Our approach to responsible investment
Responsible investment isn’t just the right thing to do, it makes sound financial sense. That’s why we integrate environmental, social and governance considerations when we make investment decisions.
These may seem absurd questions, as the answer is an obvious ‘yes’, yet the god-like status we bestow on the leaders of organisations often borders on the fanatical. However, when you consider that the incandescent lightbulb was invented by 20 different people within the space of a couple of decades, the randomness of who apparently ‘succeeds’ is hard to comprehend.
Nevertheless, every era has its stars – leaders who take ideas and grow them into hugely powerful companies. Martin Sorrell at WPP, Steve Jobs at Apple, Jack Ma at Alibaba, Zuckerberg at Facebook, Elon Musk at Tesla…the list goes on. Often, their success is closely bound with an ability to set out a vision then drive relentlessly towards that goal.
The rewards on offer for those who are the face of the company, as well as its innovator and driver, can be immense – stock options worth more than a billion dollars, for instance.1 Getting the right person in place can add vastly to a company’s market capitalisation, and cause investors to sell if their star heads for the door.2 But it’s hardly worth mentioning the skills needed to maintain a workforce of thousands are different to those required to direct a small, tight-knit team.
Understanding what motivates and what ties; these are the things that will determine the CEO’s tenure. Perhaps it’s time to check how rewards might be aligned and structured for the long haul, rather than a sprint towards a bonus cheque; and to look more closely at whether tomorrow’s organisations are likely to turn away from a dictatorial style and morph towards flatter structures.
Finding and motivating leaders for these corporate giants has become a high-stakes game
Back in the 1980s, just as Reaganomics was taking off, US economist Sherwin Rosen grappled with the superstar phenomenon. As he observed the world around him, including everything from stand-up performers to those selling economics textbooks, he saw a handful of leaders dominating their fields. In The Economics of Superstars,3 Rosen suggested the trend would continue: technology would empower the best, but lock out those on the lower rungs of the ladder.
His views seem eerily prescient. In recent decades, the superstar phenomenon has intensified, and the gulf between the ‘winners’ and ‘also rans’ has grown. The most effective corporate leaders, the best brands and connected influencers enjoy network effects, where profits cascade into the hands of a few.
Today, unique conditions – where new technologies are being applied in the process of globalisation – have created superstar companies where markets and networks collide.4 At the same time, cheap credit has fuelled expansion and helped drive rounds of mergers and acquisitions. Finding and motivating leaders for these corporate giants has become a high-stakes game.
As companies have upsized, so have the rewards on offer for their leaders. In a mix that might include salary, equity and equity options and pension, the equity component has become increasingly important, coinciding with the stock market bull run. Compensation has tended to accelerate fastest for those with substantial stock-based incentives at the top of the corporate tree.
Abnormally high real returns in the ‘golden ages’ for equities (for example, 335 per cent for UK equities in the 1980s, or 276 per cent in the 1990s for US equities),5 and more specifically in certain sectors – evidenced by ‘accelerator’ periods around secular shifts in innovation and technology – have radically altered the baseline.
However, perhaps a little more reflection is needed as to whether any one individual executive can really be responsible for the success of a large, global company. “Systems that have evolved over time, the wider economic context, the contribution of the workforce as a whole…these are all things that can shape performance too,” says Luke Hildyard of the UK’s High Pay Unit, one of the independent bodies that surveys executive compensation trends. “Whether a single executive deserves to take all the credit is questionable.”
Yet while the compensation landscape has been changing, compensation committees have often felt reluctant to brake or put downward pressure on pay awards for fear of losing the best talent. Although plenty of effort has gone into assessing annual awards, the cumulative effects often dwarf them.6 The question, of course, is whether the rewards environment promotes considered risk-taking for the long-term benefit of the company. Perhaps not if the ‘carrots’ create a steep personal payoff curve for the chief executive. Lots of out-of-the-money options can incentivise risky decision-making; CEOs have limited downside – their options simply expire – but attractive upside if the stock price increases, and their options can generate a healthy return.
Unsurprisingly, interest has grown in capping total compensation, to prevent any single individual heading off with an uncomfortably large reward. Other ideas include adding debt and convertibles to compensation packages; bonds to sensitise leaders to bankruptcy risk and recovery value should the company fail.7 The aim is to ensure insiders have genuine ‘skin in the game’.
Meanwhile, there are ongoing efforts to push out decision-making time horizons. ”Long-term incentive plans are generally set at five years now, whereas they used to be around three years,” explains Hildyard. “It’s also increasingly common that bonus payments are made in shares, and deferred for a number of years before an executive can access them.”
Strikingly, UK regulators have imposed an extended seven-year bonus clawback period in finance, beyond the minimum set out by European Union guidelines.8,9 There are even discussions on pushing those clawbacks out to a decade.
The question, of course, is whether the rewards environment promotes considered risk-taking
While the scale of financial rewards gathers column inches, not everyone believes money is a particularly effective motivator. “Money is important, but that is not what gives people high-quality motivation,” says US psychologist Richard Ryan. “It’s usually a sense of commitment, purpose, allegiance with your organisation, having a sense of concurring with those goals. These are the keys to getting the most high-quality motivation. Financial rewards are a kind of maintenance. You have to have them, but if you are using those as a primary tool, then you will likely have very low-quality motivation in your workplace.”
Ryan – who advises Fortune 500 companies in the US – believes culture is king. The factors that contribute to engagement can be enhanced and drive long-term success. “Are employees feeling a sense of autonomy? Are they feeling a sense of effectiveness and confidence? And are they feeling connected to other people in the workplace? If you have those three things – the autonomy, the confidence and the relatedness – then you very likely have a highly-engaged employee,” he adds.
Interestingly, a pacesetting leadership style, where a leader obsesses about doing everything better and faster, can lead engagement to fall. “The pacesetting style destroys climate,” believes Daniel Goleman, author of Emotional Intelligence. It can be isolating. But these are just the kind of behaviours that disrupt.
The balance between director and dictator can be a fine one. Organisations take their cues from the top and corporate culture is shaped by the examples set at the executive level, placing huge pressure on ensuring the right leadership tone. Strong decision-making with clear direction and focus can easily veer into autocracy.
“For businesses to thrive in the long term, they need a clear vision, a competent CEO and a strong board to challenge, guide and assist,” says Mirza Baig, global head of governance at Aviva Investors. There may be a time and place for a star to drive – but, ultimately, the complexity of the modern business is too much for any single individual.
Instead, diverse boards made up of independent-minded people prepared to ask tricky questions can help. Awkward subjects – like the rationale for overly-ambitious acquisitions or the need for better succession planning – cannot be ignored. Studies of what differentiates great boards from the not-so-great show that it’s not about cosy, club-like agreement.
“The highest-performing companies have extremely contentious boards that regard dissent as an obligation and that treat no subject as undiscussable,” wrote American academic Jeffrey Sonnenfeld in the Harvard Business Review in 2002.10 It is as true now as it was then.
If the executive wishes to run the company in the best interests of its owners (its shareholders) and other stakeholders (including customers and the wider community), a CEO should certainly be prepared to have decisions challenged by the chair, the ‘guide on the side’, and others to be kept wholly accountable. Combining the roles of the chair and CEO is a rarity in the UK, rooted in the idea no individual should wield too much power. This is not necessarily the case in the US, where around 50 per cent of listed companies still have powerful individuals holding both posts.11 The star can hold the aces, being the public face of the company and its guide as well. Controversially, some companies are choosing to revert from separate roles to combined ones.
As ultimate owners, shareholders have a critical role to play. By expressing their views and using their votes actively, they can help regulate company behaviour. “Investors should use their voices to bring about change,” says Steve Waygood, chief responsible investment officer at Aviva Investors. “It helps to accelerate corporate action.”
Rebelliousness is on the rise – recently, more shareholders have challenged elections to board posts and more voices have been raised against pay resolutions in the UK.12 This might account for a certain new modesty; more discussions on ‘downward discretion’ and pay restraint.
In some instances, shareholders may be constrained by share structures that privilege founders or early investors. Issuing shares with varied voting rights is not uncommon in the US, giving enhanced rights to some classes of share (say ten-fold greater than for holders of ordinary stock), as in the case of Facebook. Shares with lesser rights may trade at a discount relative to peers; not so in this instance.
Strong decision-making with clear direction and focus can easily veer into autocracy
Today’s more fluid organisational structures are challenging traditional beliefs about the optimal ways to organise and motivate and, ultimately, how best to lead companies. Although leadership styles tend to change, evolving from visionary and commanding to more democratic and affiliative, there are deeper organisational changes going on as well.
“I’ve seen a gradual movement away from hierarchy towards a different form of collaborative human organisation,” explains psychologist Dr. Meredith Belbin after years of work at Cranfield School of Management and Henley Business School. “We are in a transitional period and it’s happening in all industries and, I believe, in all countries to a different extent. We need to understand the dynamics of teamwork, how we can use human resources to the best advantage because this is applicable in a general way right across the world.”
If Belbin’s view is correct, it has implications for the kinds of skills and intelligences in demand. So, from a time when larger companies were largely driven top down, in the management style of Henry Ford or Alfred Sloan at GM (who backed centralised administration and decentralised operations), newer ways of working have emerged. Lately, the impetus to decentralise and delayer has meant fewer managers and greater focus on how individuals can co-operate and drive change themselves.
Howard Gardner, Harvard professor of education and creator of the theory of multiple intelligences, sees interpersonal skills as critical to future success: “Nowadays, when the working environment shifts quickly and unpredictably, you need individuals who have considerable interpersonal and intrapersonal intelligences,“ he says. It’s all about the science of the team, not so much the pacesetting hero.
It’s all about the science of the team, not so much the pacesetting hero
In Belbin’s view, drawing on a variety of different perspectives can lead to better results. However, there is still a widespread belief that more ‘stars’ will inevitably translate into greater success.
“The evidence is pretty clear: no matter where you work, having an entire team of superstars can be a total disaster,” according to organisational psychologist Adam Grant.13 “It turns out that if you have a team of 10 people, you’re better off with six stars than eight. You see it on Wall Street. Teams with mostly top analysts make worse financial recommendations than teams that have a mix of stars and average performers.”
And in a study of NBA basketball over a decade, teams with only three star players won more games than rivals with four or five. The star-studded teams had fewer assists, missed more of their shots and grabbed fewer rebounds. The players struggled to coordinate. They all wanted to be the ‘alpha dog’.
Encouragingly though, the power of the team is being recognised in ‘flatarchies’ – flatter organisations that draw on diverse skillsets, rather than pyramids where ‘Great Men’ command and coerce. Although rare, flatarchies can be particularly useful for businesses seeking to innovate: they are dynamic, allowing teams to be formed and then dissolved to match business priorities as they change. This also implies today’s ‘star’ may need to take a more pedestrian role tomorrow, but come back to shine further down the track.
One way to explain the shift in focus is to look at the nature of problem-solving. “When we solve problems, we climb landscapes,” says Professor Scott Page, a complex systems specialist at the University of Michigan. “If one of us gets stuck, and if we all think in the same way, we’re all stuck.”14 Diversity fuels different ways of looking at the world – of how problems are perceived and how solutions are sought. To think differently is good.
This has been explored mathematically, by comparing the predictive powers of diverse groups with forecasts from high performing individuals.15 The findings suggested better outcomes from group decision-making – all of which can be helpfully distilled into an equation:
collective accuracy = average accuracy + diversity
The reality, of course, is not all apple pie. Diverse teams tend to produce higher variance performance – both more conflict and better outcomes – so the process of working together won’t necessarily be comfortable.
Contemplating this in the context of the corporate lifecycle can be illuminating, as management researcher Jim Collins has done. Collins believes that all organisations are ultimately vulnerable to “the silent creep of impending doom”.16 Only certain organisations with the right checks and balances in place will survive, proving both malleable and resilient enough to reinvent themselves.
It is not difficult to find examples of companies whose phenomenal success left them ill-prepared for change – think of Motorola; paralysed by denial of the competitive threat from Blackberry in the 1990s, or Kodak; unable to recognise a paradigm shift to digital photography. Being aware of Collins’ ‘trajectory of decline’ can help shape a healthier company – with everyone aware success may be transient and yesterday’s hero project might need to be cast aside.
According to Collins, the leaders of companies with longevity have extraordinary resilience – they “never give in, never give in, never, never, never, never…” in Churchillian style. They also surround themselves with responsible people, who share core values and recognise others who contribute to their success.
Shared goals, shared culture; these are the features that drive and hold a team together. Traditionally, the practical side of this has fallen to managers. However, as we move to flatter models, the need for leaders to infuse such values is critical. Howard Gardner believes business leaders must lead by example and “know what they do not know, how to acquire the requisite knowledge and skills, how to find associates who may possess the knowledge or skills they lack themselves, and when to gracefully retire”.
Shared goals, shared culture – these are the features that drive and hold a team together
Time to circle back and revisit what the modern CEO needs to embody. Demand for those who can carry a brand, give direction to a strategy and promote a feeling of belonging is unlikely to end any time soon. But more mature companies are also likely to need individuals with collaborative intelligences and strong governance structures to help them stay on track. Treading the right side of the director/dictator line will mean setting culture by example, being prepared to look beyond their own tenure and, most importantly, being prepared for a healthy dose of challenge.
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