Paid to Perform? What do we Want our Business Leaders to Achieve?

Luke Hildyard16 January 2013

2

PAID TO PERFORM?What do we want our business

leaders to achieve?

Prem Sikka (prems@essex.ac.uk) Professor of Accounting, Essex Business School, UK

andDirector, Association for Accountancy & Business

Affairs (AABA) – www.aabaglobal.org

3

Paid to Perform?

• What do we want our business leaders to achieve?–Reduce Inequalities–Democracy at Work– Focus on the long-term–Build a sustainable economy

• Equitable distribution of income/wealth is the key• Inequitable distribution is a major cause of the

economic crisis.

4

Paid to Perform?

• SHORT-TERMISM• The average duration of shareholding in UK-

listed companies has fallen from about five years in the mid-1960s and about two years in the 1980s to about 7.5 months at the end of 2007.• The average shareholding periods for US

and UK banks fell from around 3 years in 1998 to around 3 months by 2008

5

Paid to Perform?

• SHAREHOLDERS AS ARE NOT THE MAIN RISK-BEARERSLeverage RatiosBarclays 24 timesHSBC 21 timesLloyds 18 timesLehman Brothers 30 timesBear Stearns 33 timesNorthern Rock 50 times• Shareholders are neither the owners, nor the main risk-

bearers.

6

Paid to Perform?

• Australian two-strikes law• if 25% or more of votes cast at two

consecutive AGMs oppose the adoption of a remuneration report, then the company must formally respond by asking all board members except the managing director to stand for re-election within 90 days.

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Paid to Perform?

• FTSE 350 CEOs Tenure–4 years and declining

• Remunerations schemes often based on short-term measures.

• Yes, link remuneration to long-term performance

• Need more effective information and disclosures BUT CSR has also become a PR vehicle.

8

Paid to Perform?

• Are there better standards: Human Rights?–They apply to all states and corporations

• Need more public information about corporate contract with society

• Quality of profits– FDI contracts– Tax payments–Pollution–Relationship with local elites

9

Paid to Perform?

• EMPLOYEES AND OTHER STAKEHOLDERS MUST HAVE A BINDING VOTE ON EXECUTIVE REMUNERATION• AN ADVISORY VOTE DOES NOT EMPOWER• Executive remuneration contracts to be

publicly available.

10

Paid to Perform?

• The UK was instrumental in developing the German system of corporate governance:–Two-tier boards–Workers on company boards–Works councils

• Scandinavian countries also build on employees• Why does the same not happen in the UK?

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Paid to Perform?

THANK YOU

Findings

• 94 FTSE 100 companies use EPS or TSR to calculate their LTIP

• TSR used by 74 companies to calculate at least part of PRP (64 companies used EPS)

• Only 38 companies use specific, measurable non-financial PRP criteria. Only 7 for LTIPs

• Most progressive companies have generally undergone massive scandal – BP & the Banks

COMPANY PERFORMANCE OVERWHELMINGLY JUDGED BY PROFIT/SHARE PRICE

Accountancy-based measures (like EPS)

Company accounts ‘are inevitably based on a series of assumptions

about the future… accounts provide precise indicators of performance

only in as much as they apply precise rules to a set of uncertain events’

(Andrew Likierman, London Business School)

Market-based measures (like TSR)

‘the market’s collective view was that risks to bank creditworthiness had fallen steadily between 2002 and 2007, reaching a historic low in the early Summer of 2007, the

very eve of the worst financial crisis in 70 years’

(Lord Adair Turner)

PROFIT/SHARE PRICE UNRELIABLE GUIDES TO COMPANY PERFORMANCE

Critical measures of performance: Companies as ‘enduring social institutions’

BEST INDICATORS OF LONG-TERM, SUSTAINABLE SUCCESS ARE NON-FINANCIAL

‘The value that a company creates should be measured

not just in terms of short-term profits, but how it

sustains the conditions that enable it to flourish over

time’ Rosabeth Moss Kanter, Harvard

Business Review

Corporate social performance

Employee engagement

Brand/reputation

Customer satisfaction

Manifestation of short-term share price/ profit orientation

Action• Ruthless cost-cutting• Debt-fuelled peculation and

acquisition• Share buyback (quadrupled in

UK since mid-90s)• Reduced business investment

(lower in UK than France, Germany & US)

Impact

SHORT-TERM FINANCIAL PERFORMANCE CAN COME AT THE COST OF LONG-TERM SUSTAINABILITY

Grounds for Action

• Taxpayer bears cost of CO2 emissions/inequality• Volatile business environment affects public finances• Millions of people depend on big companies as employer/supplier• Taxpayer is multi-billion/£ customer of big business through procurement

budget• Taxpayer contributes 32% of UK R&D funding, & funds other critical

infrastructure

PRACTICAL & MORAL BASIS FOR WIDER INPUT INTO EXEC/COMPANY OBJECTIVES

Recommendations

1) Non-financial measures should constitute 50% of PRP2) Companies should disclose Environmental/Social

performance3) Tax rates and procurement decisions should favour

environmental/social disclosers4) Investment chain should be required to consider

social/environmental impact5) Employee representation on boards

EXECUTIVE/COMPANY PERFORMANCE MUST BE UNDERSTOOD AND EVALUATED IN A WAY THAT REFLECTS ALL STAKEHOLDER INTERESTS

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PAID TO PERFORM?What do we want our

business leaders to achieve?

Prem Sikka (prems@essex.ac.uk) Professor of Accounting, Essex

Business School, UKand

Director, Association for Accountancy & Business Affairs (AABA) –

www.aabaglobal.org

19

Paid to Perform?

What do we want our business leaders to achieve? Reduce Inequalities Democracy at Work Focus on the long-term Build a sustainable economy

Equitable distribution of income/wealth is the key

Inequitable distribution is a major cause of the economic crisis.

20

Paid to Perform?

SHORT-TERMISM The average duration of

shareholding in UK-listed companies has fallen from about five years in the mid-1960s and about two years in the 1980s to about 7.5 months at the end of 2007.

The average shareholding periods for US and UK banks fell from around 3 years in 1998 to around 3 months by 2008

21

Paid to Perform? SHAREHOLDERS AS ARE NOT THE MAIN

RISK-BEARERSLeverage RatiosBarclays 24 timesHSBC 21 timesLloyds 18 timesLehman Brothers 30 timesBear Stearns 33 timesNorthern Rock 50 times Shareholders are neither the owners,

nor the main risk-bearers.

22

Paid to Perform?

Australian two-strikes law if 25% or more of votes cast at

two consecutive AGMs oppose the adoption of a remuneration report, then the company must formally respond by asking all board members except the managing director to stand for re-election within 90 days.

23

Paid to Perform?

FTSE 350 CEOs Tenure 4 years and declining

Remunerations schemes often based on short-term measures.

Yes, link remuneration to long-term performance

Need more effective information and disclosures BUT CSR has also become a PR vehicle.

24

Paid to Perform? Are there better standards: Human

Rights? They apply to all states and

corporations Need more public information

about corporate contract with society

Quality of profits FDI contracts Tax payments Pollution Relationship with local elites

25

Paid to Perform?

EMPLOYEES AND OTHER STAKEHOLDERS MUST HAVE A BINDING VOTE ON EXECUTIVE REMUNERATION

AN ADVISORY VOTE DOES NOT EMPOWER

Executive remuneration contracts to be publicly available.

26

Paid to Perform?

The UK was instrumental in developing the German system of corporate governance: Two-tier boards Workers on company boards Works councils

Scandinavian countries also build on employees

Why does the same not happen in the UK?

27

Paid to Perform?

THANK YOU