This will be the third session in our “Performance Trilogy” which examines the broad area of corporate performance and how it should be rewarded.
- Our first event focused on how investors and other external bodies define financial performance.
- The second explored the use (and abuse) of financial performance measures in annual and longer-term incentive plans.
In this session, we turn our attention to non-financial performance measures – and in particular, the extent to which Environmental Social and Governance (ESG) criteria should be used to create focus on and reward a company’s social impact and environmental sustainability. The FT has commented: “Today’s corporate zeitgeist looks notably different versus two years ago, never mind a decade back.” As climate change and Carbon Net Zero move up the agenda over the coming decade, the pressure to incorporate non-financial performance measures into incentive plans will only increase.
It is clear that investors need common benchmarks with which to measure companies, to allow employees and customers to rank companies more consistently and judge their protest accordingly. New metrics combined with rising digital transparency will subject companies to a new level of oversight. And yet the focus on reporting may actually be an obstacle to progress – consuming bandwidth, exaggerating gains, and distracting from the very real need for changes in mindsets, regulation, and corporate behaviour. It may lead to risk aversion in allocating capital when innovation is the most important tool to address many of the challenges of climate change and inequality. If done poorly, not only does ESG miss its sustainability goals, but it could also make things worse and let down the very stakeholders it should help.
We will therefore examine such issues as:
- Whether ESG objectives should link to the long-term vision and strategy of the company – or create focus on more immediate shorter-term milestones – and the balance?
- How the outturn of ESG objectives affects a company’s strategic objectives and aligns with the KPI’s that are highlighted in the Annual Report?
- What are the criteria against which the quality of an ESG objective should be assessed?
- The extent to which targets should be hard and more easily measured.
To help us gain greater clarity around these issues, Professor Alex Edmans will re-join us, together with a senior institutional investor. Completing our trilogy on performance measurement, this session will provide essential guidance for building ESG measures into future reward policy.
Professor of Finance at London Business School
Alex Edmans, Professor of Finance at London Business School and Academic Director of the Centre for Corporate Governance, who focuses on corporate governance, responsible business, and behavioural finance. He is also an elected member of the Governing Body. Alex graduated from Oxford University and then worked for Morgan Stanley in investment banking (London) and fixed income sales and trading (New York). After a PhD in Finance from MIT Sloan as a Fulbright Scholar, he joined Wharton in 2007 and was tenured in 2013 shortly before moving to LBS.