The most important thing company boards can do to promote corporate
responsibility is to redesign executive pay incentives to take greater
account of long-term performance, according to findings of the
first-ever inquiry into boards and CSR.
The inquiry, carried out over the past year by Insight Investment,
Business in the Community and FTSE Group, has concluded that
‘misaligned incentives’ are one of the chief barriers to wider uptake
of CSR, and that redesigning them should be a priority for any company
head intent on more responsible behaviour.
The inquiry’s final report, Rewarding Virtue, says ‘flawed internal
incentives create temptations for executives and staff to act
irresponsibly’, and that while they are not the only reason that
companies tend to behave in such a way, they are ‘the most important’.
All boards should therefore reassess their executive remuneration
strategies to ‘give due weight to long-term, intangible factors and
corporate responsibility in the definition, measurement and recognition
of success’. Executive salary packages should balance long-term and short-term
rewards, and ‘use performance metrics that reflect both tangible and
intangible value creation’.
The report also urges boards to ‘give priority to personal integrity in
the recruitment and retention of directors’, and to then encourage a
culture at board level and elsewhere ‘in which responsible behaviour is
expected and lapses are noticed,criticized, and punished with
appropriate sanctions’. It says the board, and not other company
echelons, should have the responsibility for setting values and
standards for the business.
The inquiry consulted 40 directors and company secretaries of Britain’s
biggest companies on the question: ‘What should boards do to ensure
companies behave responsibly, and why?’ It also brought in views from
organizations representing various stakeholders.
Its three sponsors
plan to employ the findings in their daily activity: Insight
Investment, which is the investment management arm of HBOS, in its
engagement with companies, Business in the Community in the compilation
of its annual Corporate Responsibility Index, and FTSE Group in its
assessment of company performance for inclusion in the FTSE4Good index
family.
