Executive Compensation and Corporate Social Responsibility

Executive Compensation and Corporate Social Responsibility

As I've been reading accounts of the mob with pitchforks going after greedy C-level exec's on Wall Street, I'm reminded of a prescient chapter in my book, "The Gort Cloud," that deals with this red hot issue. The subject of the chapter is a hip and eco-conscious clothing maker in Portland called Nau, Maori for "welcome, come in".

When this band of ecopreneurs founded the company, they set out to do many new things. Of course they were committed to making clothes from sustainably sourced materials, clothes that would be easy on the Earth to maintain and that would be long lasting. They would also give a large portion of revenues to environmental causes. They set out to do many things, but one of the most interesting was the commitment to tie executive compensation to overall employee compensation. In their minds, executive compensation was just as important to CSR objectives as, say, how much impact their choice of cotton had on cotton workers in Peru. Although a private boardroom decision for most corporations, Nau decided that fairness dictated another system. If the employees worked hard and produced profits, then all boats should float. If the CEO could take Fridays off for golf, then the others could go to T.G.I. Friday's for a drink -- or mountain biking, which would be the more correct analogy for the Nau team. It's the fairness doctrine built into the corporate charter.

This is how Ian Yolles, Nau's director of brand communications put it, "This entire effort has been an exercise in design in the fullest sense of the word. We've had a real opportunity to design an entire enterprise strategy, informed not only by the goal to make a profit, but also by our commitment to sustainability and a responsibility to the community. From day one, we've tried to be intentional and deliberate and conscientious about every decision we've made with those bigger ideas in mind."

To that end, Nau's original founders agreed, among other things, to abide by Robert Hinkley's Code for Corporate Citizenship. It states that the "duty of directors shall be to make money for shareholders, 'but not at the expense of the environment, human rights, public health and safety, dignity of employees, and the welfare of the community in which a company operates.' "

Nau included a version of these 28 words in their bylaws. They went a step further, and included a document called "Rules of Corporate Responsibility" with eight "commitments," one of these stating that the highest paid employee cannot make more than 12 times the salary of the lowest paid employee, and another stating that the company would never pay less than 1.5 times the U.S. minimum wage. A third point states that all spouses or partners are guaranteed benefits regardless of sexual persuasion. "The kicker to all of this -- it says that none of these rules or commitments can ever be changed without a minimum of 75 percent shareholder agreement," explains Yolles.

When companies are privately held, the fortunes of the owners, who are often the managers, rest with the performance of the company. With public companies, executives are paid obscene sums that have nothing to do with performance because it is the shareholders (or taxpayers) who take the hit when bad decisions are made. Likewise, it is the rank and file that suffers through job loss and pay cuts while executives escape on golden parachutes. Nau's corporate rules brought fairness into the equation.

Now it is true that Nau has had its ups and downs in this challenging economy, but the model they set forth could suggest a new and more equitable path for corporate governance and compensation. It's not socialism. This is capitalism that guarantees rewards for all stakeholders.

Richard Seireeni is president of The Brand Architect Group, Los Angeles, a strategic brand consultancy with affiliated offices in Tokyo and Shanghai. Seireeni is the author of "The Gort Cloud" that describes the invisible network that is powering today's most successful green brands.

You can read more about Robert Hinkley's ideas in this article originally published in 2002: "How Corporate Law Inhibits Social Responsibility." Robert C. Hinkley has been a corporate lawyer for more than 20 years. In June 2000, he resigned his partnership at Skadden, Arps, Slate, Meagher & Flom LLP to devote more time to promoting the Code for Corporate Citizenship.