Big socio-economic issues served as the backdrop for considering an array of risks that boards need to keep their eyes on
Executive compensation has become the number one reputation-related risk for boards because proxy advisory firms and institutional investors are heavily scrutinizing whether executives are paid in line with the value they create.
With that, Christie Hefner, executive chairman of Canyon Ranch Enterprises, opened a panel discussion on executive pay and succession at Women Corporate Directors’ Global institute on May 15 that explored strategies boards can use to construct better compensation plans. Other panelists included Melissa Means, managing director at Pearl Meyer & Partners, Anne Berner, CEO of Vallila Interior and Nell Minow, co-founder of GMI Ratings.
Means believes boards have ‘moved the pendulum from doing what we thought was right for the company to doing what everybody else does.’ As an alternative she encourages directors to use situational judgment and discretion to determine what’s right for their organization and then ‘go out and explain why it is right, relative to your business strategy, to drive [executive] behavior in the right way through your incentive programs.’
Determining which peer companies to benchmark against when setting pay programs is another problem panelists cited. Too often companies look for peers based on how they pay executives rather than how they perform in the marketplace, said Minow. She cited Timberland’s failed attempt to justify its CEO receiving pay similar to Nike’s even though it’s much smaller with only 10 percent of Nike’s revenues.
‘Pay is just like any other asset allocation made by the board -- it has to be rated in terms of return on investment,’ Minow said, ‘and if you’re not getting a competitive return on investment for what you are paying your executives, then you are paying them the wrong amount.’
Berner said her company considers company goals and success factors by which the CEO is graded to determine pay. The board decides what they want to achieve, the success factors needed and how success and achievement will be measured. The results must correlate with the pay. If an executive meets 80 percent of the goals and success factors, he or she will receive 80 percent of the agreed upon compensation. ‘When we do our homework as a board, we have nothing to fear, we can always defend our position and we’re always independent,’ she said.
CEO succession in many cases takes two years too long, said panelists, who recommend that boards find ways to openly discuss change without creating major disruptions. Succession discussions need to happen frequently because any unforeseen crisis can lead to a CEO’s ouster, in which case the board doesn’t want to get caught without internal candidates lined up to take over.
A panel on recruiting, managing and marketing to millennials cited rumors that ISS may begin looking at whether companies are using demographics to help justify their business strategies, which may mean younger people’s lifestyle choices and buying preferences will loom larger in board decision-making.
‘How are you viewing the reality of when these [millennials] come to economic power?’ Pepperidge Farm president Irene Craig Britt asked the audience. There will be great opportunity and great risk when dealing with consumers in an age group so accustomed to social media that its members are used to receiving responses to requests within minutes. These consumers are willing to give companies more information about themselves faster, but they want companies to correct problems faster, too, she noted.
Companies must also consider how they need to change to serve this audience of consumers and assimilate younger workers into their workforce. Boards will need to consider changing incentives for their workers in order to improve their productivity, panelists said.
A panel on ‘The crises yet to come’ led by Bloomberg Businessweek senior editor and content chief Diane Brady warned of specific issues boards will have to confront in the future, including underinvestment by companies and the government in technological innovation and the greater risks of doing business in China if internal social and political pressures rise there due to declining productivity.
The ‘contagious nature of risk’ means boards will have to be concerned about the unintended consequences of the economic policy decisions of different countries, said Joan Lamm-Tennant, global chief economist and risk strategist at Guy Carpenter & Company. ‘We have to think about unique partnerships to embrace this underemployment problem and break through the innovation changes to actually lift economies without the use of quantitative easing,’ she advised.
Future food crises and the adverse impact that climate change may have on agriculture is yet another issue that boards must consider, as well as rising company healthcare costs due to medical complications associated with obesity, said former US Secretary of Agriculture Ann Venemant of Agriculture.
Declines in worker productivity, falling national GDP, higher healthcare costs and the instability of nations can each be traced back to rising violence against women and trampling of their human rights, according to Melanne Verveer, executive director of the Georgetown Institute for Women, Peace and Security, who added that each could be affected by board decisions in the future.
