Archive for the ‘consultants’ Category

Global 100: Sustainably Misleading

Corporate Knights continues to mislead. Once again they’ve issued a list of the world’s “most sustainable” corporations — the Global 100 — and once again the metrics they’ve used have surprisingly little to do with what most of us mean by the word “sustainability.”

First, let’s get one thing out of the way. The organization is right to defend the fact that there are oil companies (including Enbridge, for example) and other producers of “sin” products on their list. There’s nothing in principle that says an oil company can’t, in some useful sense, be sustainable. And even if you think the fact that a company like Enbridge should be docked points because oil is a non-renewable resource, it still is a useful and interesting exercise to look at which oil companies (for example) are leading the field in terms of sustainability. So, CK is right to defend itself in this regard.

No, the problem with the Global 100 is not that they give kudos to a few unpopular companies. The real problem lies in the criteria used to measure what they refer to as “sustainability.”

Here are the 12 “key performance indicators” that get a company onto the Global 100:

  • Energy productivity;
  • Carbon productivity;
  • Water productivity
  • Waste productivity
  • Innovation Capacity
  • Percentage Tax Paid
  • CEO to average employee pay
  • Pension fund status
  • Safety performance
  • Employee turnover
  • Leadership diversity
  • Clean capitalism pay link.

These are essentially the same criteria they used (and which I critiqued) last year. The only difference is that they’ve added the bit about “Pension Fund Status,” the relevance of which may already have you wondering.

Hopefully the problem with those criteria is clear to most of you: only the first four — the first third of the criteria — actually have something to do with what most of us mean by “sustainability.” The rest are important issues, to be sure, but not relevant to the question of sustainable use of resources, or to the notion of sustainable economic growth that is compatible with environmental conservation.

Many will surely defend these criteria, and will tell me that I’m working with too narrow a conception of sustainability. Sustainability, they may say, isn’t just a narrow environmental concept. It’s about the whole People-Planet-Profits nexus. Well, certainly you can draw a diagram with boxes and arrows that shows connections of various kinds between those three. But to say that the three are one is to make so many undefended ethical, conceptual, and factual assumptions that the only result must be unnecessary confusion.

No, the Global 100 really isn’t a sustainability index, at least in the way that word is used by normal folks. It’s a complex index of sustainability, fairness, and a bunch of other positive stuff. And if you’re interested in all that stuff, why not just say so? Why bury it in a word that most people take to mean something else entirely?

The kicker, in terms of misleading language, here, is the tag-line that completes the title of the Corporate Knights list: “The Global 100: World Leaders in Clean Capitalism.” The problem here is that “Clean Capitalism” is a term Corporate Knights uses to describe what others might refer to as “conscious” capitalism, or perhaps “corporate social responsiblity.” But when most of us hear “clean,” we think “not dirty,” or “not polluting.” The implication, here, whether intended or not, is that the firms on this list are clean ones, firms unlike the dirty, polluting, earth-pillaging firms of the past.

Now, it would be one thing if Corporate Knights wanted to turn the word “sustainability” (or “clean”) into a technical term, a term of art with a special meaning for experts in the field. But that’s not what’s going on. Instead, they’re turning the word into a brand, a buzzword, and it’s a buzzword with which 100 companies are today adorning press releases. A hundred firms are today bragging about being sustainable, and are doing so with Corporate Knights’ endorsement. But “sustainable,” here, simply does not mean what you think it means.

Executive Compensation at a Regulated Monopoly

Protests broke out last week at the first annual shareholders’ meeting of Canadian energy company, Emera. Emera is a private company, traded on the Toronto Stock Exchange. But one of its wholly-owned subsidiaries, Nova Scotia Power, is the regulated company that supplies Nova Scotia with virtually all of its electricity.

The protest concerned the fact that several Emera and Nova Scotia Power executives had received substantial raises, despite the fact that Nova Scotia Power had just recently had to go to the province’s Utility and Review Board to get approval to raise the price it charges Nova Scotians for electricity. According to the utility, the rate hike was needed to add new renewable energy capacity to Nova Scotia’s grid. But protestors wondered if the extra cash wasn’t going straight into the pockets of wealthy executives.

The first thing worth pointing out for anyone not already aware is that practically no one thinks that anyone is doing executive compensation particularly well. Sure, most boards have Compensation Committees now, and many big companies engage compensation consultants to do the relevant benchmarking and to make recommendations. But no one is particularly confident in either the process or the results. So Emera’s board is far from alone in facing this kind of critique.

The second point worth making is that there are two very different kinds of stakeholders concerned in a case like this, but in this particular case they happen to overlap substantially. On one hand, there are Emera’s shareholders. They have an interest in making sure the company’s Comp Committee does its job, and sets executive compensation in a way that attracts, retains, and motivates top talent in order to produce good results. On the other hand, there are customers of Nova Scotia Power, ratepayers who want a cheap, stable supply of electricity. Now, as it happens, many of the vocal protestors at Emera’s annual meeting are members of both groups: they are shareholders in Emera and customers of Nova Scotia Power. But it is crucial to see that these are two separate groups, with very different sets of concerns. When this story is portrayed as a story about angry shareholders, this crucial distinction gets blurred. What’s good for shareholders per se is obviously not the same as what is good for paying customers. And, importantly, a company’s board of directors aren’t accountable to customers in the same way that they are to shareholders.

The final point to make about this is that, to observers of corporate governance, this is actually a “good news” story. As noted above, no one thinks executive compensation is handled very well. But despite that fact, corporate boards still face relatively little pushback from shareholders, and are relatively seldom held to account in this regard. There are of course exceptions (including a number of failed “say on pay” votes) but those exceptions prove the rule. And that’s unfortunate. In any ostensibly democratic system, it is a good thing when the voters take the time to show up and to ask hard questions. Even if no one is sure that such participation improves outcomes, it is an invaluable part of the process.

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(I was on CBC Radio’s Maritime Noon show to talk about this controversy. The interview is here.)
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Insider Trading and Market Integrity

Cheng Yi Liang, a chemist for the US Food and Drug Administration, has been found guilty of Insider Trading and sentenced to 5 years in prison. (I first blogged about this case back in March, when Liang was arrested.)

As it happens, the Liang verdict dovetailed nicely with the topic covered yesterday in the Management Ethics class I teach at the Ted Rogers School of Management. The class was led by a terrific guest speaker, compliance consultant and retired RBC compliance officer Georges Dessaulles.

The Liang case serves as a great example of one of the points Georges emphasized in his presentation, namely that when it comes to Insider Trading, highly-placed executives are far from the only concern. In the Freeport McMoran case in the mid-90’s, for example, the central figure was a consulting geologist, not an employee of the mining company itself. In the 2001 case related to Nortel’s acquisition of Clarify, the central figure was an executive working at a public relations firm that had a contract with Clarify. And now, in the Liang case, the guilty party not only didn’t work for the company in question, he didn’t have any contractual or other financial relationship with the company. Instead, he was a scientist at a regulatory agency. Other cases have involved administrative assistants, or even employees at companies printing corporate reports.

This highlights an important point about the ethics of insider trading. The stereotypical cases of insider trading involve executives, making use of undisclosed knowledge to gain an unfair advantage over outsiders in buying or selling stock. In taking unfair advantage, executives not only perpetrate a basic injustice, but also violate their duties to shareholders. But the kinds of cases cited above point to a different reason for the wrongness of insider trading. In the Freeport and Nortel cases, and now in the FDA case, the central figure wasn’t someone with direct obligations to corporate shareholders. There was thus no breach of fiduciary duty (at least not in the usual sense). What’s really at stake, in such cases, is the undermining of the basic principle of free-and-voluntary exchange on which the a free-market economy is based.

The challenge for organizations is to make sure that employees and contractors with access to sensitive information understand the definition of — and penalties for — insider trading. But that’s a serious challenge, especially at big companies. Better still would be for more people to understand the moral underpinnings of free markets quite generally, and to have the moral reasoning skills to figure out the rest from there.

Sustainability Isn’t Everything

The word “sustainability” doesn’t just refer to everything good. If it did, we wouldn’t need the word “sustainability” at all; we would just use the word “good.”

I’m just a small-town philosopher who likes words to mean what they mean. That’s why I got cranky when I saw the new Global 100 Ranking, which is ostensibly a sustainability ranking. (See my blog posting here.) Why cranky? Because over half of the criteria used to arrive at that ranking have nothing to do with what I — and, I suspect, most people — think of when they hear the word “sustainability.”

But let’s set aside the fact that this usage is potentially misleading; words evolve, and maybe the public will catch up with the Global 100 in its broad understanding of the term “sustainability.” Does this new, revised meaning of “sustainability” make sense?

Let’s start with the word “sustainable.” Well, standard dictionary definitions suggest that it means something like, “Able to be maintained at a certain rate or level.” OK, good. That’s a positive thing, right? But wait. No one cares about corporate sustainability in that sense, with the possible exception of certain narrow-minded shareholders. We want businesses that are more than merely capable of being maintained. We want businesses that are worthy of being maintained.

So sustainability needs some normative content. It needs some goodness baked in.

In this regard, the touchstone is the U.N.’s Brundtland Commission. In 1987, the Brundtland Commission asserted that “sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” And ever since then, at very least, the words “sustainable” and “sustainability” have had very significant environmental overtones. OK, good. Here, “sustainability” is being used to indicate some plainly good things: environmental sustainability isn’t the only good thing in the world, but it’s definitely a good thing from a social point of view, embodying not just the value of the natural environment but also a sense of intergenerational justice.

But some people (including the people behind the Global 100) want to expand the term “sustainability” to include other, non-environmental dimensions. From a certain point of view, this makes sense: other things required to allow a company to “sustain” operations. But then further problems arise.

Note that when we expand “sustainability” this way, a subtle bit of sleight-of-hand takes place. Previously, we were talking about business operations that were environmentally sustainable. Now, we’ve switched to sustainable organizations. What does it take to sustain an organization? Lots of things, and not all of them are good. And being sustainable isn’t, in itself, a good thing. The tobacco industry has lasted for centuries, leaving millions of dead bodies in its wake. Very, very sustainable. But bad.

As noted above, we don’t generally care whether companies can stay in business. We want them to merit staying in business. And if the companies on the Global 100 merit staying in business, why not just say so?

In the end, I guess my point really is that environmental sustainability is important all on its own, and doesn’t need to be fluffed up with issues like workplace safety or leadership diversity or CEO pay; and issues like workplace safety and leadership diversity and CEO pay are too important to stuff into the simple concept of sustainability.

The Complexity of Executive Compensation

Many jurisdictions have moved recently to give shareholders a “say on pay,” which typically means that companies are required to hold advisory (i.e., non-binding) shareholder votes on compensation. In other words, establishing executive pay remains the responsibility of the Board of Directors, but shareholders are given an opportunity to voice their approval or disapproval.

The Wall Street Journal recently reported that when given their say, shareholders at a resounding 98.5% of American companies have said “yes.” So it seems that, thus far, shareholders are hesitant to challenge Boards in their compensation decision-making.

This is not surprising, given the complexity of the decision that Boards face in setting executive pay. Setting executive pay is a task typically delegated to a Board’s “Compensation Committee.” Now consider the task faced by a Compensation Committee in establishing the total pay-and-incentive package offered to their CEO.

The question facing a Compensation Committee is this: what combination of cash, bonuses, equity, and perks should we put on the table in order to inspire our CEO to perform optimally? In practice, this is a pretty complex question, one not admitting of cookie-cutter solutions. A Comp Committee needs to consider, just for starters:

  • pressures from shareholder (and other stakeholders),
  • pressures from proxy advisory firms and various think-tanks,
  • human psychology, including their particular CEO’s character and motivational levers,
  • the managerial experience and expertise of Committee members,
  • corporate objectives (profit, market share, sales, social responsibility, etc.),
  • their company’s ‘risk appetite’ (roughly speaking, are they trying to incentivize their CEO to be bold, or conservative?),
  • expert opinion about optimal compensation structures (which is deeply divided, to say the least).

The problem here is as much one of epistemology as it is one of ethics. Compensation Committees need to take an enormous amount of information and opinion and distill it into a decision that will work and that will be defensible in the face of enormous scrutiny.

Of course, there is no shortage of compensation consultants, ready and willing to help Compensation Committees with this task. But recent (not-yet-published) research at the Clarkson Centre suggests that many corporate directors are skeptical about the value of compensation consultants.

Given this complexity, it’s not surprising that shareholders — even sophisticated institutional shareholders — are so far pretty hesitant to do much second-guessing. Whether or not that’s a good thing is a separate issue.

Sustainability Rankings, the Global 100, and Greenwashing

What’s so sustainable about the Global 100 “World’s Most Sustainable Companies”? Not much, as far as I can see.

The ranking was released just a few days ago, as reported here by Helen Coster for Forbes: Ranking The World’s Most Sustainable Companies

The term “sustainable”–like “green” and “all-natural” before it–conveys an abstract sense of do- gooding that many companies have been happy to adopt. Corporate Knights, a Toronto-based media company, applies hard metrics to the otherwise fuzzy term, and Saturday it released its seventh-annual list of the world’s most sustainable companies….

So, what does sustainability mean, here? Toby Heaps, Corporate Knights’ editor-in-chief, says one key is to ask this question: “how are companies squeezing more wealth from the resources that they use?” So far so good — I suspect that kind of efficiency measure has something to do with what most people take “sustainability” to mean. But next Heaps strays into strange territory when he asks, in addition, “How are they doing a better job of respecting the social contract, like paying taxes or having diverse leadership?” Huh? We’ll get back to the issue of criteria in a moment. First let’s look at the rankings.

The top end of the list is dominated by global brands from the telecommunication, pharmaceutical, and energy industries (Nokia, Johnson & Johnson and Intel are all in the top 5). But an oil company takes top honours (Norwegian oil and gas company Statoil). Yes, an oil company. Now, for many people, the petroleum industry is the epitome of unsustainable business. So this will immediately raise alarms for some people. Should it? Let’s take a closer look.

The Forbes story says that Statoil topped the list “thanks in part to improvements in its water productivity.” Fair enough: water productivity (efficiency of water use) is a clear sustainability issue. But what comes next is odd. The oil company apparently did well in the ranking in part because it is “also a healthy contributor to Norway’s coffers and has a diverse board”. In other words, this oil company scored well on a sustainability ranking by doing a whole bunch of stuff that has little to nothing to do with sustainability.

For still more detail, we can look at the ranking and an explanation of the methodology behind it on the Global 100 website. According to the Methodology page, the ranking is established by looking at “environmental, social, governance (ESG) and financial data.” Already we see here a rather expansive understanding of the word “sustainability.” Next, let’s look at specific measures they used.

Some of the metrics used make perfect sense, such as energy productivity and waste productivity. Some of them, however, are hard to figure, such as CEO-to-average-worker pay ratio. Executive compensation is an interesting (and, I think, complicated) ethical issue, but how does it relate to sustainability? The detailed explanation of the various criteria offers this rationale:

A disproportionate share of compensation expenditure going to one person can lead to lower overall workforce motivation, and can also be indicative of potential governance risks, or misalignments of interests.

All of that seems true, but largely irrelevant. Sure, those risks are real, and they may (may!) have something to do with keeping the company in business. But surely that is not what anyone beyond a handful of consultants means by the word “sustainability.” When the public wonders whether Walmart’s business is “sustainable,” they are certainly not wondering whether the company’s business practices are going to let them keep chugging along.

Another mystifying criterion is “Leadership Diversity: % of women board directors.” Again, that’s an important issue; companies need to do more to get women into senior leadership positions, including on the board. But is there really a clear link — either conceptual or empirical — between having women on the board and the company being sustainable? Unfortunately, while that criterion is mentioned on the Criteria & Weights page, it is missing entirely from the more detailed explanation of those criteria (see PDF document here) so what the link is supposed to be is anyone’s guess.

Other weird criteria include “Safety Productivity”, “% tax paid” and “Innovation Capacity,” though the latter makes at least a modicum of sense. As far as I can see, fully half of the ten criteria used have no clear link to sustainability. And given that all criteria are given equal weight in the Global 100 methodology, that means the ranking is actually only half about sustainability, and half about other stuff.

Now, I’ve been critical of the term “sustainability” before (see “Sustainability is Unustainable.”) A lot of what I’ve said before has to do with confusion over the meaning of the term, and the resulting difficulty in measuring and tracking companies’ performance in this area. I think the Global 100 ranking ends up providing a wonderful case in point.

But the real problem, here, is that the kind of sustainability measure instantiated by the Global 100 profits directly from the confusion over the meaning of the term “sustainability.” (And I do mean “profits” — Corporate Knights is a for-profit organization, as presumably are the research firms that helped develop the Global 100 and the vast majority of sustainability consultants who help companies preen for such rankings.) Now, I don’t actually have anything against profits, and I’m not impugning anyone’s intentions. My point is that the only reason this particular set of measures can be thought to add up to “sustainability” is that the term itself is ambiguous and means different things to different people.

What’s really being measured here is a broad range of indicators having to do with all kinds of things. Again, it includes “environmental, social, governance…and financial data.” And it’s all important stuff. So the Global 100 ranking really does tell us something important (but vague) about the companies listed. But what is announced is that ‘these companies are sustainable.’ What does that mean to the public? Environment. So the list implies that these companies are environmental good guys. The result: greenwash.

So, what’s the public to do? Maybe all the public can do is realize that what sustainability consultants and gurus mean by “sustainability” has relatively little to do with what they mean by that word.

Ethics Consultant as Hall Monitor: Business Ethics on “The Office”

“Let’s get ethical! Ethical! I wanna get ethical!”

A couple of weeks ago, the hit show The Office had an episode all about business ethics. In case you missed it, here’s the Two Minute Replay on NBC’s website. [Note: the link seems to be dead.]

It’s a nice send-up of the role(s) many people see (or just fear) ethics consultants and ethics officers playing in businesses: cheerleader, schoolmarm, formulaic applier of checklists.

Anyone with the word “ethics” attached to their job title (or just to their organizational role) will be able to sympathize with this lament, from the ethics consultant character in the episode:

People are suspicious of me. Turns out being the morality police does not make you popular. I should know, because in middle school I was the Hall Monitor and the kids used to stuff egg salad in my locker. I was just hoping middle school was over.

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p.s. not all ethics consultants are like that!

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