When the Business Roundtable announced their “new” commitment to “stakeholders,” we said it was not meaningful unless we saw incentive compensation aligned to specific stakeholder goals. At the Harvard Law School Forum on Corporate Governance and Financial Regulation, Equilar research analyst Connor Doyle looks at current incentive plans tied to goals other than the traditional EPS and other short-term financial targets. We note once again that we see no “non-financial” aspect to ESG; it is simply and solely a more nuanced and accurate risk assessment.
Metrics related to employee engagement jumped from six to 16 companies in the past three years, and environmental considerations went from 30 to 38 companies in five years. Customer satisfaction and safety remained relatively flat, going from 45 to 43 companies for customer satisfaction and safety plateauing at 68 companies. All of these metrics peaked in 2017, besides employee engagement which saw the most significant gain this year. However, the rise in employee engagement this year suggests that boards are paying closer attention to employee needs, and that the stakeholder model has already begun to take effect. Of course, performance metrics are only one of many tools used to measure the trends in corporate governance towards a stakeholder model. Diversity decreased as a metric in the past three years, but board gender diversity has grown in this time period as directors see increasing pressure from lawmakers and investor groups to bring women into boards that have historically favored men, as seen by the Equilar Q2 2019 Gender Diversity Index. Boards have attempted to set an example in the highest levels of corporate governance, with the hope that these changes will facilitate cultural transformation in the lower rungs of the ladder. While this trend should be encouraging to supporters of the stakeholder model, it is important to focus on the way executives are incentivized to make key decisions for their companies, as these are the individuals who bring about change on a daily basis. Boards can make sweeping changes to company culture, but each board only meets a few times a year. It is the responsibility of upper management to implement changes on the ground, and to directly engage with the corporate culture in which they participate. For the stakeholder model to truly take hold, executives should be evaluated on how they deliver results for their employees, customers and their communities.