Ethical Performance
inside intelligence for responsible business
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get rewards right ‘and CSR success will follow’

January 2006

The most important thing company boards can do to promote corporate responsibility is to redesign executive pay incentives to take greater account of long-term performance, according to findings of the first-ever inquiry into boards and CSR.

The inquiry, carried out over the past year by Insight Investment, Business in the Community and FTSE Group, has concluded that ‘misaligned incentives’ are one of the chief barriers to wider uptake of CSR, and that redesigning them should be a priority for any company head intent on more responsible behaviour.

The inquiry’s final report, Rewarding Virtue, says ‘flawed internal incentives create temptations for executives and staff to act irresponsibly’, and that while they are not the only reason that companies tend to behave in such a way, they are ‘the most important’.

All boards should therefore reassess their executive remuneration strategies to ‘give due weight to long-term, intangible factors and corporate responsibility in the definition, measurement and recognition of success’. Executive salary packages should balance long-term and short-term rewards, and ‘use performance metrics that reflect both tangible and intangible value creation’.

The report also urges boards to ‘give priority to personal integrity in the recruitment and retention of directors’, and to then encourage a culture at board level and elsewhere ‘in which responsible behaviour is expected and lapses are noticed,criticized, and punished with appropriate sanctions’. It says the board, and not other company echelons, should have the responsibility for setting values and standards for the business.

The inquiry consulted 40 directors and company secretaries of Britain’s biggest companies on the question: ‘What should boards do to ensure companies behave responsibly, and why?’ It also brought in views from organizations representing various stakeholders.

Its three sponsors plan to employ the findings in their daily activity: Insight Investment, which is the investment management arm of HBOS, in its engagement with companies, Business in the Community in the compilation of its annual Corporate Responsibility Index, and FTSE Group in its assessment of company performance for inclusion in the FTSE4Good index family.

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