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Economy

Executive pay as an issue of responsible business

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The Royal Bank of Scotland (RBS), WPP, Hiscox, BG Group, Lloyds Banking Group, ITV, Standard Chartered, Reckitt Benckiser and Ocado. You might think there isn’t much that connects these nine large, diverse businesses. But in the 2014 round of annual general meetings (AGMs), each has been asked tough questions by shareholders on the issue of executive pay.

A third of Reckitt Benckiser’s shareholders voted against its executive remuneration report in May. Insurance firm Hiscox suffered an even bigger revolt, with 42% of investors voting down its remuneration policy. Meanwhile, RBS and WPP were the latest two corporates to face the wrath of dissatisfied shareholders at their AGMs last month.

It is no wonder – given how hot the topic is for the investor community – that Responsible 100 chose to host a roundtable session to discuss exactly this at the end of June. A utility for open, honest and accountable businesses, Responsible 100 provides companies a platform on which to publish answers to a range of social and environmental questions. Businesses are scored based on their answers, and all their information is then subject to public scrutiny, comment and rating on www.responsible100.com.

Its current question around executive pay reads, “Is [your company’s] highest paid executive paid more than 20 times the average employee salary?

The event – held at consultancy firm KPMG’s London office – was run under the Chatham House rule, so as to allow participants to speak more freely. It included investors representing over £750 billion of managed assets between them, a leading pay consultant, an international trade union body, founders of leading shareholder advisory consultancies and senior directors from the UK’s leading civil society organisations focused on tackling high pay and inequality issues. The aim was to discuss whether the question Responsible 100 was currently asking businesses was fit for purpose.

Initial conversation focused on the history of executive pay. One participant noted that it wasn’t until former Marks & Spencer chief executive Sir Richard Greenbury’s 1995 government-commissioned report on corporate governance that the issue really became a mainstream consideration.

Since then, some businesses have responded in exemplary fashion – listening to shareholders and having a reasonable ratio between the highest and lowest paid employees in their organisation. Others, though, have refused to listen. Executive pay is “a window” into the way a company is managed, it was said.

Participants agreed that the debate needs to change. FTSE 100 directors are often blamed for Britain’s wealth inequality – but what about the footballers who get paid far more?

Another participant said that executive pay should be looked at in relation to what’s going on in the rest of the company. They said that directors needed to suffer in the same way that shareholders do when a company’s share price falls – and vice versa.

One area up for debate was determining what an acceptable highest to lowest pay ratio looks like. The Responsible 100 question suggests 20:1 is the benchmark. However, many in the room agreed that overreliance on a single number was problematic, especially in that it varies widely from sector to sector for perfectly legitimate reasons.

Further, given the average pay ratio in the FTSE100 is 133:1, and that John Lewis, which is employee-owned and often held up as a poster child for responsible business, has a 75:1 ratio, the 20:1 benchmark began to look seriously outdated.

One participant said that some companies lowered their pay ratios by outsourcing the lowest-paid work. John Lewis had recently faced calls to pay all staff the living wage, and it responded by saying most of its cleaning staff were contractors – and therefore not subject to the living wage commitment that it employs across most of the business.

It was said by someone else at the meeting that in actual fact, most companies simply don’t know their pay ratios. They’re not being evil and purposely not publishing it – it’s just very difficult and time consuming to work out. They added that we should strive to get as much information out into the public domain for analysis.

Performance-related pay was also a topic of discussion. A participant pointed towards behaviourist theory – if you do X and get Y, then Y reinforces X – saying that most incentive schemes work in that fashion.

They noted a study by Harvard economist Roland Fryer, who looked at how students in low-performing schools responded to financial incentives. He found that it doesn’t work because the children don’t know how to get the grade – but if you can pay them to go to school, they pick up the knowledge almost by accident. This, the participant said, was a useful lesson in how business approaches the junction between performance and pay.

Speaking after the event, Michael Solomon, director of Responsible 100, described the discussion as “excellent and enlightening”.

He added, “Again we have found, as with previous meetings looking at issues ranging from involvement in the defence sector to transparency on tax, that despite the infinite nuances and complexities which exist, it is quite possible for businesses that want to tell the truth about what they are doing inside their organisation to do so.

Even on issues as sensitive executive pay, how it is set, and how it compares to those at the opposite end of the company pay scale.”

Vincent Neate, head of climate change and sustainability at the event’s host KPMG, said, “For as long as I have been in business, the mantra has been that business is private and transparency an imposition.  There is a growing demand from society, whether your value proposition is B2B or B2C, that business leaders need to turn this on its head.”

Meanwhile Graham Precey, head of corporate responsibility and ethics at Legal & General, one of the founders of this new form of transparent business practice, added, “The Responsible 100 is the only place where heads of policy within companies and campaigning NGOs sit down and discuss standards of responsible business out of the heat of campaigning. It is also the only place where the answers to the questions are then published direct to consumers to vote on the integrity of the answers.”

The Responsible 100 question on executive pay, its rationale and answering guidelines that support it, and the answers which various businesses have provided to it, can be viewed here.

It is likely that, further to the meeting and after subsequent and ongoing discussions, that the reference to the 20:1 ratio will be dropped and a new question – “Is [your company] transparent on executive pay?” – introduced, alongside answering guidelines which will specify the minimum amount of detail answers must contain.

It’s clear that executive pay is an issue that investors and businesses should be taking seriously. A small but growing minority are, if the Responsible 100 meeting is anything to go by, but there is clearly a long way to go. The more information that is available to help all parties formulate rational responses can only be a good thing.

Photo: Orkla via Flickr

Further reading:

RBS and WPP latest firms to face investor anger over executive pay

Investors at Hiscox, ITV and Lloyds the latest to voice executive pay concerns

Charities urged to disclose chief executive pay

Performance vs pay: should boardroom officials be rewarded regardless of their company’s success?

Clamping down on excessive executive pay

Economy

New Zealand to Switch to Fully Renewable Energy by 2035

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renewable energy policy
Shutterstock Licensed Photo - By Eviart / https://www.shutterstock.com/g/adrian825

New Zealand’s prime minister-elect Jacinda Ardern is already taking steps towards reducing the country’s carbon footprint. She signed a coalition deal with NZ First in October, aiming to generate 100% of the country’s energy from renewable sources by 2035.

New Zealand is already one of the greenest countries in the world, sourcing over 80% of its energy for its 4.7 million people from renewable resources like hydroelectric, geothermal and wind. The majority of its electricity comes from hydro-power, which generated 60% of the country’s energy in 2016. Last winter, renewable generation peaked at 93%.

Now, Ardern is taking on the challenge of eliminating New Zealand’s remaining use of fossil fuels. One of the biggest obstacles will be filling in the gap left by hydropower sources during dry conditions. When lake levels drop, the country relies on gas and coal to provide energy. Eliminating fossil fuels will require finding an alternative source to avoid spikes in energy costs during droughts.

Business NZ’s executive director John Carnegie told Bloomberg he believes Ardern needs to balance her goals with affordability, stating, “It’s completely appropriate to have a focus on reducing carbon emissions, but there needs to be an open and transparent public conversation about the policies and how they are delivered.”

The coalition deal outlined a few steps towards achieving this, including investing more in solar, which currently only provides 0.1% of the country’s energy. Ardern’s plans also include switching the electricity grid to renewable energy, investing more funds into rail transport, and switching all government vehicles to green fuel within a decade.

Zero net emissions by 2050

Beyond powering the country’s electricity grid with 100% green energy, Ardern also wants to reach zero net emissions by 2050. This ambitious goal is very much in line with her focus on climate change throughout the course of her campaign. Environmental issues were one of her top priorities from the start, which increased her appeal with young voters and helped her become one of the youngest world leaders at only 37.

Reaching zero net emissions would require overcoming challenging issues like eliminating fossil fuels in vehicles. Ardern hasn’t outlined a plan for reaching this goal, but has suggested creating an independent commission to aid in the transition to a lower carbon economy.

She also set a goal of doubling the number of trees the country plants per year to 100 million, a goal she says is “absolutely achievable” using land that is marginal for farming animals.

Greenpeace New Zealand climate and energy campaigner Amanda Larsson believes that phasing out fossil fuels should be a priority for the new prime minister. She says that in order to reach zero net emissions, Ardern “must prioritize closing down coal, putting a moratorium on new fossil fuel plants, building more wind infrastructure, and opening the playing field for household and community solar.”

A worldwide shift to renewable energy

Addressing climate change is becoming more of a priority around the world and many governments are assessing how they can reduce their reliance on fossil fuels and switch to environmentally-friendly energy sources. Sustainable energy is becoming an increasingly profitable industry, giving companies more of an incentive to invest.

Ardern isn’t alone in her climate concerns, as other prominent world leaders like Justin Trudeau and Emmanuel Macron have made renewable energy a focus of their campaigns. She isn’t the first to set ambitious goals, either. Sweden and Norway share New Zealand’s goal of net zero emissions by 2045 and 2030, respectively.

Scotland already sources more than half of its electricity from renewable sources and aims to fully transition by 2020, while France announced plans in September to stop fossil fuel production by 2040. This would make it the first country to do so, and the first to end the sale of gasoline and diesel vehicles.

Many parts of the world still rely heavily on coal, but if these countries are successful in phasing out fossil fuels and transitioning to renewable resources, it could serve as a turning point. As other world leaders see that switching to sustainable energy is possible – and profitable – it could be the start of a worldwide shift towards environmentally-friendly energy.

Sources: https://www.bloomberg.com/news/articles/2017-11-06/green-dream-risks-energy-security-as-kiwis-aim-for-zero-carbon

https://www.reuters.com/article/us-france-hydrocarbons/france-plans-to-end-oil-and-gas-production-by-2040-idUSKCN1BH1AQ

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Economy

How Going Green Can Save A Company Money

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going green can save company money
Shutterstock Licensed Photot - By GOLFX

What is going green?

Going green means to live life in a way that is environmentally friendly for an entire population. It is the conservation of energy, water, and air. Going green means using products and resources that will not contaminate or pollute the air. It means being educated and well informed about the surroundings, and how to best protect them. It means recycling products that may not be biodegradable. Companies, as well as people, that adhere to going green can help to ensure a safer life for humanity.

The first step in going green

There are actually no step by step instructions for going green. The only requirement needed is making the decision to become environmentally conscious. It takes a caring attitude, and a willingness to make the change. It has been found that companies have improved their profit margins by going green. They have saved money on many of the frivolous things they they thought were a necessity. Besides saving money, companies are operating more efficiently than before going green. Companies have become aware of their ecological responsibility by pursuing the knowledge needed to make decisions that would change lifestyles and help sustain the earth’s natural resources for present and future generations.

Making needed changes within the company

After making the decision to go green, there are several things that can be changed in the workplace. A good place to start would be conserving energy used by electrical appliances. First, turning off the computer will save over the long run. Just letting it sleep still uses energy overnight. Turn off all other appliances like coffee maker, or anything that plugs in. Pull the socket from the outlet to stop unnecessary energy loss. Appliances continue to use electricity although they are switched off, and not unplugged. Get in the habit of turning off the lights whenever you leave a room. Change to fluorescent light bulbs, and lighting throughout the building. Have any leaks sealed on the premises to avoid the escape of heat or air.

Reducing the common paper waste

paper waste

Shutterstock Licensed Photo – By Yury Zap

Modern technologies and state of the art equipment, and tools have almost eliminated the use of paper in the office. Instead of sending out newsletters, brochures, written memos and reminders, you can now do all of these and more by technology while saving on the use of paper. Send out digital documents and emails to communicate with staff and other employees. By using this virtual bookkeeping technique, you will save a bundle on paper. When it is necessary to use paper for printing purposes or other services, choose the already recycled paper. It is smartly labeled and easy to find in any office supply store. It is called the Post Consumer Waste paper, or PCW paper. This will show that your company is dedicated to the preservation of natural resources. By using PCW paper, everyone helps to save the trees which provides and emits many important nutrients into the atmosphere.

Make money by spreading the word

Companies realize that consumers like to buy, or invest in whatever the latest trend may be. They also cater to companies that are doing great things for the quality of life of all people. People want to know that the companies that they cater to are doing their part for the environment and ecology. By going green, you can tell consumers of your experiences with helping them and communities be eco-friendly. This is a sound public relations technique to bring revenue to your brand. Boost the impact that your company makes on the environment. Go green, save and make money while essentially preserving what is normally taken for granted. The benefits of having a green company are enormous for consumers as well as the companies that engage in the process.

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