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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

Will Self-Driving Cars Be Better for the Environment?

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self-driving cars for green environment
Shutterstock Licensed Photo - By Zapp2Photo | https://www.shutterstock.com/g/zapp2photo

Technologists, engineers, lawmakers, and the general public have been excitedly debating about the merits of self-driving cars for the past several years, as companies like Waymo and Uber race to get the first fully autonomous vehicles on the market. Largely, the concerns have been about safety and ethics; is a self-driving car really capable of eliminating the human errors responsible for the majority of vehicular accidents? And if so, who’s responsible for programming life-or-death decisions, and who’s held liable in the event of an accident?

But while these questions continue being debated, protecting people on an individual level, it’s worth posing a different question: how will self-driving cars impact the environment?

The Big Picture

The Department of Energy attempted to answer this question in clear terms, using scientific research and existing data sets to project the short-term and long-term environmental impact that self-driving vehicles could have. Its findings? The emergence of self-driving vehicles could essentially go either way; it could reduce energy consumption in transportation by as much as 90 percent, or increase it by more than 200 percent.

That’s a margin of error so wide it might as well be a total guess, but there are too many unknown variables to form a solid conclusion. There are many ways autonomous vehicles could influence our energy consumption and environmental impact, and they could go well or poorly, depending on how they’re adopted.

Driver Reduction?

One of the big selling points of autonomous vehicles is their capacity to reduce the total number of vehicles—and human drivers—on the road. If you’re able to carpool to work in a self-driving vehicle, or rely on autonomous public transportation, you’ll spend far less time, money, and energy on your own car. The convenience and efficiency of autonomous vehicles would therefore reduce the total miles driven, and significantly reduce carbon emissions.

There’s a flip side to this argument, however. If autonomous vehicles are far more convenient and less expensive than previous means of travel, it could be an incentive for people to travel more frequently, or drive to more destinations they’d otherwise avoid. In this case, the total miles driven could actually increase with the rise of self-driving cars.

As an added consideration, the increase or decrease in drivers on the road could result in more or fewer vehicle collisions, respectively—especially in the early days of autonomous vehicle adoption, when so many human drivers are still on the road. Car accident injury cases, therefore, would become far more complicated, and the roads could be temporarily less safe.

Deadheading

Deadheading is a term used in trucking and ridesharing to refer to miles driven with an empty load. Assume for a moment that there’s a fleet of self-driving vehicles available to pick people up and carry them to their destinations. It’s a convenient service, but by necessity, these vehicles will spend at least some of their time driving without passengers, whether it’s spent waiting to pick someone up or en route to their location. The increase in miles from deadheading could nullify the potential benefits of people driving fewer total miles, or add to the damage done by their increased mileage.

Make and Model of Car

Much will also depend on the types of cars equipped to be self-driving. For example, Waymo recently launched a wave of self-driving hybrid minivans, capable of getting far better mileage than a gas-only vehicle. If the majority of self-driving cars are electric or hybrids, the environmental impact will be much lower than if they’re converted from existing vehicles. Good emissions ratings are also important here.

On the other hand, the increased demand for autonomous vehicles could put more pressure on factory production, and make older cars obsolete. In that case, the gas mileage savings could be counteracted by the increased environmental impact of factory production.

The Bottom Line

Right now, there are too many unanswered questions to make a confident determination whether self-driving vehicles will help or harm the environment. Will we start driving more, or less? How will they handle dead time? What kind of models are going to be on the road?

Engineers and the general public are in complete control of how this develops in the near future. Hopefully, we’ll be able to see all the safety benefits of having autonomous vehicles on the road, but without any of the extra environmental impact to deal with.

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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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