How to extend investment horizons, more sustainable pay-packet bonuses and for-profit philanthropy
Investing for the longer term
Be in no doubt: quarterly capitalism still rules. As long as business leaders are beholden to the demands of immediate returns, their attempts at sustainability will always fall short. If such short-termism is ever to be countered, it will require big asset owners (pension funds, insurance firms and their ilk) to act, this paper argues.
First off, the asset owner’s leadership needs to spell out what “long-term value creation” looks like. No more wishy-washy claims. Provide a multiyear time horizon (Singapore’s sovereign wealth fund, GIC, sets its horizon at 20 years) and stick to it. Two easy ways of doing so would be a) to invest in illiquid or “real” asset classes, like infrastructure and real estate, and b) to reduce exorbitant fixed management fees.
Asset owners need to get active, too. Don’t just walk away when your stock slumps. Engage with the executives of the companies you own. Build relationships. If your stake is small and the issue urgent, then form “micro-coalitions” with like-minded investors to get the company’s ear.
Metrics matter as well. Conventional financial accounts offer little in the way of meaningful forward-looking projections. Much more valuable for long-term investment decisions are indicators like 10-year economic value added, R&D efficiency, energy intensity of production and the like. Finally, governance: asset owners and asset managers both need to be clear that their fiduciary duty lies in long-term returns – “rather than to compete in horse races judged on short-term performance”. Policy mechanisms can help here. Automatic rebalancing systems that require the sale of equities during an unsustainable boom offer a case in point.
The paper’s conclusion is unambiguous: “Until [major asset owners] radically change their approach, the other key players – asset managers, corporate boards, and company executives – will likely remain trapped in value-destroying short-termism.”
Barton, D & Wiseman, M (Jan-Feb, 2014), “Focusing Capital on the Long Term”, Harvard Business Review, pp44-51.
Bonus culture has come to stand for all that’s ill with the current fat-cat system, especially in the finance sector. As a result, corporations are increasingly toying with “sustainable bonuses”. These seek to link executive pay packages and incentive plans with non-financial dimensions of sustainability performance. Well-meaning though such efforts sound, are they effective in moving companies towards greater sustainability?
As a new field, the empirical data is a little sketchy. But the study, which is based on four Dutch multinationals, throws up some interesting considerations. First is the role of benchmarks. One popular approach is to tie these new types of incentives to external rankings, such as the widely cited Dow Jones Sustainability Index. However, serious questions revolve around the unreliability and static nature of such rankings (lead performers often retain their place year on year).
Far better, the authors suggest, to develop firm-specific measures linked to priority stakeholders. So DSM and TNT, for example, have developed target indicators linked to employees, the environment and customers – a strong performance in all of which plays into its financial performance too. The size and type of bonus are also critical. The fact that Shell’s sustainable bonus only used to cover 10% of the variable pay component of an executive’s remuneration (precise details on current levels are no longer made public) diminishes its impact as a motivational tool. Oh, and unlike usual remuneration schemes, sustainable bonuses need to get away from obfuscation and spell out their terms for all to see.
Kolk, A & Perego, P (January 2014), “Sustainable Bonuses: Sign of Corporate Responsibility or Window Dressing?”, Journal of Business Ethics 119: 1-15.
Buy one, give one: just a fad?
So-called “buy one, give one” business models are becoming increasingly popular as a for-profit model of philanthropy. Sparked by US firm Toms Shoes, and mimicked by the likes of eyewear retailer Warby Parker, Soapbox Soaps and Two Degrees Food, the approach rests on a simple proposition: for every item a consumer buys, the company donates one to a charitable cause. But does the idea have legs, or is it just a fad?
The model as it currently stands displays a variety of core characteristics: it typically focuses on consumer products (most often clothing), it carries a price premium (although price labels generally fall below $100), it enjoys considerable marketing cachet (thanks to its simplicity and tangibility), and it remains flexible in terms of distribution (with cash and in-kind gifts, as well as direct product donations).
Is this robust enough? One of the key problems that buy one, give one enterprises face, for example, is ensuring its donations keep pace with growing consumer sales. Reputational damage from handling the charitable redistribution phase badly is another risk. Yet the paper is confident that the model is here to stay, as long as companies meet two key criteria: their missions remain authentic and the quality of their products remains high.
Marquis, A & Park, A (Winter 2014), “Inside the Buy-One Give-One Model”, Stanford Social Innovation Review, Vol 12 (1): 28-33.
The Boston College Center for Corporate Citizenship is hosting its 2014 International Corporate Citizenship Conference in Los Angeles on 23-25 March, 2014.
Asian Business and Management is issuing a call for papers for a special issue titled New CSR Dynamics in Asia? Institutions and Systems in a more Challenging Era.Academic news Business School Bulletin
May 2014, London, UK
Make sustainable innovation add to your bottom line. 15+ CEOs and C-Suite from leading multinationals plus heads of CSR will discuss the future of sustainability