CEO compensation linked to sustainability
A recent survey concluded that the salaries of CEOs in S&P 500 companies are no longer increasing—a reflection of the fact that companies are struggling to reach their sustainability goals. Most recently, Freeport-McMoRan and Intel have made changes to CEO compensation with overall financial and sustainability performance in mind.
In fact, the same survey showed that shareholders and investors are increasingly linking executive bonuses to risk management and business growth opportunities in relation to climate change and sustainability, energy efficiency and availability, resource depletion, and waste management.
Environmental Leader published an article that reported shareholders in the United States filed 417 proxy resolutions on sustainability issues in 2013—substantially more than any of the three previous years. 39 percent of these resolutions related to environmental and governance topics. The New York Times reported that FirstEnergy, in response to a shareholder resolution, agreed to outline a pollution and emissions reduction plan in its 2014 Sustainability Report.
Requests for transparency on sustainability issues and performance improvement are not limited to companies with large carbon footprints. According to The Wall Street Journal, leading banks—such as Capital One, Bank of America, and J.P. Morgan Chase have also been asked to disclose additional details about their contributions to greenhouse gas emissions. In addition, PNC Financial was asked by shareholders to provide more information regarding their involvement with Appalachian mining.
An article published on The Harvard Law School Forum on Corporate Governance and Financial Regulation blog attributed the change in shareholder and investor focus to the new-age investor. The Huffington Post suggests that activist investor assets represent as much as 15 percent—$34 trillion—of global investments.
To illustrate, California Public Employees' Retirement System and the Ontario Municipal Employee Retirement System allocate capital to activist hedge funds and are publicly supporting activist investors on investment and corporate oversight issues. Others see sustainability interest growing as a result of the financial crisis of 2008.
Investors now look to evaluate not only the short-term financial performance of companies, but also their real viability to grow in the context of new challenges and manage new risks generated by a rapidly changing world.
In contrast to a decade ago, the majority of S&P companies are now reporting on a broad range of topics, including political spending, governance, energy efficiency, and labor standards. Organizations, such as the Global Reporting Initiative, the Carbon Disclosure Project, and the International Integrated Reporting Council, have created frameworks that have assisted companies in disclosing their corporate responsibility efforts.
In addition, the Sustainability Accounting Standards Board is creating guidance for companies who file with the SEC and who want to share their perspective on industry specific sustainability issues with investors.
As shareholders and investors increasingly link executive compensation to the sustainable growth of the business, extra-financial performance will become more and more important in defining what it means to be a successful company.