The 2007 Skoll World Forum:The thorny issue of CEO pay

I had the privilege of attending, for the second time, the Skoll World Forum on Social Entrepreneurship, in Oxford, from which I’ve just returned.  The conference has emerged as the world”s pre-eminent gathering of social entrepreneurs.

A variety of interesting and thought-provoking issues emerged, each of which would justify its own posting.  One of the most fascinating to me, and it came up at several sessions, was that of pay.  In short, what social enterprise chief executives can or should pay themselves.  Putting aside financial constraints, there appears to be a big question around the moral issues regarding the level of remuneration that can be justified for enterprises that claim to operate along social lines.

A CEO of one business asks how much is appropriate for her to be paid.  Another social enterprise founder mentions the fact that a key staff member earns $100,000, prompting loud groans and rolling eyes of those in attendance.  (It subsequently transpires that this employee subsequently leaves for twice the money to the private sector.)

I have seen this issue surface recently outside of Skoll as well.  I know a firm, which has been started by two high paid (but not independently wealthy) media executives.  In their case, they are vital to make the enterprise succeed, but feel queasy to pay themselves even one third of their private sector pay packets.  The business will not succeed without the skills they “bring to the table”, but their families depend upon their earnings to bring sustenance to their family “table” as well.  Another CEO pays himself a derisory salary as chief executive, even below charitable sector standards.  Yet his competitors at other firms perform the same role on a voluntary basis.  For this, the chief executive has come under criticism.

While I sympathize with those who feel private sector executive pay has gotten out of hand and concur with the view that social enterprise CEOs cannot be mercenary in their approach to their own compensation, I think this has gone too far.  Furthermore, the unwillingness to pay close to competitive wages is puritanical and short-sighted.  It will inevitably lead to slower growth for social enterprises and social businesses, and cause a long delay in bringing forth the substantial social returns they can generate.  It is simply a fact of life in our system that certain skills are vital to the success of fast growing businesses, and in many cases these skills are high-priced.  Moreover, not everybody in an organization has the dedication or the family circumstances to carry on in the social enterprise irrespective of financial reward.  I think it’s vital that as the social sector matures it also “grows up” with respect to this issue of pay.  Failure to do so will be like cutting off its nose to spite its face.

Size matters – for social business

Social businesses tend to be smaller than mainstream businesses.  This is unsurprising given the fact that the social business phenomenon in the UK is relatively new, and many of these companies will have only started in the last few years.  Yet I see there relatively small size is having advantages, and moreover, puts them in a position of being morally superior – at least for now.

I have worked all my life for large companies and found that they share certain similarities with large entities in the charitable sector and also in government.  One feature of this size is that in order for the organizations to function effectively they become highly vertical.  That is to say that with several thousand employees, there tends to be many layers of reporting lines between the CEO and the individual on the lowest rung of the ladder.  This is necessary–in fact, it is hard to imagine any other way in which they could operate.

By being smaller, social businesses have fewer layers between the chief executive and the clients being served by that company.  As a result, the cause-related aspect of social businesses is strengthened by the proximity of the chief executive to the clients.  Her or his success and that of the organization will ultimately be determined by how well it delivers to clients.  With the large organization, by contrast, I contend, that the connection between customers and the chief executive is highly attenuated.  Their success, or more to the point, their compensation, is largely a function of staying in place.  The skills required to achieve this end, are not at all the same as those required to meet the needs of the market – their clients.  They are about survival, not service.

I believe it is inherent in the highly vertical nature of large corporations that the distance between the market and the leader leads to a corruption of sorts, in that the CEO’s imperatives (or the Prime Minister’s) are often, in my experience, not aligned with the mission of the organisation (or the citizens) – at least in the short term.  On the other hand, the closeness of the social business leader to the market and to the social objectives for which the social business strives is good for the business and good for the cause.  Thus, for now, at least until social businesses find their own path to corruption, I believe they remain morally superior, and also likely to be more effective in achieving their aims.

Social businesses cannot rely on good feeling alone

Social businesses have much to offer as a form of economic organisation.  In fact, I believe they are vital to our economy. Firstly, the cause-related nature of these firms gives them a certain dynamism often lacking in mainstream businesses.  Such dynamism, and the enthusiasm it elicits, benefits social businesses.

This is particularly true during the earlier entrepreneurial phase of development – resources are low and this energy may be the only “reserve” on which the company can draw.

Social businesses are also smaller than mainstream businesses.  Staff and the management are therefore more closely connected to the needs of the market in which they operate.  This is a concept I will explore in a later blog.  They are also more agile, partly as a result of their size, which enables them to respond more quickly to changing market circumstances.

In fact, social businesses, as a construct, are uniquely well-suited to today’s environment in the way they utilise the market-based/capitalist system to meet clients” needs.  Observers may criticize the system and the underlying moral assumptions, but as a mechanism to identify and then deliver against customer needs, the market is hard to beat.  We may one day live in a world where the imperatives of the marketplace do not dictate so much of our daily lives, but this day has not yet come.  Many have dedicated their lives to changing the system – I am too old to think about this and will work within this system to deliver the greatest potential social and financial returns.

An example of a social business which has responded to market needs is Divine (formerly Day) Chocolate Ltd., which has grown and prospered as a fair trade chocolate company.   In 1997, a cooperative of Ghanaian farmers decided to produce their own mainstream chocolate bar to compete with other major brands in the UK – this based on interest from some international customers.  Day Chocolate was formed with support from The Body Shop, Christian Aid, the NGO Twin Trading and Comic Relief.  However, consumer interest remained limited until management improved the product (in terms of taste) and adopted more traditional marketing techniques.  Now the firm has enjoyed rapid growth, is profitable and expanding.  The growing interest in fair trade by wealthier consumers in the “North” was undoubtedly a factor, but the response to the market’s other needs (good taste) was essential.

Becoming a board member of the Ethical Property Company

On Saturday, I travelled to Bristol for the AGM of the shareholders of the Ethical Property Company (EPC).  At the end of that meeting, the shareholders voted to add me as a Non-Executive Director of the Board. Unfortunately, I had to run off right after the meeting.  I was unable to have a drink with my new colleagues on the board and those shareholders who were good (foolish?) enough to vote for me.

Nevertheless, I took my train seat with a big smile on my face.  I felt privileged to have been invited to join the board of this remarkable company.  Jamie Hartzell, the CEO, aided by Sam Clarke as Chair and the rest of the board have built a truly unique firm – one that sets the pace for the UK ethical and social business sector.

At face value, EPC is just a landlord (what could possibly be ethical about that?!).  But, atypically, EPC restricts its prospective tenants to UK social change organizations.  Moreover, it offers these organizations discounts of 20% to 33% off market rents.  In addition, to adhere to its own stringent environmental criteria, the company makes investments in its buildings that will reduce its carbon footprint, even if these investments may not maximize its ROI.  Finally, to top it all off, shareholders know all this and yet still buy the shares.

Over time, they have been reasonably well rewarded with the shares rising from £1 to 1.25 since the first share issue in December 1999.  In addition, they have received dividend income.  Yet what makes this firm so delightfully bizarre is that the shareholders, many of whom I met in Bristol, knowingly forsake some of the financial upside that could come from investing in a property share in exchange for the social, ethical and environmental (SEE) returns that EPC generates.  In fact, if their passion in the session or the workshops was anything to judge by, their interest in the SEE returns is far greater than in the financial returns.  Mark my words, this investor segment will grow in years to come.

So what about this word “social”?

“Social enterprise”, “socially responsible investment”, “social business”, “social return on investment”, “corporate social responsibility” etc., etc..  These are all phrases that have been popping up in our daily lexicon to an increasing and, some would say, increasingly tedious extent.  In fact, the only usage of social which is distinctly taboo is “social-ist”!

New Labour in Britain has put an emphatic end to that usage, but nearly all political parties seemed to have embraced the other forms and phrases of this word.  I often wonder, what is actually going on here and should anybody care?

Since the early 80s (the Thatcher/Reagan era) the economies of the UK, the USA and the OECD overall have become increasingly liberalised and market-oriented.  This trend may have accelerated overall growth but only, many argue, at the expense of the social objectives of the welfare state.  I too think that the pendulum has swung too far; thus the emergence of a strong desire to reconcile capitalist markets and their key underlying concepts (e.g. investment, enterprise, business) with social objectives and thus the appearance of the “word blends” noted above.

Consumers, governments, investors, businesses and other stakeholders in society are each playing their part in making the concepts behind these phrases concrete.  Consumers and investors are demanding greater recognition of social criteria and business and government are, unsurprisingly, responding.  The ideas have been around for years, but their move out of the concept stage into reality has taken time.  Catalyst Fund Management & Research Limited, the business that I co-founded ten years ago, exists to facilitate and speed up this process.

Catalyst is a business, so it will surprise nobody that it seeks to benefit from this process, by providing the services described elsewhere on this website.  This blog is its contribution to the ideological debate over the issues which impact this broad area-?most particularly social businesses but also social enterprises.  Tell me what you think about these issues, the sector or us!