CSR and the 5 Levels of Corporate Governance, Innovation & Accountability

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Mark Van Clieaf, Managing Director - MVC Associates International - USA

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CSR and the 5 Levels of Corporate Governance, Innovation & Accountability

  1. 1. Creating The Sustainable Enterprise 5 Levels of CEO Work & Corporate Governance To Drive Value Creation for Shareholders & Society Triple Bottom Line Conference Frankfurt Nov, 2005 www.mvcinternational.com [email_address] 813-943-3970 Copyright @ 2005, MVC Associates International
  2. 2. Agenda <ul><li>Current State of Corporate Governance </li></ul><ul><li>Current State of SRI / CSR </li></ul><ul><li>5 Levels of CEO Work & Corporate Governance as a new model for SRI to create above median investment returns </li></ul><ul><li>5 Levels of Investment and Capital Governance </li></ul><ul><li>New Role for Pension Funds & Boards as active and credible owners in creating sustainable value </li></ul>© Copyright 2005 MVC Associates International
  3. 3. Current State of Corporate Governance <ul><li>Anglo-American Capitalism is Failing: </li></ul><ul><ul><li>North American under-funded pension liability is </li></ul></ul><ul><ul><li>> $ 600 billion </li></ul></ul><ul><ul><li>Private Equity Returns over 5 to 10 yrs are 40 % to 100 % greater than public equities </li></ul></ul><ul><ul><li>Current investment mandates create structural flaws in current model of capitalism & drive short-term focus at the risk of corporate sustainability </li></ul></ul><ul><ul><li>Organization design, metrics, incentive & talent </li></ul></ul><ul><ul><li>assessment systems at investees NOT designed for: </li></ul></ul><ul><ul><ul><li>VIABILITY </li></ul></ul></ul><ul><ul><ul><li>SUSTAINABILITY </li></ul></ul></ul>© Copyright 2005 MVC Associates International
  4. 4. 50 % of CEO roles at too Low a Level of Work & Accountability <ul><li>> 50 % top 1800 public companies in North America have failed to create a ROIC > Cost of Capital over 5 years </li></ul><ul><li>Based on Proxy Statement Disclosures: </li></ul><ul><ul><li>85 % not held accountable for business performance beyond 3 years </li></ul></ul><ul><ul><li>90 % have NO non-financial measures of success and contribution to broader society ( triple bottom line ) </li></ul></ul><ul><li>McKinsey Survey </li></ul><ul><ul><li>55 % Directors had no meaningful process or metrics to evaluate CEO role / performance </li></ul></ul><ul><li>CEO Pay-for-Performance focused on Current Operations should be focused on Strategic & Innovation Work </li></ul>© Copyright 2005 MVC Associates International
  5. 5. Current State of Socially Responsible Investment <ul><li>Limited material impact or value added investment returns ( SRI / CSR a luxury for many ) </li></ul><ul><li>NOT mainstream to current core investment management model </li></ul><ul><li>Most SRI screening / research fails to link to material economic, environmental, social or ethical issues / risks that impact investment value drivers </li></ul><ul><li>Just reporting on CSR ( check the box ) does not create shareholder / societal value </li></ul><ul><li>Need for a 3rd generation of SRI that transforms core investment management models </li></ul>© Copyright 2005 MVC Associates International
  6. 6. 3 Domains of Work Copyright @ 2005, MVC Associates International Credit to Luc Hoebeke for the 3 Domains of Work Systems
  7. 7. 5 Levels of CEO Work & Governance Across 3 Domains of Work
  8. 8. Work Domains & Enterprise Value <ul><li>• Current Value (CV) </li></ul><ul><li>& </li></ul><ul><li>Future Value (FV) </li></ul><ul><li>already in Market Value (MV) & Stock Price </li></ul>Copyright @ 2005, MVC Associates International
  9. 9. 5 Levels of CEO Work, Innovation & Authority
  10. 10. Hierarchy of CEO Work & Corporate Governance
  11. 11. 5 Levels of Corporate Governance (Not All Boards Are Created Equal)
  12. 12. 5 Levels of Investment Management
  13. 13. The ONLY way to Sustainable Returns is a Long-Term Shareholder View <ul><li>Recognizing the relationship between the Values & Innovation Work Domains: </li></ul><ul><ul><li>Changing 5 to 50 yr Societal / Consumer & Environmental Developments / Possibilities </li></ul></ul><ul><ul><li>Market Based Capitalism & profit focus in creating new products / new services / new markets / new business models & new industries </li></ul></ul><ul><ul><li>1 to 10 yr + Economic Viability and Return on Invested Capital > Cost of Capital is THE core building block of “Best in Breed” business models & future societal contribution beyond statutory compliance </li></ul></ul>© Copyright 2005 MVC Associates International
  14. 14. 3 Generations of SRI / CSR Transformation to True Viability & Sustainability <ul><li>Generation 1 </li></ul><ul><ul><li>CSR Reporting / check the box / “spin” </li></ul></ul><ul><li>Generation 2 </li></ul><ul><ul><li>Converging SRI / CSR analysis with materiality & impact on investment value drivers </li></ul></ul><ul><li>Generation 3 </li></ul><ul><ul><li>Scenario & investment planning for ∆CV & ∆FV including: </li></ul></ul><ul><ul><ul><li>Changing Consumer / Societal needs, preferences & values </li></ul></ul></ul><ul><ul><ul><li>Analysis of how emerging 10 to 50 yr future values could materially impact investment value drivers - Revenue Growth, Margin, Profit, FCF, ROIC > COC & relative TSR </li></ul></ul></ul><ul><ul><ul><li>Identifying new 1 to 10 yr + investment opportunities for new products, new services, new markets, new business models & new industries </li></ul></ul></ul>© Copyright 2005 MVC Associates International
  15. 15. The Pension Funds’ Role as Credible Owners <ul><li>Fix their own organization structures, staffing strategies & incentive systems to create a real 10 yr + investment focus on innovation / viability / sustainability </li></ul><ul><li>Create proxy voting guidelines that are strategic, a holistic look at the business, and where performance metrics are clear (not check the box & superficial) </li></ul><ul><li>Develop a smart & credible engagement strategy for underperforming companies / industries </li></ul><ul><li>Influence regulators to change disclosure rules on CEO Accountability & Pay for Performance related to Business Strategy, Viability & Sustainability </li></ul>© Copyright 2005 MVC Associates International
  16. 16. Pension Funds as Active Owners <ul><li>What Level of CEO & Board Capability is Required? </li></ul><ul><li>Investors need to become active when Board / CEO at too low a Level of Capability </li></ul>
  17. 17. Voting For Directors & Sustainable Returns <ul><li>Is the Board / CEO at the Right Level of Capability for the Strategic Challenge facing the enterprise & its Viability / Sustainability? </li></ul><ul><li>Has the firm returned a ROIC > COC over 5 yrs? </li></ul><ul><li>A “Yes” vote for Director election is a vote for: </li></ul><ul><ul><li>Business Strategy / Level of Work & Governance </li></ul></ul><ul><ul><li>Firm Performance / Viability / Sustainability </li></ul></ul><ul><ul><li>CEO Accountability </li></ul></ul><ul><ul><li>CEO Pay-for-Performance </li></ul></ul><ul><ul><li>CEO Succession / Selection </li></ul></ul>© Copyright 2005 MVC Associates International
  18. 18. Thank You For Your Interest www.mvcinternational.com

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