Governance and Executive Pay: Adapting to a New Era

Edna Twumwaa Frimpong

Governance and Executive Pay: Adapting to a New Era

How is the governance and regulatory landscape in the Belux region evolving?

 

Listen to Episode 70 on Apple Podcasts

 

Guests: Bart Van den Bussche, Director, PwC Belgium and
Aurore Zadeling, Manager, PwC Belgium

Hosts: Dottie Schindlinger, Executive Director of the Diligent Institute, and Meghan Day, Senior Director of Board Member Experience for Diligent Corporation

In this episode:

  1. Inside the 2021 Report: Van den Bussche and Zadeling talk about the history of the report and highlight some key developments.
  2. An Evolving Regulatory Landscape: Van den Bussche gives his take on the new directives introduced by the European Commission to advance sustainability reporting in the region.
  3. Director Focus in the Future: Zadeling and Van den Bussche discuss current governance gaps and steps companies can take to address them while meeting stakeholder needs.

Summary:

In this episode of The Corporate Director Podcast, hear Bart Van den Bussche, Director, and Aurore Zadeling, Manager, at PwC Belgium discuss key findings from the 2021 edition of the Corporate Governance and Executive Pay report.

Inside the 2021 Report

Van den Bussche begins by giving us a background of the report: :”We have a long-standing joint business relationship that dates to 2017. It became quite clear that both organizations have compatibility and joining forces will give added value to our clients. Diligent offers structured data and analytics tools which we combine with PwC tax reward and regulatory knowledge. By roping in our capabilities, we believe our series of reports contribute to broadening stakeholder concerns by shaping the corporate governance landscape well into the future.”

Zadeling shares some of her favorite insights from the report: “One interesting insight is that the data shows that average proportion of realized long term incentive (LTI) increased compared to short term incentives (STI). This is not surprising, as we had seen it before in 2019 only that the increase in LTI has been exaggerated in 2020 quite significantly.” She explains why this result occurred: “Companies are putting more emphasis on sustainability and long-term value creation in compensation plans.”

She goes on to provide more nuance on this point: “However, companies are still largely measuring performance against financial criteria. Even though non-financial KPIs typically reflect long-term objectives and performance, and especially when they are linked to sustainability, we still observe that they are more integrated into short-term incentives than in long-term incentive plans.”

According to Zadeling, this might change: “We expect a change in the future as investors are putting pressure on companies to link long-term incentive plans with meaningful ESG indicators. Rightly so, ESG will be measured with a balance between annual progress and long-term achievements. This will be a positive shift, as we know that certain ESG metrics will take a long time to realize such as the transition to carbon-neutral or become a net-zero business, and hence makes more sense to link such metrics with LTIs.”

 

We hope that our suites of reports together represent a scope of findings that are very valuable to our clients and the general audience.”

Bart Van den Bussche, Director, PwC Belgium

The pandemic’s  effect on the results cannot be overlooked. The proportion of LTI grew in terms of average figures, and this could be because of certain decisions made by REMCOs during the pandemic. Companies cut STIs more relative to LTIs and this could have affected how STIs grew relative to LTIs.

Aurore ZadelingManager, PwC Belgium

 

An Evolving Regulatory Landscape

The European Commission has introduced a series of directives aimed at enhancing sustainability reporting in the region. Van den Bussche gives us a breakdown of how these directives interact as well as how they will enhance the landscape in the region: “The corporate sustainability reporting directive (CSRD) will amend the existing reporting requirements of the non-financial reporting directive 2014. Both the Sustainable Finance Disclosure Regulation (SFDR) and CSRD are actually for documentation disclosure for nonfinancial data and require certain large companies to disclose information on how they operate and how they manage their social-environmental changes. The goal is to help investors and other stakeholders evaluate how they report on non-financial performance.”

Compared to the non-financial reporting directive 2014, there are four new scopes to these two directives:

  • The directives have been extended to certain large companies.
  • Introduction of assurance by sustainability information third party auditors.
  • The directives now specify the specific details that companies should report.
  • The directives now require companies to prepare their documents in machine reading formats to help stakeholders analyze and interpret the documents.

Van den Bussche sheds more light on how companies can address the challenge of making sure corporate disclosures focus on what matters, rather than a laundry list of generalized ESG issues: “Measures should be aligned to strategy, and companies need to be clear on why they have chosen these particular measures. Focus on the big issues for your business.”

 

 “Once ESG factors are integrated into strategy and the company can analyse, measure and report on them, linking them to executive pay is the natural next step.”

– Bart Van den Bussche, Director, PwC Belgium

 

Director Focus in the Future

Van den Bussche discusses how boards should address diversity gaps: “Diversity is a key element of any board discussion and board composition. It is not only limited to gender, age, race, and ethnicity but also the range of skills set backgrounds, personalities, and experience of the board. Moreover, it is important to think about the tenure of the current board and anticipate turnover and director retirements. The companies that identify gaps should set appropriate targets with measurable steps to meet them. For the sake of transparency, they should report their steps in their annual reports, so shareholders are able to gain insights into how companies are meeting their targets.”

Zadeling adds: “Diversity is indeed very important, and we should think of the tenure of current directors in relation to diversity. Companies that identified diversity gaps should put appropriate targets. There needs to be a concrete plan in place. Long-term succession planning is very important.”

 

“The first step is to map the most urgent diversity needs in relation to the company’s operations, purpose and stakeholders.”

Bart Van den Bussche, Director, PwC Belgium.

Forward-looking directors see beyond the board and  C-suite level to expand their pool of candidates to fill up board roles. This provides broader pool of individuals with more diverse backgrounds.”

– Aurore Zadeling, Manager, at PwC Belgium

 

Also in this episode…

Both guests share their views on how corporate directors can prepare for the future of governance in the world of ESG. Van den Bussche says, “ESG has become a business imperative and it’s no longer simply nice to have. ESG linkage to compensation remains challenging and technical for companies. It requires a certain level of expertise, and it is not something you do overnight and without support from third-party experts.”

Aurore adds: “Companies need to be prepared for new reporting requirements. Entering 2022, companies will have to reflect on how they can identify gaps for sustainability information, risks, and set targets so they can prepare for the new directives.”

Resources from this episode:

 

 

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Edna Twumwaa Frimpong
Edna Frimpong is an experienced research analyst with a demonstrated history of working in the information technology and services industry. In her role with the Diligent Institute, Edna oversees and directs corporate governance research projects and partnerships internationally, outside the US. She joined Diligent Institute in 2021 after six years with CGLytics' -- a corporate governance analytics firm based in Amsterdam, The Netherlands, acquired by Diligent -- where she served as Head of Research for the EMEA region. Previously, Edna held research positions at firms including Sustainanalytics and Carnomise.' She received her Master's Degree in Finance and Law from the Duisenberg School of Finance in Amsterdam, and her Bachelor's Degree in Administration, Insurance and Risk Management from the University of Ghana.