association for Accountancy & Business
Affairs (AABA) – www.aabaglobal.org
3
Paid to Perform?
•
What do we want our business leaders to
achieve?
–
Reduce Inequalities
–
Democracy at Work
–
Focus on the long-term
–
Build a sustainable economy
•
Equitable distribution of income/wealth is the key
•
Inequitable distribution is a major cause of the
economic crisis.
4
Paid to Perform?
•
SHORT-TERMISM
•
The average duration of shareholding in UK-
listed companies has fallen from about five
years in the mid-1960s and about two years
in the 1980s to about 7.5 months at the end
of 2007.
•
The average shareholding periods for US
and UK banks fell from around 3 years in
1998 to around 3 months by 2008
5
Paid to Perform?
•
SHAREHOLDERS AS ARE NOT THE MAIN RISK-BEARERS
Leverage Ratios
Barclays
24 times
HSBC
21 times
Lloyds
18 times
Lehman Brothers
30 times
Bear Stearns
33 times
Northern Rock
50 times
•
Shareholders are neither the owners, nor the main
risk-bearers.
6
Paid to Perform?
•
Australian
two-strikes law
•
if 25% or more of votes cast at two
consecutive AGMs oppose the
adoption of a remuneration report,
then the company must formally
respond by asking all board members
except the managing director to stand
for re-election within 90 days.
7
Paid to Perform?
•
FTSE 350 CEOs Tenure
–
4 years and declining
•
Remunerations schemes often based on short-
term measures.
•
Yes, link remuneration to long-term
performance
•
Need more effective information and
disclosures
BUT
CSR has also become a PR
vehicle.
8
Paid to Perform?
•
Are there better standards: Human Rights?
–
They apply to all states and corporations
•
Need more public information about corporate
contract with society
•
Quality of profits
–
FDI contracts
–
Tax payments
–
Pollution
–
Relationship with local elites
9
Paid to Perform?
•
EMPLOYEES AND OTHER STAKEHOLDERS
MUST HAVE A
BINDING
VOTE ON
EXECUTIVE REMUNERATION
•
AN
ADVISORY VOTE
DOES NOT EMPOWER
•
Executive remuneration contracts to be
publicly available.
10
Paid to Perform?
•
The UK was instrumental in developing the
German system of corporate governance:
–
Two-tier boards
–
Workers on company boards
–
Works councils
•
Scandinavian countries also build on employees
•
Why does the same not happen in the UK?
11
Paid to Perform?
THANK YOU
Findings
•
94 FTSE 100 companies use EPS or TSR to
calculate their LTIP
•
TSR used by 74 companies to calculate at least
part of PRP (64 companies used EPS)
•
Only 38 companies use specific, measurable non-
financial PRP criteria. Only 7 for LTIPs
•
Most progressive companies have generally
undergone massive scandal – BP & the Banks
COMPANY PERFORMANCE OVERWHELMINGLY JUDGED BY PROFIT/SHARE PRICE
Accountancy-based measures (like
EPS)
Company accounts ‘are inevitably
based on a series of assumptions
about the future… accounts
provide precise indicators of
performance only in as much as
they apply precise rules to a set of
uncertain events’
(Andrew Likierman, London
Business School)
Market-based measures (like TSR)
‘the market’s collective view was
that risks to bank
creditworthiness had fallen
steadily between 2002 and 2007,
reaching a historic low in the
early Summer of 2007, the very
eve of the worst financial crisis in
70 years’
(Lord Adair Turner)
PROFIT/SHARE PRICE UNRELIABLE GUIDES TO COMPANY PERFORMANCE
Critical measures of performance: Companies
as ‘enduring social institutions’
BEST INDICATORS OF LONG-TERM, SUSTAINABLE SUCCESS ARE NON-FINANCIAL
‘
The value that a company
creates should be measured
not just in terms of short-
term profits, but how it
sustains the conditions that
enable it to flourish over
time
’
Rosabeth Moss Kanter, Harvard
Business Review
Corporate social
performance
Employee
engagement
Brand/
reputation
Customer
satisfaction
Manifestation of short-term share price/ profit
orientation
Action
•
Ruthless cost-cutting
•
Debt-fuelled peculation and
acquisition
•
Share buyback (quadrupled
in UK since mid-90s)
•
Reduced business
investment (lower in UK
than France, Germany & US)
Impact
SHORT-TERM FINANCIAL PERFORMANCE CAN COME AT THE COST OF LONG-TERM
SUSTAINABILITY
Grounds for Action
•
Taxpayer bears cost of CO2 emissions/inequality
•
Volatile business environment affects public finances
•
Millions of people depend on big companies as employer/supplier
•
Taxpayer is multi-billion/£ customer of big business through
procurement budget
•
Taxpayer contributes 32% of UK R&D funding, & funds other critical
infrastructure
PRACTICAL & MORAL BASIS FOR WIDER INPUT INTO EXEC/COMPANY OBJECTIVES
Recommendations
1)
Non-financial measures should constitute 50%
of PRP
2)
Companies should disclose Environmental/Social
performance
3)
Tax rates and procurement decisions should
favour environmental/social disclosers
4)
Investment chain should be required to consider
social/environmental impact
5)
Employee representation on boards
EXECUTIVE/COMPANY PERFORMANCE MUST BE UNDERSTOOD AND EVALUATED IN A
WAY THAT REFLECTS ALL STAKEHOLDER INTERESTS
18
P
A
I
D
T
O
P
E
R
F
O
R
M
?
W
h
a
t
d
o
w
e
w
a
n
t
o
u
r
b
u
s
i
n
e
s
s
l
e
a
d
e
r
s
t
o
a
c
h
i
e
v
e
?
Prem Sikka (prems@essex.ac.uk) Professor
of Accounting, Essex Business School, UK
and
Director, Association for Accountancy & Business
Affairs (AABA) – www.aabaglobal.org
19
P
a
i
d
t
o
P
e
r
f
o
r
m
?
What do we want our business
leaders to achieve?
Reduce Inequalities
Democracy at Work
Focus on the long-term
Build a sustainable economy
Equitable distribution of income/wealth is
the key
Inequitable distribution is a major cause of
the economic crisis.
20
P
a
i
d
t
o
P
e
r
f
o
r
m
?
SHORT-TERMISM
The average duration of shareholding in
UK-listed companies has fallen from
about five years in the mid-1960s and
about two years in the 1980s to about
7.5 months at the end of 2007.
The average shareholding periods for
US and UK banks fell from around 3
years in 1998 to around 3 months by
2008
21
P
a
i
d
t
o
P
e
r
f
o
r
m
?
SHAREHOLDERS AS ARE NOT THE MAIN
RISK-BEARERS
Leverage Ratios
Barclays
24 times
HSBC
21 times
Lloyds
18 times
Lehman Brothers
30 times
Bear Stearns
33 times
Northern Rock
50 times
Shareholders are neither the owners, nor the
main risk-bearers.
22
P
a
i
d
t
o
P
e
r
f
o
r
m
?
Australian
two-strikes law
if 25% or more of votes cast at two
consecutive AGMs oppose the
adoption of a remuneration report,
then the company must formally
respond by asking all board
members except the managing
director to stand for re-election
within 90 days.
23
P
a
i
d
t
o
P
e
r
f
o
r
m
?
FTSE 350 CEOs Tenure
4 years and declining
Remunerations schemes often based on
short-term measures.
Yes, link remuneration to long-term
performance
Need more effective information and
disclosures
BUT
CSR has also become a
PR vehicle.
24
P
a
i
d
t
o
P
e
r
f
o
r
m
?
Are there better standards: Human
Rights?
They apply to all states and
corporations
Need more public information about
corporate contract with society
Quality of profits
FDI contracts
Tax payments
Pollution
Relationship with local elites
25
P
a
i
d
t
o
P
e
r
f
o
r
m
?
EMPLOYEES AND OTHER
STAKEHOLDERS MUST HAVE A
BINDING
VOTE ON EXECUTIVE
REMUNERATION
AN
ADVISORY VOTE
DOES NOT
EMPOWER
Executive remuneration contracts
to be publicly available.
26
P
a
i
d
t
o
P
e
r
f
o
r
m
?
The UK was instrumental in developing
the German system of corporate
governance:
Two-tier boards
Workers on company boards
Works councils
Scandinavian countries also build on
employees
Why does the same not happen in the
UK?
27
P
a
i
d
t
o
P
e
r
f
o
r
m
?
THANK YOU
Reduce inequalities, focus on the long-term, build a sustainable economy - these are key goals business leaders should aim for. Addressing short-termism and shareholder risks are essential in achieving these targets.
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Presentation Transcript
Paid to Perform? What do we Want our Business Leaders to Achieve? Luke Hildyard 16 January 2013
PAID TO PERFORM? What do we want our business leaders to achieve? Prem Sikka (prems@essex.ac.uk) Professor of Accounting, Essex Business School, UK and Director, Association for Accountancy & Business Affairs (AABA) www.aabaglobal.org 2
Paid to Perform? What do we want our business leaders to achieve? Reduce Inequalities Democracy at Work Focus on the long-term Build a sustainable economy Equitable distribution of income/wealth is the key Inequitable distribution is a major cause of the economic crisis. 3
Paid to Perform? SHORT-TERMISM The average duration of shareholding in UK- listed companies has fallen from about five years in the mid-1960s and about two years in the 1980s to about 7.5 months at the end of 2007. The average shareholding periods for US and UK banks fell from around 3 years in 1998 to around 3 months by 2008 4
Paid to Perform? SHAREHOLDERS AS ARE NOT THE MAIN RISK-BEARERS Leverage Ratios Barclays 24 times HSBC 21 times Lloyds 18 times Lehman Brothers 30 times Bear Stearns 33 times Northern Rock 50 times Shareholders are neither the owners, nor the main risk-bearers. 5
Paid to Perform? Australian two-strikes law if 25% or more of votes cast at two consecutive AGMs oppose the adoption of a remuneration report, then the company must formally respond by asking all board members except the managing director to stand for re-election within 90 days. 6
Paid to Perform? FTSE 350 CEOs Tenure 4 years and declining Remunerations schemes often based on short- term measures. Yes, link remuneration to long-term performance Need more effective information and disclosures BUT CSR has also become a PR vehicle. 7
Paid to Perform? Are there better standards: Human Rights? They apply to all states and corporations Need more public information about corporate contract with society Quality of profits FDI contracts Tax payments Pollution Relationship with local elites 8
Paid to Perform? EMPLOYEES AND OTHER STAKEHOLDERS MUST HAVE A BINDING VOTE ON EXECUTIVE REMUNERATION AN ADVISORY VOTE DOES NOT EMPOWER Executive remuneration contracts to be publicly available. 9
Paid to Perform? The UK was instrumental in developing the German system of corporate governance: Two-tier boards Workers on company boards Works councils Scandinavian countries also build on employees Why does the same not happen in the UK? 10
Paid to Perform? THANK YOU 11
Findings 94 FTSE 100 companies use EPS or TSR to calculate their LTIP TSR used by 74 companies to calculate at least part of PRP (64 companies used EPS) Only 38 companies use specific, measurable non- financial PRP criteria. Only 7 for LTIPs Most progressive companies have generally undergone massive scandal BP & the Banks COMPANY PERFORMANCE OVERWHELMINGLY JUDGED BY PROFIT/SHARE PRICE
Accountancy-based measures (like EPS) Company accounts are inevitably based on a series of assumptions about the future accounts provide precise indicators of performance only in as much as they apply precise rules to a set of uncertain events (Andrew Likierman, London Business School) Market-based measures (like TSR) the market s collective view was that risks to bank creditworthiness had fallen steadily between 2002 and 2007, reaching a historic low in the early Summer of 2007, the very eve of the worst financial crisis in 70 years (Lord Adair Turner) PROFIT/SHARE PRICE UNRELIABLE GUIDES TO COMPANY PERFORMANCE
Critical measures of performance: Companies as enduring social institutions Employee engagement Brand/ reputation The value that a company creates should be measured not just in terms of short- term profits, but how it sustains the conditions that enable it to flourish over time Rosabeth Moss Kanter, Harvard Business Review Corporate social performance Customer satisfaction BEST INDICATORS OF LONG-TERM, SUSTAINABLE SUCCESS ARE NON-FINANCIAL
Manifestation of short-term share price/ profit orientation Action Ruthless cost-cutting Debt-fuelled peculation and acquisition Share buyback (quadrupled in UK since mid-90s) Reduced business investment (lower in UK than France, Germany & US) Impact SHORT-TERM FINANCIAL PERFORMANCE CAN COME AT THE COST OF LONG-TERM SUSTAINABILITY
Grounds for Action Taxpayer bears cost of CO2 emissions/inequality Volatile business environment affects public finances Millions of people depend on big companies as employer/supplier Taxpayer is multi-billion/ customer of big business through procurement budget Taxpayer contributes 32% of UK R&D funding, & funds other critical infrastructure PRACTICAL & MORAL BASIS FOR WIDER INPUT INTO EXEC/COMPANY OBJECTIVES
Recommendations 1) Non-financial measures should constitute 50% of PRP 2) Companies should disclose Environmental/Social performance 3) Tax rates and procurement decisions should favour environmental/social disclosers 4) Investment chain should be required to consider social/environmental impact 5) Employee representation on boards EXECUTIVE/COMPANY PERFORMANCE MUST BE UNDERSTOOD AND EVALUATED IN A WAY THAT REFLECTS ALL STAKEHOLDER INTERESTS
PAID TO PERFORM? What do we want our business leaders to achieve? Prem Sikka (prems@essex.ac.uk) Professor of Accounting, Essex Business School, UK and Director, Association for Accountancy & Business Affairs (AABA) www.aabaglobal.org 18
Paid to Perform? What do we want our business leaders to achieve? Reduce Inequalities Democracy at Work Focus on the long-term Build a sustainable economy Equitable distribution of income/wealth is the key Inequitable distribution is a major cause of the economic crisis. 19
Paid to Perform? SHORT-TERMISM The average duration of shareholding in UK-listed companies has fallen from about five years in the mid-1960s and about two years in the 1980s to about 7.5 months at the end of 2007. The average shareholding periods for US and UK banks fell from around 3 years in 1998 to around 3 months by 2008 20
Paid to Perform? SHAREHOLDERS AS ARE NOT THE MAIN RISK-BEARERS Leverage Ratios Barclays 24 times HSBC 21 times Lloyds 18 times Lehman Brothers 30 times Bear Stearns 33 times Northern Rock 50 times Shareholders are neither the owners, nor the main risk-bearers. 21
Paid to Perform? Australian two-strikes law if 25% or more of votes cast at two consecutive AGMs oppose the adoption of a remuneration report, then the company must formally respond by asking all board members except the managing director to stand for re-election within 90 days. 22
Paid to Perform? FTSE 350 CEOs Tenure 4 years and declining Remunerations schemes often based on short-term measures. Yes, link remuneration to long-term performance Need more effective information and disclosures BUT CSR has also become a PR vehicle. 23
Paid to Perform? Are there better standards: Human Rights? They apply to all states and corporations Need more public information about corporate contract with society Quality of profits FDI contracts Tax payments Pollution Relationship with local elites 24
Paid to Perform? EMPLOYEES AND OTHER STAKEHOLDERS MUST HAVE A BINDING VOTE ON EXECUTIVE REMUNERATION AN ADVISORY VOTE DOES NOT EMPOWER Executive remuneration contracts to be publicly available. 25
Paid to Perform? The UK was instrumental in developing the German system of corporate governance: Two-tier boards Workers on company boards Works councils Scandinavian countries also build on employees Why does the same not happen in the UK? 26
Paid to Perform? THANK YOU 27
