Pensive incentives
There is a another row brewing over pay for corporate leaders. Leaked documents this week suggest that the government may be reviewing restrictions on non-executive pay, in particular whether they could take incentive pay.
A backlash has already begun. Sarah Wilson, chief executive of investor advisers Minerva Analytics, tells the Financial Times that non-execs are not employees or part of management and therefore “performance-related pay or similar incentives would not be appropriate”.
Andrew Ninian, director of stewardship at the Investment Association, told the FT non-executive incentive pay focused on boosting a company’s share price would “risk undermining their independence”.
It’s not entirely clear whether during a period of high inflation and a cost of living crisis, company bosses would grant themselves more pay while trying to hold down pay rises for employees. Still, stranger things have happened.
Sustainability agreement
Europe has reached agreement on ESG reporting. This week the European Council of Ministers and the European Parliament settled the final version of the new Corporate Sustainability Reporting Directive (CSRD), a new law which takes over from the Non-Financial Reporting Directive (NFRD).
Richard Howitt, a former MEP instrumental in pushing through the NFRD and now an independent adviser on corporate sustainability, said: “This is an important next step as the world moves towards standardisation of environmental, social, governance reporting by business, to back responsible business itself and to step up Europe’s response to the urgent challenges of the climate emergency and the UN Sustainable Development Goals.”
CSRD extends the scope of non-financial reporting in the EU and, perhaps most importantly, adopts the ”double materiality” concept: companies should reporting on how ESG affects their value, but also how they affect the environment and people. CSRD also demands disclosure of more forward-looking information and info on intangibles such as social, human and intellectual capital.
Bruno Le Maire, Europe’s minister for economic affairs, said: “Greenwashing is over. With this text, Europe is at the forefront of the international race to standards, setting high standards in line with our environmental and social ambitions.” Nicely done.
Sporting endeavours
JD Sports says it needs more experience on its board, and an overhaul of its corporate governance, risk management and internal controls.
The statement came in a report this week on final results and follow the departure in May of former executive chair Peter Cowgill after JD Sports was fined £4.7m by the Competition and Markets Authority over information-sharing during the takeover of Foot Asylum. The CMA also ruled JD Sports should sell Foot Asylum.
Interim chair Helen Ashton said in the results statement: “A number of regulatory issues have arisen through this time which, following a series of independent investigations alongside the completion of the group’s governance review, have highlighted the need for both greater relevant experience on the board and more formalisation in governance systems, risk management recording, the documentation and appraisal of internal controls and the mechanisms for reporting relevant matters to the regulatory authorities where appropriate.” The Foot Asylum debacle continues to wear the sole of JD Sports.
Cold climate for free speech?
Back to non-financial reporting. Could mandatory climate risk reporting in the US be a breach of the country’s First Amendment right to free speech? Some academics think it could.
Sean J. Griffith, a professor at Fordham law school, says financial rules proposed by the Securities and Exchange Commission (SEC), the US financial regulator, effectively “abridge” freedom of speech. The US government only has the right to do that if new regulations are “purely factual and uncontroversial”.
Griffith says proposals mandating climate-risk reporting are “controversial” in three ways: they “impose” a political viewpoint; they harm investors in general because they favour a minority; and they “redefine concepts” at the heart of securities legislation.
“The SEC would do well to consider its constitutional constraints before attempting to compel further ESG disclosures,” concludes Griffith. Climate risk reporting in the US is in for a stormy time.