ExecutiveLoyalty.org

EXECUTIVE COMPENSATION AND SOCIETAL GOOD

Generally

​On August 19, 2019, the Business Roundtable announced that 181 CEOs had committed "to lead their companies for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders." By so doing, they signalled a shift away from the conventional wisdom that shareholder interests are paramount. The implications are being widely debated.

Turning to executive compensation, consider this quote from the director of Berkeley Law’s Business in Society Institute: "It’s boards that hold CEOs accountable. If there’s accountability it needs to be baked into how the board oversees management and that starts with executive compensation." Quoted from "Companies under pressure to declare ‘social purpose’ " (Financial Times, 8/22/2019). ​Tracked below are new developments relating to the intersection between executive compensation, corporate governance, and societal good.

• 2019.09.10  Executive Compensation and ESG (Posted on Harvard Goveranance Blog by Janice Koors, Pearl Meyer & Partners LLC). This insightful analysis concludes with an excellent thought: "Finally, beyond driving actions, don’t underestimate the role compensation can play in communicating priorities. Including incentives based on ESG in your plan signals to all stakeholders—including employees and management—its importance to the company and can spur the process of embedding it into the business and the culture."
  

• 2019.09.03  Six Reasons We Don’t Trust the New “Stakeholder” Promise from the Business Roundtable includes this intriguing warning about ulterior motives (see reason #4 in the commentary by ValueEdge Advisors):
  
  • "Everything will depend on how specifically and quantifiably each CEO describes his or her stakeholder goals and especially how their compensation is tied to those goals. If pay continues to be exclusively or primarily based on stock price, this statement is just an attempt at distraction. Indeed, its greatest significance may be as an indicator that CEOs do not think stock-based metrics will support current levels of compensation in a likely recession and they want to tie it to something less quantifiable."  
    
• 2019.08.26  "CEO Incentives Shown to Yield Positive Societal Benefits" - This Harvard Governance Blog describes a 5-year study that found a direct correlation between CEO incentives and GDP increases in free market nations covering Asia, Europe, and the Americas. The study found that "in nations where a CEO incentive compensation is more frequently employed, these nations exhibit relatively more robust economic growth in the years that follow. It appears ubiquitous CEO incentives may result in future positive societal benefits at the macroeconomic national level."  The real challenge comes from moving from the macro-level correlation to the micro-level design of incentive programs that appropriately and fairly advance corporate objectives.

"ESG" Incentive Compensation (Environmental, Social, and Governance)

• 2019.07.19 "Five Steps for Tying Executive Compensation to Sustainability" -- This Harvard Business Review article outlines an approach by which corporate boards may design ESG incentive, stating "What implementation steps do you take? And how can you overcome the challenges that deter executives and directors from changing how company incentives have traditionally been designed?"
  
• 2019.05  Mercer SpotSurvey of ESG Incentives - presents survey data such as the following, which indicates an early stage emergence of ESG factors mainly as a minor influence on annual incentive compensation:
  • ​51% of respondents either use ESG metrics in their incentive plans (30%) or are considering doing so (21%)
    
  • Short-term incentive plans: 21% Long-term incentive plans: 2% Both short- and long-term incentive plans: 7% 
    
  • Weighting of ESG metrics as a percentage of all plan metrics is typically 5% or less
    
• ​​2018 The ESG Impact on Executive Compensation from Pearl Meyer observes a muted impact from ESG factors: "Typically such metrics are given only modest weight in the overall incentive funding formula—something along the lines of 10-20% of the total."
  

Redirecting Corporate Gains to Societal Good

It is possible to fund community foundations with a portion of the shares sold in initial public offerings (IPOs).  Since the 1990s, this has been a somewhat common feature of IPOS in which banks and insurance companies have converted from a non-stock "mutual" form of ownership into a mutual holding company structure. See this IPO description of a minority stock offering that includes a contribution of "2% of [Pioneer Bank's] Common Stock to the Pioneer Bank Charitable Foundation".  More recently, charitable pledges of future IPO income has become an IPO selling point. More on these alternatives appears below. (being developed)

2019.08.14  WeWork Executives Make IPO Pledges.  Here is an indication of what is possible in terms of a forward-looking pledge (reproduced from page 173 of WeWork's Form S-1):

Charitable Commitments of our Co-Founders and Other Senior Leaders
In connection with this offering, our co-founders and senior leaders are dedicating additional resources to amplify the positive global impact of our organization. This effort is designed to enable us to scale our social and global impact as the Company grows.
  •  Rebekah and Adam Neumann have pledged $1 billion to fund charitable causes. To fulfill this pledge, Rebekah and Adam will contribute cash and equity to charitable causes within the 10 years following this offering. Their first contribution aids in the conservation of over 20 million acres of intact tropical forest, including the region pictured on the final page of this prospectus.
  •  Miguel McKelvey has pledged 50% of the value of his equity to fund causes aligned with our mission.
  •  Each of our named executive officers has pledged to donate to charity the equivalent of 10% of proceeds from sales of their equity.
  •  Each of our senior leaders who received option awards and profits interests as described under “Executive Compensation—Incentivizing Our Leadership Team” has indicated their intent to donate to charity 10% of the proceeds from sales of such equity.

​[Quoting from WeWork's S-1 page 199:]  To evidence their commitment to charitable causes and to ensure this commitment is meaningful, if Adam and Rebekah have not contributed at least $1 billion to charitable causes as of the ten-year anniversary of the closing date of this offering, holders of all of the Company’s high-vote stock will only be entitled to ten votes per share instead of twenty votes per share.