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Executive Pay Transparency May Come to Global Reporting Initiative

| Friday July 27th, 2012 | 0 Comments

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On Friday afternoons I like to reserve time for the deep reading it’s hard to make time for in the middle of the weekly bustle. This week’s selection: the Global Reporting Initiative’s proposed G4 guidelines. Don’t let your eyes glaze over yet, there is a really fascinating nugget I need to share.

But first, some background: The Global Reporting Initiative (GRI) is a non-profit organization dedicated to promoting transparency around economic, social and environmental issues at all organizations – companies to NGOs to governments at any level. Basically, it’s an international standard for writing sustainability reports – and interest in the reporting standard is growing rapidly. In 2011, 2834 reports were registered with GRI.

The Global Reporting Initiative is tremendously popular in Europe with 47% of reports originating there. GRI reporting in the US is growing like gangbusters, however, with 350 reports registered in 2011 compared to only 100 in 2010. That’s partly thanks to the attention and commitment of Mike Wallace, Director of GRI’s Focal Point USA. The GRI guidelines are continuously updated based on feedback from users, which is filtered through working groups. The last round of feedback and iteration began in May of 2011 and a draft of the latest guidelines – the G4 – is now available for comment. Hence my selection of reading.

I must say that when I dove into the guidelines, I wasn’t expecting any surprises. But I was wrong:

Check out this note from the summary on the changes to the “Governance” section of reporting:

G4 is proposing a number of changes to governance and remuneration disclosures to strengthen the link between governance and sustainability performance, taking into account the consistency within existing governance frameworks and developments in that field. The proposed changes include new disclosures in the Profile section of the report on the ratio of executive compensation to median compensation, the ratio of executive compensation to lowest compensation and the ratio of executive compensation increase to median compensation.

… For every one of those nearly 3000 reporting organizations. Many of them private.

Now, U.S. readers might be aware that public companies in the U.S. are already required to disclose some information on executive pay. Specifically, the SEC requires disclosures on the pay rate and terms of corporate CEO, CFO and the pay rates of the other top three earners.

But no disclosures are currently required for the rest of an organization’s employees, and there are certainly no requirements that executive pay be compared to median or lowest paid employee with anything as blatant as a black-and-white ratio. And nothing is required for private companies.

Not that folks wouldn’t like to change that. A common theme emerging from last year’s Occupy Wall Street protests and 99% movements was that executive pay at the biggest companies has gotten completely out of wack. In 2011 the average CEO compensation was 380 times the average worker pay – it was a comparatively staid 42 times average pay in 1980. And people are angry. The AFL-CIO, one of the biggest worker rights organizations in the country, has chosen CEO pay inequality as one of its core political issues because:

CEOs supposedly deserve all this money for increasing shareholder value. However, while the average CEO pay increased 13.9 percent at S&P 500 Index companies in 2011, the S&P 500 Index ended the year at the same level as it started.

That low performance is bad enough, but even more difficult to swallow is the executive pay for CEOs like J.P. Morgan’s Jamie Dimon – 893 times the rate for a bank teller in 2008. He’s currently the highest paid banking executive, despite leading his company to an active role in the subprime crisis. He continues to make out like a bandit on the back of the American economy.

Increased transparency around pay rates would certainly bring attention to this inequality, and GRI is a master at nothing if not transparency.

I wonder whether the inclusion of this indicator is an activist move. It’s a big deal to ask companies that want to be seen as sustainable to disclose the financial side of how their companies are run. Or is it simply that things are generally more equal across the pond and this change in the reporting guidelines doesn’t seem that revolutionary?

I love the idea of having more transparency around pay rates as a component of the sustainability reporting process, as financial equality is a key component of the human side of sustainability. However, pay is *such* a sensitive issue in the U.S. that I fear that requiring this level of transparency is going to make it a lot more difficult for Sustainability Coordinators to get buy-in to draft GRI reports. Since GRI reports and CSR reports in general are 100% voluntary, I fear that the new requirement, if it successfully makes its way into the G4 guidelines, will mean fewer U.S. reporters. The U.S. market just isn’t ready for that level of transparency.

What do you think? Share your thoughts with us in the comments or submit feedback to GRI here.

[Image credit: _Davo_, Flickr]


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