Article 43
Aspen Principles
Responsible Business: ‘We want regulation’
By Alison Maitland
Financial Times
July 3, 2007
Regulation is usually a dirty word in the business world. The default position of business lobbies is to argue for less of it.
So, when a group of prominent corporate leaders calls for more, and better, regulation to reward environmentally and socially responsible companies, it invites attention.
Just such a call came last month at the launch of the findings of an 18-month inquiry into the challenges and choices facing global companies.
“There are serious failures in the frameworks of law, regulations and agreements that frustrate many efforts to deal with some of the global issues both companies and societies face,” said the international inquiry team, which includes chairmen and senior executives of Alcan, Anglo American, BP, Ford, Infosys, Standard Chartered and Suez.
“Fiscal systems often do not drive the market in sustainable directions and subsidies are frequently perverse.”
Companies should use their power, not to resist, but to help create better international agreements and national laws, they said.
“The full creative potential of the market can only be realised if governments, supported by companies and others, put in place effective frameworks of regulation and incentives in the short-term.”
Speaking at the launch event, Wolfgang Schneider, vice-president for legal, governmental and environmental affairs at Ford’s European division, went further.
When governments stepped in to regulate - for example, to try to address climate change, they set minimum conditions for business to meet.
If responsible global companies were to thrive, governments had to do more.
“You need to go to ambitious maximum conditions and enforce them worldwide.”
Why are multinationals speaking out on regulation now? It is partly because of the unprecedented combination of pressures that led the think-tank, Tomorrow’s Company, to initiate the inquiry.
Not only do governments, social activists and consumers expect companies to play an ever bigger role in addressing problems such as climate change, poverty and Aids, companies face serious challenges to their existence and way of operating from competitors in the emerging powerhouses of China, India and Russia, and - closer to home - from the rapid growth of private equity.
But progressive businesses are also speaking out because they sense a widening gulf between themselves and the rest, and they want to reap the benefits rather than be hit over the head for their efforts.
Those that take their responsibilities most seriously - and are most open about what they do - often find themselves under greatest scrutiny from pressure groups and the media, while their silent and possibly less scrupulous competitors stay out of the spotlight.
Further, when they talk to investors about the positive steps they are taking, they meet doubt and incomprehension. The risks and opportunities associated with social and environmental issues often seem too far off for the short-term focus of stock markets.
“We have had to educate shareholders about our approach to sustainability,” says Mervyn Davies, chairman of Standard Chartered, a bank with 60,000 employees operating largely in emerging economies.
Such companies are therefore seeking tougher international regulation to try to ensure that rivals, unburdened by the costs of environmental or social investment, do not undercut them. It is a case of enlightened self-interest.
Their call is part of a wider debate on the future of corporate responsibility in a year of milestones.
It is the 25th anniversary of Business in the Community in the UK, 20 years since the Brundtland Report defined “sustainable development”, and 20 years since the creation of SustainAbility, a think-tank and strategic consultancy that has been at the forefront of developments.
It is also seven years this month since the launch of the United Nations Global Compact, a manifesto for business to address human rights and environmental responsibilities. To concentrate minds further, the final part of the most authoritative scientific assessment of global warming to date, published by the UN’s Intergovernmental Panel on Climate Change, warned in May that the world had until 2020 to reverse rising greenhouse gas emissions and avoid the most dangerous effects of climate change.
Events such as these raise questions about how much has been achieved by big business, and what remains to be done.
Against this background, leading companies are seeking ways to maintain their “licence to operate” and increase their positive impact. As the Tomorrow’s Company report stresses: “This is not about philanthropy or companies being seen to be ‘doing good’. These are actions that serve the long-term interests of any company.”
It seems to be a far cry from the unfettered capitalism expounded by Milton Friedman, the Nobel prize-winning American economist, in the 1970s.
The vast majority of business executives today accept, at least on paper, the need for a balance between generating high returns for investors and contributing to the broader public good.
Only one in six executives questioned in a global survey by McKinsey Quarterly last year agreed with the Friedman notion that the sole responsibility of business was to increase profits.
The same survey, however, revealed that these executives were unsure how to make the most of this broader social role. It said “most view their engagement with the corporate social contract as a risk, not an opportunity, and frankly admit that they are ineffective at managing this wider social and political issue.”
This underlines how there is still no consensus about what those wider responsibilities are, how far they extend, or how companies can best respond.
This gap between “the best and the rest” helps explain the disparities between the rhetoric and the reality of corporate responsibility that feed public cynicism about business.
Despite talk of companies reducing their “carbon footprint”, a recent survey of executives of big UK companies found that only 14 per cent had a clear strategy for addressing climate change.
A third saw initiatives as more about managing reputation than mitigating global warming, and most gave a higher priority to brand awareness and marketing.
A simultaneous report by Headland, a communications consultancy, found that fund managers, too, paid little attention to climate change when deciding on investments because the effects were too long-term for their time-scale. For the investment community, three years was long-term, it said.
Global companies that want to be responsible have their work cut out. Not only do they have to persuade governments and consumers of their credentials, they have to educate investors and other businesses about why corporate responsibility is good for the bottom line.
There are the beginnings of a shift in focus from short-term performance to longer-term investments. Growing numbers of institutional investors are starting to factor social and environmental impacts into their decisions.
Corporate responsibility-watchers seized on the publication last month of the so-called Aspen principles, a set of guidelines drawn up by a US coalition that included multinationals, trade unions and institutional investors.
The principles call for quarterly earnings guidance to be scrapped in favour of longer-term measures of performance. They also say that executives’ and fund managers’ compensation should be based on meeting long-term objectives.
The main motive behind the principles is to create better conditions for US companies to compete with rivals in fast-growing, low-cost economies by allowing them to focus on the horizon instead of nervously watching their backs. If taken up widely, however, they should also encourage mainstream institutional shareholders to see value in companies’longer-term social andenvironmental investments.
These developments, and calls for better regulation, are about changing the conditions under which capitalism operates. That is a tall order. At the launch event, John Elkington, founder of SustainAbility, asked: “Is system change best ensured by getting the current incumbents to push for it, or should it come from outside the current system?”
The corporate leaders calling for change say they want to “expand the space” in which business operates and to adopt a stronger and more proactive role in society.
They also stress they will work with other companies, governments, NGOs and international organisations. But critics who see business as already all-powerful - and not necessarily a force for good - may revolt at the thought of it expanding its influence further.
Reforming businesses will have to tread carefully as they seek to push out the boundaries of corporate responsibility.
Tomorrow’s Global Company: Challenges and Choices is available by e-mail from or by telephone on +44 (0)20 7222 7443
SOURCE
The Aspen Principles: Guidelines for Long-Term Value Creation in Business.
Aspen Institute
June 2007
The Aspen Principles represent an unprecedented consensus among companies, investors, and corporate governance professionals. In subscribing to these principles, and moving to implement them in their own organizations, subscribers are leading by example and taking a stand that a long-term focus is critical to long-term value creation.
As operating companies and institutional investors, we agree to:
Work together and with others in the spirit of continuous improvement and ongoing communication, dedicating real resources to identifying and testing best practices for creating long-term value at our own firms;
· Support each others efforts to promote metrics, communications, and executive compensation that create long-term value; and
· Support each other even in the face of internal and external pressures to compromise on these principles and default to short-term thinking.
We issue these principles as a call to action, and urge adoption of the Principles among other operating companies and investors. We believe the Aspen Principles, broadly adopted, can quite literally transform our capital markets reinvigorating the ability of business to serve as the driver of long-term economic growth on a national scale, and to more fully serve the public good.
We particularly encourage boards of directors to consider the appropriate means to implement these principles.
Current Subscribers (as of June 2007)
AFL-CIO
Apache Corporation
Business Roundtable (co-convener of the Principles Drafting Committee)
CalSTRS
Center for Audit Quality
Change to Win Investment Group
Council of Institutional Investors (co-convener of the Principles Drafting Committee)
William H. Donaldson, Donaldson Enterprises, Inc.
Patrick W. Gross, The Lovell Group
Ira Millstein, Weil, Gotshal & Manges LLP
New York State Common Retirement Fund
Office Depot
John Olson, Gibson, Dunn & Crutcher LLP
PepsiCo, Inc
Pfizer Inc
Henry B. Schacht, Warburg Pincus
TIAA-CREF
Xerox Corporation
The Aspen Institute’s Corporate Values Strategy Group (CVSG) is dedicated to re-asserting long-termorientation in business decision-making and investing. Members of the CVSGshare concern about excessive short-termpressures in todays capitalmarkets that result fromintense focus on quarterly earnings and incentive structures that encourage corporations and investors to pursue short-term gain with inadequate regard to long-term effects. Short-termism constrains the ability of business to do what it does best - create valuable goods and services, invest in innovation, take risks, and develop human capital. CVSGmembers believe that favoring a long-term perspective will result in better business outcomes and a greater business contribution to the public good.
The Aspen Principles offer guidelines for long-term value creation for both operating companies and institutional investors. The Principles were created in dialogue with CVSG members whoas leaders in both investment and businessחsought to identify common ground from many sources, including the Business Roundtable, Council of Institutional Investors, CalPERS, CED, TIAA-CREF and others. To fully understand the spirit and nature of the Principles, it should be noted that:
1. The Principles are not intended to address every issue of contemporary corporate governance, but instead are designed to drive quickly to action in areas that all parties agree are critically important. CVSG members share a deep concern about the quality of corporate governance and favor effective communication between and among executives, boards, auditors, and investors. CVSG members will continue to engage in independent activities related to corporate governance issues not addressed here.
2. In drafting these Principles, members of the CVSG sought consensus and agreed that an overly-prescriptive approach would slow progress. The Principles are thus offered as guidelines, and are not detailed at a tactical level. Investors and companies, especially boards of directors, have the opportunity to innovate and adapt them to meet individual and evolving circumstances. The Aspen Principles address three equally important factors in sustainable long-term value creation: metrics, communications, and
compensation.
1. DEFINE METRICS OF LONG-TERM VALUE CREATION
Companies and investors oriented for the long-term use forward-looking incentives and measures of performance that are linked to a robust and credible business strategy. Long-term oriented firms are built to last,ђ and expect to create value over five years and beyond, although individual metrics may have shorter time horizons. The goal of such metrics is to maximize future value (even at the expense of lower near-term earnings) and to provide the investment community and other key stakeholders the information they need to make better decisions about long-term value.
In pursuit of long-termvalue creation, companies and investors should
1.1 Understand the firm-specific issues that drive longterm value creation.
1.2 Recognize that firms have multiple constituencies and many types of investors, and seek to balance these interests for long-term success.
1.3 Use industry best practices to develop forward-looking strategic metrics of corporate health, with a focus on:
· enhancing and sustaining the value of corporate assets,
· recruiting, motivating, and retaining high-performing employees,
· developing innovative products
· managing relationships with customers, regulators, employees, suppliers, and other constituents, and
· maintaining the highest standards of ethics and legal compliance.
1.4 De-emphasize short-term financial metrics such as quarterly EPS and emphasize specific forward-looking metrics that the board of directors determines are appropriate to the long-term, strategic goals of the firm and that are consistent with the core principles of long-term sustainable growth, and long-term value creation for investors.
2. FOCUS CORPORATE-INVESTOR COMMUNICATION AROUND LONG-TERM METRICS
Long-term oriented companies and investors are vigilant about aligning communications with long-term performance metrics. They find appropriate ways to support an amplified voice for long-term investors and make explicit efforts to communicate with long-term investors.
In pursuit of long-term value creation, companies and investors should
2.1 Communicate on a frequent and regular basis about business strategy, the outlook for sustainable growth and performance against metrics of long-term success.
2.2 Avoid both the provision of, and response to, estimates of quarterly earnings and other overly short term financial targets.
2.3 Neither support nor collaborate with consensus earnings programs that encourage an overly short-term outlook.
3. ALIGN COMPANY AND INVESTOR COMPENSATION POLICIES WITH LONG-TERM METRICS
Compensation at long-term oriented firms is based on long-term performance, is principled, and is understandable. Operating companies align senior executivesΠcompensation and incentives with business strategy and long-term metrics. Institutional investors assure that performance measures and compensation policies for their executives and investment managers emphasize long-term value creation.
In pursuit of long-term value creation, companies and investors should implement compensation policies and plans, including all performance-based elements of compensation such as annual bonuses, long-term incentives, and retirement plans, in accordance with the following principles
3.1 How are Compensation Plans Determined and Approved?
Executive compensation is properly overseen by a compensation committee of the board of directors. The board recognizes that
a) The compensation committee is comprised solely of independent directors with relevant expertise and experience, and is supported by independent, conflict-free compensation consultants and negotiators.
b) The compensation committee calculates and fully understands total payout levels under various scenarios.
c) Boards and long-term oriented investors should communicate on significant corporate governance and executive compensation policies and procedures.
d) Careful strategic planning, including planning for executive succession, helps the board retain a strong negotiating position in structuring long-term compensation. The succession planning process is disclosed to investors.
3.2 What are Executives Compensated For?
Corporate and investor executives and portfolio managers are compensated largely for the results of actions and decisions within their control, and compensated based on metrics of long-term value creation [see Principle #1].
3.3 What is the Appropriate Structure of Compensation?
Compensation that supports long-term value creation
a) Promotes the long-term, sustainable growth of the firm rather than exclusively short-term tax or accounting advantages to either the firm or employee.
b) Requires a meaningful proportion of executive compensation to be in an equity-based form.
c) Requires that senior executives hold a significant portion of their equity-based compensation for a period beyond their tenure.3
d) Prohibits executives from taking advantage of hedging techniques that offset the risk of stock options or other long-term oriented compensation.
e) Provides for appropriate Ņclawbacks in the event of a restatement of relevant metrics.
f) Requires equity awards to be made at preset times each year to avoid the appearance of market timing.
g) Ensures that all retirement benefits and deferred compensation conform to the general goals of the compensation plan.
3.4 How Much Are Corporate and Investor Executives Compensated?
Corporations and society both benefit when the public has a high degree of trust in the fairness and integrity of business. To maintain that trust, the board of directorsӔ
a) Ensures that the total value of compensation, including severance payments, is fair, rational and effective given the pay scales within the organization, as well as the firms size, strategic position, and industry.
b) Remains sensitive to the practical reality that compensation packages can create reputation risk and reduce trust among key constituencies and the investing public.
3.5 How is Compensation Disclosed?
Public disclosure, fully in compliance with SEC rules, includes, in clear language…
a) Individual and aggregate dollar amount of all compensation afforded to senior executives, under various scenarios of executive tenure and firm performance.
b) The compensation philosophy of the board and the specific performance targets that promote the creation of sustainable value in the long-term.
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