Ethical Performance
inside intelligence for responsible business


executive pay and the social responsibilities of investors

May 2003

Executive pay has always occupied an odd position in the debate about the social responsibilities of companies. In the past, it has tended to fall within the realm of corporate governance. Formerly, executive pay out of line with performance was no more than a conflict of interest between the owners of a company and their agents.

But the pay ratio between chief executives and the lowest-ranking employees has reached sky-high levels, and the question of executive reward has moved beyond the realm of corporate governance to the point where it directly relates to the social responsibilities and reputations of companies. And, one might add, of investors, who woke up to the dangers late. Under the checks and balances of corporate governance, it is the investors, who ultimately own companies, that bear the greatest responsibility for sorting out the mess. Directors can hardly be expected to put the house in order and exercise voluntary restraint on pay when systems supposedly designed to incentivize them to make as much money for the owners as possible, are allowed to run amok.

The fact is that investors failed to take account of their social responsibilities when times were good, and finding that they had taken huge losses, began taking belated action. They certainly had warning that trouble lay ahead: the socially responsible investment community has been flagging up executive remuneration as an issue of concern for several years. Once again, SRI showed its efficacy as an early warning system by predicting an up-and-coming issue long before it actually hit.

How should companies respond? By acting on the recognition that business ethics are indivisible and apply to all levels of employee from top to bottom; by adequately accounting for stock options and other benefits, and by taking a leaf out of the SRI analysts’ book and publishing full details of their executive remuneration packages. In a word, by being more transparent. This would allow the media to compile league tables of the companies with divisive policies.

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