Aligning management's variable compensation with the environmental and social impact of their company: the idea has been making progress over the past few years and is gradually becoming a pre-requisite widely encouraged by stakeholders.
Financial performance can no longer be considered the only criterion of a company's competitiveness, to the detriment of extra-financial performance. This awareness is leading to a slow erosion of the theory of maximising economic profit to give way to the consideration of all stakeholders. In this context, a real groundswell is at work in terms of corporate governance.
In order to avoid any risk of greenwashing, shareholders are demanding greater transparency in terms of remuneration, for a good understanding of the elements of short-term variable compensation and long-term plans. They argue for the setting of specific non-financial objectives (Environment, Social, Governance) over these time horizons. Progress must be measured at intermediate stages, to ensure that the strategy implemented follows the right path as well as to avoid forcing the future generation of leaders to meet alone challenges that have not been met in previous years. It must be quantitative as well as qualitative and scrupulously verified, for example through the SBT initiative1.
These targets may include reducing the company's CO2 emissions (scopes 1, 2 and 32), the feminisation of management bodies (Comex or Top 100 of managers) and increasing the share of "green" products in revenues. In our opinion, some players stand out in terms of communicating their clear and tangible intentions, and the results achieved, such as L'Oréal and Schneider Electric. That said, too many companies use performance criteria vaguely to "compensate" for the financial criteria that have not been met.
These issues are currently being examined by the European Commission. To ensure that this concept of sustainability is actually taken into account, it could introduce a "duty of care3" which would require directors to consider social, environmental and human rights impacts in the company's strategy. The proposal also mentions remuneration as a lever for action.
FRANCE IS ALREADY A VERY GOOD STUDENT IN TERMS OF RESPONSIBLE GOVERNANCE
According to the IFA - Ethics & Boards survey of the Boards of Directors of the SBF 120 published in October 2021, there are material signs of responsible and sustainable governance in France. The recommendations of the AFEP-MEDEF Code of Corporate Governance for listed companies constitute a foundation of principles which companies can use to implement these changes.
Three new SBF 120 companies included their raison d'être in their Articles of Association at their Annual General Meeting in 2021, bringing the total number of companies to 14. The raison d'être of a company, a structuring axis and equivalent of the terms "purpose" or "mission statement" commonly used in English-speaking countries, refers to the way in which it intends to play a role in society beyond its sole economic activity. This concept was introduced in the Pacte Law of 22 May 2019.
In addition, around two-thirds of the SBF 120 Boards of Directors have a CSR Committee. The international comparison is particularly favourable for France, with a much more pronounced increase in CSR committees in France than elsewhere since 2017.
The Middlenext Governance Code, revised in September 2021, makes three new recommendations, including the creation of a CSR committee, as well as fairness and respect for gender balance at each hierarchical level of the company.
Dual governance structures, separating the positions of Chairman and Chief Executive Officer, which have been in the majority in France for several years, allow for greater control over the implementation of the financial and extra-financial strategy and are adopted by two-thirds of the boards. Boards are more feminised but also more balanced in terms of age diversity and more open to international profiles than boards from other comparable countries. The 2021 ranking of women in management bodies of the SBF 120 confirms the impact of the Copé Zimmermann Act of 2011 on the feminisation of boards, which reached 45.7% at the end of the 2021 General Meetings, compared with 31% for the German DAX, with more and more women Board chairs (10 in 2021 vs. 3 in 2015). In addition, within the SBF120, 12 women are at the head of the executive. This is notably the case at Amundi, La Française des Jeux and Engie.
SEVERAL LEVERS FOR ACTION
Shareholders have several levers for action to change a company's extra-financial strategy, starting with voting at General Meetings. In this way, they can sanction the company's compensation policy or climate strategy through the "Say on Pay" and "Say on Climate" resolutions.
The extra-financial assessments carried out by rating agencies such as Sustainalytics or Ethifinance or by the in-house SRI teams of asset management companies make it possible to send clear signals to investors but also to companies that may lead to the exclusion or disinvestment of certain companies in SRI funds.
Finally, the policy of dialogue and engagement implemented by shareholders aims to lead the company to rethink its strategy and change its trajectory if necessary. Accordingly, regular contacts with management or the filing of resolutions may make it possible to propose changes within one of the E, S or G pillars and to monitor any progress made by the company on these issues.
The remuneration of executives must reflect the setting of clear and credible targets. Shareholders undeniably play a key role in this paradigm shift.
1 Launched in June 2015, the Science Based Targets (SBTi) initiative is a joint project of the Carbon Disclosure Project (CDP), the United Nations Global Compact, the World Resources Institute (WRI) and the World Wildlife Fund (WWF). The initiative aims to encourage companies to set targets to reduce greenhouse gas (GHG) emissions (also referred to as reduction targets) in line with scientific recommendations.
2 Scope 1: Greenhouse gases emitted directly by manufacturing the company's product. Scope 2: indirect greenhouse gas emissions from the use of electricity by the company, the heating of buildings, etc. Scope 3: greenhouse gas emissions from the transport and use of the product; the combustion of gasoline in cars, for example.
3 Due diligence requirement.
November 2021. This document is issued by Edmond de Rothschild Asset Management (France). This document is non-binding and its content is exclusively for information purpose. Any reproduction, disclosure or dissemination of this material in whole or in part without prior consent from the Edmond de Rothschild Group is strictly prohibited. The information provided in this document should not be considered as an offer, an inducement, or solicitation to deal, by anyone in any jurisdiction where it would be unlawful or where the person providing it is not qualified to do so. It is not intended to constitute, and should not be construed as investment, legal, or tax advice, nor as a recommendation to buy, sell or continue to hold any investment. EdRAM shall incur no liability for any investment decisions based on this document. The information about the companies cannot be assimilated to an opinion of Edmond de Rothschild Asset Management (France) on the expected evolution of the securities and on the foreseeable evolution of the price of the financial instruments they issue. This information cannot be interpreted as a recommendation to buy or sell such securities. The composition of the portfolio may change in the future. This document has not been reviewed or approved by any regulator in any jurisdiction. The figures, comments, forward looking statements and elements provided in this document reflect the opinion of EdRAM on market trends based on economic data and information available as of today. They may no longer be relevant when investors read this document. In addition, EdRAM shall assume no liability for the quality or accuracy of information / economic data provided by third parties. Past performance and past volatility are not reliable indicators for future performance and future volatility. Performance may vary over time and be independently affected by, inter alia, changes in exchange rates. « Edmond de Rothschild Asset Management » or « EdRAM » refers to the Asset Management division of the Edmond de Rothschild Group. In addition, it is the commercial name of the asset management entities of the Edmond de Rothschild Group.
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