Boards must play a pivotal role in ensuring that executives' rewards do not tempt them to behave improperly, according to a report published recently with the endorsement of Sir Derek Higgs, a corporate governance expert, and Sir Digby Jones, director general of the Confederation of British Industry (CBI) in the UK.
Remuneration committees should review rewards, such as bonuses and career progression, to see if they create "undesirable incentives", says the report, jointly produced by Insight Investment, the asset management arm of HBOS, FTSE Group, the producer of stock market indices, and Business in the Community, the corporate responsibility campaign.
Also, audit committees should ensure that internal controls identify and manage risks related to corporate responsibility -- including ethical, social and environmental risks, it says. Nominations committees should satisfy themselves that board candidates are vetted for integrity.
The report, "Rewarding Virtue", provides the first detailed guidance for boards on how to fulfil their corporate responsibility duties under the combined code on corporate governance. The code states that directors "should set the values and standards of the company and ensure that it meets its obligations to shareholders and others." Sir Derek is deputy chairman of Business in the Community, a scheme involving 700 UK companies that looks at improving the impact of business on society.
In a foreword to the report, he says that boards should deal with corporate responsibility in their routine agenda items.
"Boards that treat corporate responsibility as a bolt-on risk failing to fulfil their obligations to both shareholders and others," he says.
Sir Digby says the report takes "a refreshingly hard-nosed approach" to corporate responsibility: "It explains the pressures that can blow companies off course and the rewards of getting it right."
Written before UK Chancellor Gordon Brown's move to scrap the legal requirement for operating and financial reviews, the study says boards should include in the OFR information on corporate responsibility "to the extent necessary for shareholders to understand the company's strategy, risks, resources and relationships". In their remuneration reports, boards should say how they take account of long-term, intangible factors such as customer satisfaction. The report says market failure can tempt companies to prosper by behaving deceiving customers or externalising pollution costs.
Under syndication arrangement with FE