February 17, 2021
In the Year of the Stakeholder: Getting Skin in the Game
by Robin Ferracone
Is it just me? It seems that with few exceptions, most articles and reports are focused on what the new Administration might do, the aftermath of COVID-19 and the continuing efforts around environmental social and governance (ESG) actions. In January, our company, Farient Advisors, along with our partners in the Global Governance and Executive Compensation Group (GECN Group), published our fourth in a series of Global Trends Reports, entitled: 2021 and Beyond: Global Trends in Stakeholder Incentives. As mentioned in last month’s Farient Blog, we looked at more than 500 companies across six regions, interviewed global directors, investors and credit rating agencies to help our clients in North America and internationally gain a better understanding of what boards of directors and management may expect going forward.
Clearly, the impact of COVID-19 isn’t going away anytime soon. It has been an accelerant that has required an almost instant pivot of all stakeholders (employees, customers, suppliers and communities). COVID created more political divisiveness, increased our focus on sustainability, ramped up our technology needs (almost overnight), and highlighted the significant inequities in our society. Stakeholders, including investors, continue to pressure companies to address these issues. To that end, it would appear the real starting point for including stakeholder incentives in executive pay is around accountability. Should stakeholder measures be incorporated in executive incentive plans to ensure there is alignment of executive and stakeholder interests: in essence, true skin in the game? As we address this, it’s important to consider two questions: (1) what is your company’s stakeholder strategy and culture? And, (2) how do you measure and report on your strategic progress? As I’ve highlighted below, Strategy and Culture, Measurement and Reporting, and Incentives and other levers, while all very different, play a supporting role in achieving objectives for stakeholders.
From COVID safety protocols to addressing global climate extremes, our research highlights the fact that Boards of Directors and CEOs around the world are stepping up to ensure the financial, physical and emotional wellbeing of their employees and their families, and understand how the long-term sustainability of the company depends on it. As one of our interviewees shared, evaluating a company’s longevity has far-reaching consequences. The financial markets are paying attention. Bond markets recognize the importance ESG factors play in the credit rating process. Investors, like BlackRock, State Street and Vanguard among others, are showing an increased appetite for ESG information and are pushing companies to disclose material risks. Sixty-seven percent of the companies that participated in our Farient/GECN Group research now include stakeholder metrics in their short- and/or long-term incentive programs. Companies such as Apple, Royal Dutch Shell and Clorox recently introduced sustainability metrics as part of their executive compensation plans. In addition, trailblazing companies like Textron, Verizon and Microsoft have added diversity and inclusion metrics to their short-term incentives while Prudential has added this metric to its long-term incentive programs.
Most of the directors we interviewed suggested that reporting on stakeholder progress needs to be flexible in its timing and not constrained to once a year. Moreover, once corporations have defined their strategy and culture, they should be expected to disclose their goals and progress against those goals. It has been my experience over the past year that reporting to all stakeholders on progress against key metrics runs the gamut from company websites, to sustainability and to proxy reports and 10Ks.
ESG has opened the discussion for companies to think about their relationship with all stakeholders. As the year progresses, consider how your board and management can work together to align the interests of the company with employee, customer, supplier, community and investor interests. Questions to get you started and/or keep the process moving include:
- Does your company have sound ESG initiatives with clear measures and goals? Does the board oversee these initiatives? If so, through what mechanisms?
- How does your company report on these initiatives? Are these disclosures sufficient? If not, what improvements are needed?
- How well does your company describe the link between ESG and its HR practices?
- Does your company use ESG measures in its incentive plans? Why or why not?
I am convinced that focusing on stakeholder wellbeing and creating a level of accountability through incentives will have long-term benefits for everyone. As we focus on doing right by stakeholders, we can all help maintain a healthy economy, expand opportunities and protect our planet.
Robin Ferracone is Farient’s Founder and Chief Executive Officer. She is the author of the book entitled, “Fair Pay Fair Play: Aligning Executive Performance and Pay” and is a frequent presenter for well-known organizations including Council of Institutional Investors, Society for Corporate Secretaries and Governance Professionals, the National Association of Corporate Directors (NACD), and The Conference Board, among others.