Executive remuneration received some very important pointers for South African companies to take note of.
Stakeholder capitalism was a key topic at Davos and received support from many CEO’s who attended the WEF.
Last year the WEF published a new “Davos Manifesto” titled “The Universal Purpose of a Company in the Fourth Industrial Revolution.” They argue “the purpose of a company is to engage all its stakeholders in shared and sustained value creation. And, “in creating such value, a company serves not only its shareholders but its stakeholders- employees, customers, suppliers, local communities and society at large”.
Stakeholder capitalism differs from traditional capitalism where the focus is on making money for shareholders. Stakeholder capitalism means that companies need to do more than just look after shareholders … they also need to look after the other stakeholders such as employees, communities and the environment. ESG, as it is called, refers to the environment, society and governance.
Fortunately, South African companies are largely ahead of the USA and many other countries. As Richard Wainwright, CEO of Investec Bank stated in an interview on Biznews Radio 23 January 2020, South African law follows British and Dutch Law, and hence our law says that the directors are responsible to the company. In the USA, the directors are responsible to the shareholders. This results in significantly different objectives for the directors and hence the remuneration in the USA, is generally tied to shareholder wealth creation only. Stock option schemes are still the most popular long-term incentives.
In South Africa, we have tended to follow UK remuneration trends and hence our remuneration policies and practices are more focused on stakeholders. This does not imply that we are high and dry. On the contrary, we have a long way to go to get to where the presenters at Davos were aiming. A set of metrics developed by the big 4 accounting firms was presented, and this goes further than anything we are doing in South Africa.
King IVTM published by the IoDSA in 2016 highlighted “Three shifts in the corporate world”.
- “From financial capitalism to inclusive capitalism”.
- “From short-term capital markets to long-term, sustainable markets”.
- “From siloed reporting to integrated reporting.”
All three of these align with Davos stakeholder activism.
“Business leaders now have an incredible opportunity. By giving stakeholder capitalism concrete meaning, they can move beyond their legal obligations and uphold their duty to society. They can bring the world closer to achieving shared goals, such as those outlined in the Paris climate agreement and the United Nations Sustainable Development Agenda. If they really want to leave their mark on the world, there is no alternative.” – Professor Klaus Schwab
The remuneration of executives in South Africa, and elsewhere, needs to align with this movement. The strategy of the company, the objectives for the executives and the rest of the company need to consider all stakeholders. If you want to implement strategy successfully, then the remuneration must align with the strategy. Executives and employees will follow the money. Make sure the money is pointed in the right direction.