Boards have been warned they must “sharpen up,” according to the head of the world’s largest sovereign wealth fund. He promises opposition to directors who fail to adapt to climate risk and those guilty of “corporate greed” through bumper executive pay settlements.
Nicolai Tangen, chief executive of Norges Bank, sent the message ahead of an appearance at Davos, the World Economic Forum’s annual meeting for global business leaders, being held this week. He wrote that this year would also see the investment fund make its own shareholder proposals on climate, should it believe boards are falling short.
Writing in the Financial Times, Tangen says: “Our message is clear: we expect boards to sharpen up. They must become increasingly effective in overseeing business strategy and management in a complex business environment.”
He adds: “Companies should report on climate matters and set net zero targets. Filing climate-related proposals where companies do not meet our expectation and are clear laggards sends a signal to the board that they need to step up their efforts.”
Tangen will join former Bank of England governor Mark Carney on a Davos stage to discuss the “power of shareholders to shape the corporate narrative”.
The session asks: “What is the responsibility of large shareholders to challenge misaligned corporate behaviour and excess in executive compensation?”
Tangen also reasserts his belief in splitting the roles of chair and chief executive—a jibe mostly at some US and European companies—saying dual roles could “threaten” the chair’s task of ensuring “remuneration is in line with value creation”.
He says boards need to be aware that they set pay levels in a “social context”.
“At a time when the cost of living is climbing, it is not sustainable to increase executive pay aggressively while average wages lag far behind. There has never been a worse time for corporate greed,” Tangen writes.
Davos this year is themed “Cooperation in a Fragmented World” and takes places against a backdrop of concerns about the invasion of Ukraine, fears of recession, rising interest rates and a cost of living crisis. In addition, the focus of global leaders on beating climate change also remains.
In opening remarks, Klaus Schwab, executive chair of the WEF, said: “We see the manifold political, economic and social forces creating increased fragmentation on a global and national level.
“To address the root causes of this erosion of trust, we need to reinforce cooperation between the government and business sectors, creating conditions for a strong and durable recovery.”
Political leaders might do well to cosy up to counterparts in business. According to the 2023 Edelman Trust Barometer, business is the only “trusted institution”—when compared with NGOs, governments and the media—in a world that is increasingly polarised. Business leaders join NGO leaders and teachers as more unifying than the “rich and powerful”: viewed as the most divisive societal members, hostile foreign government, government and journalists.
Tangen may be right to focus on climate and executive pay. A recent survey reveals that the number of shareholder “say-on-climate” votes is increasing, though investor support may be falling as they become more skilled at analysing climate plans. They may become jaded after reading other documents. A recent report suggests most investors believe corporate annual reports contain greenwashing.
Providers of directors’ insurance too have become concerned about ESG risk.
ESG and climate are likely to remain big issues throughout this year’s AGM season, while regulatory developments on climate and sustainability reporting in the US, the EU and internationally are likely to take significant steps forward. Tangen finds himself among the many exerting pressure this year.