Principle 10: Value for All Stakeholders (Item 4)
Sustainability is determined by an organization's ability to create
and deliver value for all stakeholders.
Your reward and recognition systems should focus on the long term best
interest of the organization (rather than the short term interest of
the executives).
Senior managers have to determine how to split the company's investment
between the six stakeholder groups. Unfortunately, pressures from the
owners for money now and the reward structures for managers to keep
dividends flowing may cause the managers not to act in the long term
best interests of the company.
For example, managers are often rewarded according to performance of
the share price. The share price is usually very strongly influenced
by the dividend stream. Managers may be tempted to increase the share
price by investing too much into the dividend stream. This can mean
cuts in maintenance, innovation, research, customer service, product
development, education and training, diversification or knowledge retrieval
systems. This keeps the dividend stream going – for a while. Does
it help the company and the owners in the long term? No!
Warning shareholders! Beware of the huge pay-packet syndrome. It is
not in your best interest. Good share market analysts look at what the
company is not investing in.
We expect senior managers to do the best possible for the company and
its stakeholders. Unfortunately, reward schemes often put senior managers
in a conflict between their own best interests and the best interests
of the company. When they act in their own best interest and accept
the reward, the interests of the other stakeholders can be neglected.
The conflict occurs because of the executives reward and recognition
systems. The rewards at the top are now so huge that they have diverted
the behavior of the people at the top to look after themselves first.
When they are looking after themselves first, they are not always acting
in the best interest of the company.
Huge pay-packets causes considerable political infighting and diversion
of attention away from the main game. Too much is personally at stake
for the players to be seriously interested in the company, its customers
or its other stakeholders. With the competition so fierce for the highly
paid top jobs, most people get sucked into highly destructive back stabbing
tactics – do anything to undermine their fellow executives - the
real competition.
This system is not designed to have the most capable at running the
company for the benefits of the owners. It is designed to float to the
top those who are best able to survive a rugged system of corporate
infighting and political intrigue.
Owners hope that the best interest of the individual aligns with the
best interest of the company. However, it is no more than a hope. It
is almost as though reward according to share price performance is guaranteed
to give less than optimum distribution of funds among stakeholders and
hence less than optimum performance of the company. Another case of
rewarding A while hoping for B.
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