remuneration | INSEAD International Directors Network (IDN)

ESG x Governance (5): The CSRD Challenge – Céline Abecassis-Moedas

Date June 6, 2024

This is the fifth of a series of interviews intended to help our IDN members grapple with the ESG topic.
In this episode, we delve into the experiences of a seasoned business academic who is also an INED, and explore the insights she has gained in the course of her career.

Céline Abecassis-Moedas

Céline Abecassis-Moedas is an academic and corporate leader, with over 25 years of experience spanning academia, consulting, and board positions. She is the Dean for Executive Education and Associate Professor at Católica-Lisbon School of Business and Economics, and serves as a non-executive director on the boards of CUF (chair of the innovation and sustainability committee), Vista Alegre Atlantis in Portugal, and Lectra (Chair of the remuneration committee and member of the CSR committee) in France. She also was on the board of Europac in Spain and of CTT and Grrenvolt in Portugal. She earned her PhD from Ecole Polytechnique, a MSc from Dauphine University (France), and is also an INSEAD IDP-C certified independent non-executive board director.

How does ESG, particularly with the emergence of the CSRD, impact company governance and success?

In my view, the relevance of ESG for overall company governance and success is multifaceted. Firstly, it’s a requirement. Legislation is evolving, and 2024 is a pivotal year as companies will need to report increasingly detailed ESG information due When I say it’s a requirement, I’m referring to the Corporate Sustainability Reporting Directive (CSRD). The first cohort of large companies will need to report on their fiscal year 2024 activities under this directive.
From my perspective, obtaining this information is quite challenging, especially for SMEs, which are often suppliers to the companies on whose boards I serve. It’s like we’re reinventing accounting or creating a parallel system of accounting. We must report all these new metrics, and many companies are unsure where to begin.

What’s the added value of ESG beyond compliance and risk management, considering your board and academic experience, and do you see any geographical variations in its importance?

Yes, it’s an interesting topic. Last week, during our Advanced Management Programme (AMP)—the most senior programme we have— I invited a guest speaker (a female seasoned expert in the area) to discuss the Corporate Sustainability Reporting Directive (CSRD) because it’s a major topic. She titled her talk “CSRD: Challenge or Strategic Opportunity,” which aligns perfectly with what we were considering. While not all companies view it as an opportunity, some definitely do.
For example, I serve on the board of a company in technology for the fashion industry that focuses on computer-aided design and manufacturing. They report on metrics such as energy usage and improvements over time. This company structurally benefits the environment by helping its clients reduce waste. However, since it’s their clients’ waste being reduced, it doesn’t directly reflect on the company’s own sustainability metrics, which is frustrating. The fashion industry is highly polluting, but by enabling on-demand fashion and reducing waste, this company contributes to sustainability. This exemplifies how CSRD can be seen as an opportunity rather than just a challenge.
On the other hand, I also sit on the board of a ceramics company, which uses a lot of energy. The recent rise in energy costs has been a financial nightmare for them. They’re now considering changing their energy sources to become less dependent on traditional, more polluting options. For them, CSRD is more of a challenge, but it can become an opportunity.
I notice more industry-specific differences rather than geographical ones. My experience is mostly in continental Europe—Portugal, France, and some in Spain. I suspect the topic is less pressing in the US, but I don’t have detailed information on that.
I am an optimist and believe CSRD presents opportunities for those who understand what is at stake. In the last two years, I’ve seen the growing importance of our role as non-executive directors in this area. While executives drive these initiatives, we have a significant responsibility bring external perspectives and best practice from company to company. This makes our work as non-executives particularly valuable.

What alignment challenges do you observe between executive leadership and non-executive boards in terms of ESG, and what recommendations would you offer to address these?

In terms of alignment, I also see the need to balance the Environmental (E), Social (S), and Governance (G) aspects of ESG. When people talk about ESG, they often prioritize the Environmental part, while the Social and Governance parts receive less attention. Two companies where I serve on the board—a tech company, and a healthcare company—are very people-oriented. Both have faced the issue of doing a lot in terms of social initiatives but not reporting it effectively. It’s a pity because their efforts are not visible. They needed to make an effort to report better, use more KPIs, and show their social impact more clearly.
The environment part is always present and significant but difficult to address. As for governance, it’s often assumed to be well-managed, but it should receive more focus. This could be because governance was previously well-handled, or because the other two areas need so much attention that governance is overlooked. I believe it’s a bit of both.
In governance, two things are particularly important, diversity and processes. Diversity on the board is essential, beyond just gender diversity. Diversity is becoming mainstream, but it’s crucial to extend it beyond gender. More than anything it is the existence of processes that guarantees good governance.
Finally the balance between the three and they interact is core and needs to be looked at.

What are the main gaps for boards to become ‘ESG fit,’ and how can they efficiently up-skill directors? What should Board Chairs prioritize?

What I’ve been observing more and more from the inside is that, in the last year or two, companies are increasingly hiring for ESG roles. They are bringing in consultants and hiring dedicated ESG personnel within the company. It’s like we’re creating a second accounting system and now building the team for it.
If you compare it, today a company might have an accounting team of 25 or 30 people for regular accounting and only two or three for ESG. It will take time to build up to the same level, but that’s where we are getting. As both a board member and an academic, I see that even the most dedicated companies often don’t know where to start. The CSRD rules are very demanding, still being designed, and this creates a significant challenge. Companies often don’t know where to begin. They are seeking help from consultants, but even the consultants are still learning. This situation is both exciting and a bit scary because we are all learning as we go.
For boards to be “ESG fit,” the biggest gap to close is in understanding and capability. Boards need to prioritize building their own knowledge and skills in ESG. This means Board Chairs should create ESG training for board members, hire or consult with experienced ESG professionals, and integrate ESG considerations into the core strategy of the company.
Efficient and effective up-skilling can be achieved through dedicated training programs, learning from best practices, and ensuring ongoing education on the evolving ESG regulations and expectations. It’s essential to foster a culture of continuous learning and adaptation to keep up with this rapidly changing field.

What are the primary ESG challenges ahead for non-executive boards, and how can companies address them effectively?

I think the big challenge is not just having a strategy and an ESG strategy separately, but rather integrating ESG as an essential part of one cohesive strategy. Not all companies are ready for this integration, and in some cases, it might require significant changes that are daunting for them.
The role of the board is essential here. Because we have a broader perspective and can bring insights from across different companies, non-executive directors have a unique responsibility. For example, I serve on the boards of three companies with different activities, but the discussions we have in one often become relevant in another.
One example I’m proud of is how we integrated ESG into the variable remuneration of the CEO at one of the companies. As the Chair of the Remuneration Committee and a member of the ESG Committee, I led multiple discussions to include ESG criteria in the CEO’s variable pay. For 2024, 50% of his variable remuneration will be based on ESG performance, which is a significant change. Next year, we plan to extend this to a few more executives and eventually further throughout the company. This makes ESG truly strategic; if variable remuneration is tied to both EBITDA and ESG, it changes priorities significantly.
Another critical issue is getting the right information, which is often challenging. In the private healthcare group that I sit at the board of, we discovered that anaesthetic gases had the same carbon footprint than their entire fleet of vehicles. Initially, this seemed like a mistake, but after thorough checks, including comparisons with NHS data, it was confirmed (Desflurane has a significantly higher global warming potential compared to Sevoflurane). We then had to convince doctors to switch to the gas with the lower carbon footprint. This example illustrates how crucial it is to have accurate information; without it, significant impacts can go unnoticed.
In summary, for boards to be “ESG fit,” they need to integrate ESG into their core strategy and ensure accurate information flow. Prioritizing ESG training, hiring knowledgeable professionals, and setting clear ESG metrics in executive compensation are key steps. This approach not only aligns short-term actions with long-term goals but also makes ESG a fundamental part of the company’s success.

Could you provide an overview of University’s upcoming CSRD preparation program, its objectives, target audience, and key features?

The programme is still a work in progress, we aim to launch it by October. It will be called ESG Strategy and Reporting. The idea is to address the needs of the many companies that will soon be required to comply with the CSRD. For example, in Portugal, around 1,200 companies will need to report, a significant increase from the current number. The top 50 companies probably have the resources and knowledge, working with large Audit firms. However, the remaining thousand companies probably don’t know where to start.
Our goal is to build a programme that helps guide these companies through compliance. We’re still finalizing the length and cost because it needs to be accessible. We also want to involve the right experts, as few people have deep knowledge of the CSRD requirements. The programme will include expert instruction and numerous guest speakers from top companies that have already begun this process. We aim to create a community where participants can share best practices and support each other during and after the program. These companies are not in competition; they are facing the same challenges and would benefit from working together.
We see this as a significant opportunity, but we acknowledge that auditors are already moving into this space, which is only fair. We will need to collaborate with them to ensure the programme’s success.

The interviewer:

Dr. Pamela Ravasio, Shirahime

Dr. Pamela Ravasio is the founder and managing director of Shirahime Advisory, a Corporate Development & Responsibility Governance boutique consultancy. She serves as fractional Chief Sustainability Officer for companies and advises boards on ESG and governance. With a background in roles like Global Stakeholder Manager, she played a key role in making the European outdoor industry a leader in future-proofing.
She currently is a member of INSEAD’s International Directors Network.

Fat Cats or Heroes? The Dilemmas of Executive Pay

Date June 25, 2020

Posted by Karen LOON

Fat Cats or Heroes? The Dilemmas of Executive Pay

By Helen Pitcher OBE, President of INSEAD Director Network, Experienced Chairman, NED and Board Committee Chair

The world is focused on the tragedy of the Covid epidemic and the horror stories of death, financial hardship and vulnerability within communities and ethnic groups. As companies battle to survive by rapidly changing their operational management processes, and responding fairly and ethically to the challenges, there are few businesses untouched by this crisis.

As we gain more traction and control in the disease contagion phase, government and businesses are turning their attention to the looming economic crises which will follow in the aftermath of this pandemic.

Executives in the depth of the crisis are experiencing a peculiar maelstrom around the issue of executive pay. At the same time these executives have worked harder and longer than ever before, focused on sustaining their businesses, often taking voluntary pay cuts, questions are being asked about the levels of their current and future pay. These questions are primarily being driven by the Investment industry and represent a triple whammy; questioning bonuses to be paid for largely last year’s performance, questioning the validity of any bonuses to be paid for this year due to crystallise next year, questioning the short- and long-term award of ‘Long Term Incentive Plans (LTIPs) designed to focus on business sustainability.

While Boardrooms have been supporting and guiding their executive teams through the immediate threats and issues for their workforces, customers, and the broader stakeholders, there has been a growing dilemma for Boards and Remuneration Committees, as to how effectively they respond to the thorny issue of executive pay in both the short and longer term.

Even before this crisis there was an increasing groundswell for the re-alignment of executive remuneration to reflect the realities of performance and to introduce a concept of fairness. This focused on executive remuneration being more in line with a defensible stance on the actual performance of the business. Being more critical about whether the executive performance actually made a difference to the business and considering the general equality of pay levels within the company and society. The ‘Fat Cats’ campaign has been gaining momentum leading more and more institutional shareholders to question executive remuneration, particularly in the pensions field, where the ‘special’ executive pensions are becoming increasingly exposed and Remuneration Committees are focused on aligning these with the company’s general pension provisions.

In the turmoil of this debate and the immediate threats to the business escalated by the Covid crisis and in the face of the immediate threats to the business, executives have been stepping up to the plate. We have seen reductions in their pay and bonuses, with pay cuts of 20-40% and bonuses forfeited whilst individuals are working significantly harder to minimise the impact on their businesses and quickly develop new ideas, processes and creative solutions to tackle problems.

The nightmare for the Chair of any Remuneration Committee is how to balance these new realities and pressures, whilst anticipating the short- and long-term outcomes. Nobody wants to do a ‘Persimmon’ by introducing schemes which cause a crisis of reputation and credibility and then having to explain themselves to a Select Committee in 18 months’ time. This vortex of reputation even encompasses the ‘Covid-free’ businesses which have ‘boomed’, such as big pharmaceutical and healthcare companies, who continue to pay executives ‘top dollar’ with potential bonuses on the way. Will they be seen as the ‘hero’s’ who saved us or ‘carpet baggers’ who profited from our woes.

In particular the Investment Association (IA) representing the biggest British Investors, has taken a very tough stance suggesting, “companies that have received government support to help them through the coronavirus crisis should cut executive pay and consider clawing back bonuses from bosses”.

The Remuneration Committee and the Board now have the responsibility under the revised ‘Code’ to consider all stakeholders in their decision making and are required to articulate and clearly communicate their approach. So how will their actions look in the eyes of the shareholders, employees, suppliers, customers and broader society? The government has also taken a stance; ‘a spokesperson’ for the government department for Business, Energy and Industrial Strategy warned that they would “expect companies to act in a socially responsible way and exercise judgment and discretion when considering executive pay”.

The reputational risk if you are furloughing people or making drastic salary cuts to rank-and-file workers while the executives continue getting big pay packages, is profound. As always, timing is everything, with questions about this year’s bonus declarations, from last year’s performance occurring now and the equal dilemma of setting this year’s performance levels for bonuses to be paid in 2021 still being in flux. It is perceived that the tone for bonus payments for 2021, will be pretty poor or possibly non-existent, just as executives should have a “maximum performance attitude” to deliver results and survive. There is also a significant communication vacuum creating high levels of uncertainty for executives, with many boards saying, ‘let’s just see what it looks like’.

The granting of LTIPs is a particular dilemma at the moment. Pervious grants have been dented due to the Covid economic winds, while new grants offered at a very low share price could potentially generate windfall gains, for little more than being there. However, while there are challenges, Remuneration Committees do have much more ‘discretion’ written into their plans these days, which provides them with greater opportunity to fine tune bonuses and share grants more easily, never forgetting the imperative of effective communication to all stakeholders.

The bigger picture is also lurking in the background. The Covid crisis will mean many businesses will be doing things differently with remote working as a good example. They have been presented with the opportunity to radically rethink their approaches and processes with many grasping this will both hands.

Consequently, is it not the time to also rethink Executive Remuneration which has been stuck in a rut for many years with little innovation? In particular as we respond to the gathering momentum for equality, inclusion, and diversity, the ‘old’ way of rewarding executives should be refined. There is little resistance for true performance reward, but it is how you decide what is to be rewarded and the proportional scale of the reward that is crucial. There is the sense that it is commercially and morally right for Boards to reduce very high levels of pay. While many of the current actions on executive pay might be necessary they are a temporary measure in unprecedent circumstances, but could also be the trigger for a more permanent change in attitudes to both the levels and make-up of executive pay.

The following pronouncements have been made from the IOD, “Ideally, pay policy during a crisis would be designed to encourage the whole organisation to pull together” and the IA “During this exceptional period we expect companies to adopt an approach that is appropriate to their business and the specific impacts of Covid-19, being careful to ensure that executives and the general workforce are treated consistently. ”Where does that take us?”

Maybe this is the opportunity for Remuneration Committees to ‘move the dial’ by incentivising performance on a wider range of targets including, diversity, climate change, gender and team performance. What are your executive doing which is different? Have they grasped the new challenges and solutions for the future or just fallen back into their old ways? While it is easy to be cynical that the IA for example, is taking the opportunity to ‘have a go at the executives’ their members such as Blackrock, have for some time been calling for wider changes in business, recognising the broader stakeholder responsibilities to society.

Never before have the ‘collective wisdom’ of Boards and the Remuneration Committees been of such potential value. While there are no magic solutions, the careful communication out to all stakeholders and executives will be a significant performance factor for the Committee itself. The challenge for executive teams is that people will need to make a huge contribution to the business during the crisis, and use innovation and ingenuity to navigate their companies through difficult times. The ability to sensitively reward key executives who will be the current and future sustainability drivers of the business is a key role of the Board and Remuneration Committees.

While there will be little commiserating with relatively well-paid executives in these testing times, it is however, the executives in the commercial sector who will lead our businesses to survive and flourish in the immediate post contagion economic crunch. The commercial sector shareholders (pension funds), employees, and suppliers will be hardest hit during the financial phase of the crisis, this includes the executives of those businesses who slim down or fail. Boards will need to continue to retain, motivate, and reward those executives who perform and innovate successfully to accelerate their business through this retrenchment.

Ensuring executive reward is effective, progressive and not just a slash and burn exercise on executive pay, will require Boards and Remuneration Committees to exhibit the ‘Art of the Possible’ and the ‘Art of the Wise’.

First published here.

Align Risk Management with Strategy and Operating Performance, Reward and Remuneration

Date December 31, 2018

Posted by Liselotte ENGSTAM

Align Risk Management with Strategy and Operating Performance, Reward and Remuneration

This blogpost is shared as part of a series of insights from INSEAD Directors Network, based on roundtable discussions held during INSEAD Directors Forum October 2018. The Directors Forum Round Table Discussions were held with IDN members led by IDN board members or IDN Ambassadors. Other Blogpost in Series shared last.

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(Photo: Pixabay)

The round table discussion “Align Risk Management with Strategy and Operating Performance, but also Reward and Remuneration” was led by Susana Gomez-Smith, NED and IDN Ambassador for Portugal with the introduction

As the ultimate steward of value and overseer of risk, the board must grasp the relationship between strategy and risk and assist management, in gaining that understanding but also in putting it to practical use. The Board must also ensure that remuneration policies/practices are consistent with and promote sound and effective risk management and in line with the business strategy.

Why should the Board consider and discuss strategy and risk appetite in tandem? How to do it in practice?
What can the board do to drive greater awareness of the risks to the strategy throughout the organization?
“Remuneration forms part of the culture and governance priority as set out in our Business Plan. As a key driver of behavior, remuneration of senior and risk taking staff is an important area of focus for the FCA to ensure that risk and reward are aligned in firms that we regulate through our Remuneration Codes (the Codes). Whilst our remuneration rules only apply to specific groups of firms, remuneration is a key driver of behavior for all firms and individuals. Implementing appropriate remuneration policies and practices helps to ensure appropriate outcomes and reduces the likelihood of harm from occurring “
Financial Conduct Authority, Remuneration Codes
How can Boards satisfy themselves that firms remuneration practices lead to appropriate outcomes and risk and reward are aligned?

Pre-readings:
Strategic Risk Management: A Primer for Directors, Harvard Law School Forum on Corporate Governance and Financial Regulation
The UK Corporate Code, Financial Reporting Council (from page 16)

Roundtable discussion

The strategy and risk areas has historically kept as quite separate topic, as the risk focus has tended to be quite operational in focus. As the strategic risk has been in steep increase for many companies the boards needs to find more appropriate ways to work with the topics in tandem. Some key insights from the board members were noted as;

The strategy of the firm is and has to be the starting point of all the considerations
The Strategy should comprise the areas of the core business and potential new business areas
The risk appetite for both areas has to be set and will be overseen by the Board (in a regular exercise)
The risk culture is set at the top of the company!
The second line of defence (Risk Management, Compliance) as well as the third line of defence are supporting the first line (operations) – clear definitions needed
Especially the Risk Management and Compliance functions must be filled with experienced and independent staff
With regard to risk measurement and risk identification, the right KPIs (which are rather backward looking) and KRIs have to be defined (better start with few but the most telling ones). Monitor not only your risks but also how the probability, impact of such risk is evolving.
The Risk Management process is not static, it is a constant effort. Risk managers should be incentivized to identify emerging risks. Some companies on the side of the regular Risk Committees perform regular exercises to reflect on emerging risks. It is advisable to include in such exercises different areas of the company and not only a closed inward exercise of the risk department.
At Board level, a trade-off between investments in new business areas and investments to mitigate/eliminate existing risks has to be found
The remuneration should be linked to

Implementation of the strategy (s-t, m-t, l-t) and hence parts of the variable compensation be deferred
Accomplishments in the core business areas as well as in developing new business areas
Risk taking and risk management
Implementation and living the risk culture in the firm

The Remuneration Committee should be given the power to override formulaic outcomes of bonus schemes
Remember: The Management is responsible for Risk Management, the Board is responsible for Risk Oversight.

Conclusion: Strategy and risk needs a framework to be jointly considered as the strategic risk is increasing for many companies, and it needs to be fully aligned also with new and balanced remuneration schemes.