Ethical Funds to tackle executive compensation

Vancouver-based Ethical Funds is adding executive compensation to its ambitious shareholder action program for 2006. Ethical, the first company in Canada to market socially responsible mutual funds, says it wants to raise awareness on the need to link executive compensation to sustainability.

“In our view, companies today rely far too much on stock options as a means for compensating and providing incentives to executives,” Ethical says in a report. “Many shareholder and compensation experts fear that stock options dilute the earnings and voting strength for shareholders, do not expose executives to downside risk, reward and punish executives for performance they cannot control, and lead to a focus on short-term share price performance to the detriment of long-term wealth creation.”

Ethical says this narrow, short-term view defies logic, pointing to a survey which revealed that the majority of executives were willing to forego an investment that offered a decent return if it meant missing quarterly earnings expectations.

A separate survey found that that more than 80% of executives were willing to cut expenditures on research and development to ensure they hit quarterly earnings targets — even if they believed that the cuts were destroying value over the long term, Ethical adds.

“In 2006, we’ll be asking companies to establish compensation schemes with transparent links between the pay provided and the achievement of long- term financial, environmental, social, and governance goals,” Ethical says.

It’s an issue investor advocates have been pushing for years and there are signs of progress. On Tuesday, the Globe and Mail reported that Canada’s big banks are ready to begin disclosing how much of their profit is used to pay senior executives, including salaries, bonuses and stock options.

Other issues on Ethical’s radar for 2006 include climate change, human rights and AIDS.

“Our focus will remain on U.S. oil and gas companies and the need for basic disclosure of greenhouse gas baseline data and plans to reduce emissions. We will engage both U.S. and Canadian oil and gas companies to begin long-term scenario planning, transitioning them from oil and gas to a broader definition of what it means to be an energy provider.”

The climate change dialogue will be expanded this year to include Canada’s five major banks. Ethical’s research on human rights will be the basis for discussions with a number of energy and mining companies, including Alcan, Barrick Gold, Canadian Natural Resources, Falconbridge, Husky Energy, and Petro-Canada.

In 2005, Ethical wrote to 153 TSX-listed Canadian companies, asking each to a better job of disclosing information related to environmental, social and governance performance, and held direct discussions with 51 companies on various topics.

The firm voted proxies on 2,467 proposals at 274 annual meetings last year, voting against management nearly one-third of the time. “Most of our negative votes were cast against directors that failed to meet our criteria for independence.”

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com