Get a grip on high executive pay

The investment industry has to turn up the heat on high executive pay, says a new white paper by NEI Ethical Funds.

The paper, titled Crisis, What Crisis?, says there’s a design flaw at the heart of how the executives of public companies get paid. As a result, excessive risk-taking has been encouraged and has contributed to the global financial crisis.

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Also, this behaviour poses systemic risks to our economy by contributing to income polarization and the shrinking of the middle class.

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To fix this ongoing problem, it suggests companies will have to move away from maximizing returns for shareholders. Instead, they need to provide positive returns to all company stakeholders including customers, employees, communities and investors.

“A focus on shareholder value maximization is misplaced,” says Robert Walker, vice president of Ethical Funds for NEI Investments. “While companies do need to pay attention to share price, they also need to focus on providing good products at good value for customers.”

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He adds, “They need to attract, motivate and retain engaged employees, as well as work well with their suppliers. The companies that continue to focus solely on the shareholder will underperform over the long term.”

He recommends public companies, and the investment institutions that own their shares, embrace the stakeholder theory of the firm.

“We’re calling on our colleagues to support the stakeholder model as they vote on company pay packages.”

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