IRRCi, IRRCi Research
Jessica Ziegler, Steve Lydenberg, William Burckart – Monday, March 12, 2018
In this, the summary report of the Investors’ System-level Impact Measurement project, TIIP provides investors with a roadmap for measuring the effectiveness of their system-level investing approach- es—Measuring Effectiveness: Roadmap to Assessing System-level and SDG Investing (see Figure E.1). The roadmap helps investors ensure that they are moving beyond generating environmental or social impact through individual market transactions and alignment with broader system-level goals (e.g., the United Nations Sustainable Development Goals), and are also in related system-level change. That is, it helps them to answer the following question: How can I measure whether I, as a long- term institutional investor, have contributed to promoting the long-term wealth-creating potential of the environment, society, or the financial system?
IRRCi, IRRCi Research
Monday, March 12, 2018
“Roadmap” report offers guidance for measuring effectiveness of system-level and SDG Investing; Applies in-depth example to addressing SDG on Climate ActionWebinar on March 26th at 1 PM ET to Review FindingsNEW YORK, NY, March 12, 2018 -A new report provides investors with a breakthrough roadmap for measuring the effectiveness of system-level investing strategies, including measuring progress toward achieving the United Nations’ Sustainable Development Goals (SDGs). The new report, Measuring Effectiveness: Roadmap to Assessing System-level and SDG Investing, examines how investors can chart a course to assess system-level issues (like those contained in the SDGs) appropriate for their specific situation, and then establish effective goals for influence against which to measure progress. In doing so, investors also can assess the potential usefulness of the tools available to them and the effectiveness of the tools they have selected. Ultimately, this approach enables investors to assess their influence in determining changes at the system-level itself and the potential contribution of their efforts and investments. The report is authored by William Burckart, Steve Lydenberg and Jessica Ziegler of The Investment Integration Project (TIIP) and was sponsored by the Investor Responsibility Research Center Institute (IRRCi). A companion document to the report, Measuring Effectiveness: Roadmap to Assessing System-level and SDG Investing—Supplemental Appendices, contains a series of appendices that provide tools and examples for investors, as well as additional context for and information about the concepts discussed. A webinar is scheduled for Monday, March 26, 2018, at 1:00 PM ET to review the findings and respond to questions.
- Register at no charge here.
- Download the full report here.
“Investors increasingly realize that mitigating systemic risk is far more important to their returns over time than any trading strategy,” explained Jon Lukomnik, IRRCi executive director. “That is one reason for the groundswell in investor interest in the sustainable development goals. This report suggests how to go beyond aligning investment strategy with the SDGs and how to actually measure an investor’s ability to impact systemic risk issues.” “Central to the findings of this report is that investors now can measure whether individual organizations are using system-level investing strategies in ways that can lead to collaborative action and influence,” said report co-author William Burckart. “Ultimately, it is through the collective actions of a diverse set of members of the investment community using a variety of tools in differing ways that sufficient leverage can be achieved to exercise influence within today’s complex, global, interconnected systems.” “Measuring the effectiveness of system-level investing is possible; it is the foundation upon which investors can base consistent, system-wide impact over time and protect the ability of their funds to generate returns in the long term. To paraphrase the business management pioneer Peter Drucker, the only way investors will be able to effectively manage the wealth-creating potential of these systems is if they measure their influence on them,” Burckart observed. To help facilitate investors’ use of the roadmap, the report uses an example of climate change, and outlines how investors or third-party evaluators can use the guidance to assess the effectiveness of actions targeted at addressing that key system-level challenge. Among the key findings in the report is the identification of four foundational characteristics of environmental, societal and financial systems. Investor actions which strengthen any of those four characteristics mitigates systemic risk, while investor actions which weaken any of those four will increase systemic risks.
- Adaptability: the environment, society, or the financial system’s ability to adjust to shocks and major disruptions (i.e., high adaptability, or self-regulation, helps systems better adjust to unanticipated external shocks).
- Clarity: the coherence, flow, access to, and transparency of information about and within a system (i.e., information flows among actors and about system components—and their interrelationships— enables investors’ ability to understand their influence and act accordingly).
- Connectivity: the value of a good or service is determined in part by how many people use it. The more it is used, the greater the benefit to the system (i.e., systems so structured have positive feedback loops that increase their health and resilience).
- Directionality: market incentives structured to encourage positive changes in stakeholder behavior (i.e., healthy systems are those in which influential actors enhance positive characteristics and align their actions with the systems’ fundamental goals).
Watch a video of a presentation regarding the report here, and read here a column with overview of the report’s key findings. The Investor Responsibility Research Center Institute is a nonprofit research organization that funds academic and practitioner research enabling investors, policymakers, and other stakeholders to make data-driven decisions. IRRCi research covers a wide range of topics of interest to investors, is objective, unbiased, and disseminated widely. More information is available at http://www.irrcinstitute.org The Investment Integration Project helps institutional investors understand the feedback loops between their investments and the planet’s overarching systems – be they environmental, societal or financial – that make profitable investment opportunities possible. Once this relationship is understood, TIIP provides investors with the tools to help manage the impacts of their investment policies and practices on these systems. More information is available at http://tiiproject.com
Contacts
Kelly Kenneally, +1-202-256-1445 kelly@irrcinstitute.org @irrcresearch William Burckart, +1-646-661-5734 wburckart@TIIProject.com @TIIP_Insights
IRRCi, IRRCi Research
Tuesday, December 19, 2017
Honorable Mention Winner Finds Linking Corporate Social Responsibility to Compensation Increases Company Value and Green InnovationNEW YORK, NY, December 19, 2017 – The timing of stock-related chief executive officer (CEO) compensation is a predictor of corporate actions that boost short-term stock price but destroy long-term value, according to the two winning academic papers of the Investor Responsibility Research Center Institute (IRRCi) annual investor research competition. The winning academic research teams will share a $10,000 award. “The two winning research papers use the vesting schedule for CEO compensation – when the CEO can sell stocks and options – to demonstrate that heavy vesting periods lead to actions that suggest that some CEOs are more concerned with short-term stock price movement than long-term value creation.” said Jon Lukomnik, IRRCi Executive Director. “These are the first papers to closely examine the structure of CEO equity vesting schedules and then correlate it to value-creating or value-destroying corporate activities.” “For example, the research finds that a high amount of equity vesting will increase the likelihood that a company will revise guidance upward; reduce research and development and capital expenditures; buy-back shares or increase the amount of its share buy-back; and even enter into merger and acquisition activity. The research paints a clear and bold portrait of short-termism with concern for long-term value creation faded into the background,’ Lukomnik explained. The first winning research paper, Equity Vesting and Investment, is co-authored by Alex Edmans, London Business School; Vivian W. Fang, Carlson School of Management at the University of Minnesota; and Katharina A. Lewellen, Tuck School of Business at Dartmouth. This paper studies the link between real investment decisions and CEO’s short-term stock price concerns. It finds that vesting equity induces CEOs to reduce investments in long-term projects and to take actions that increase short-term stock price. More broadly, it shows that that the structure of CEO compensation has a causal effect on real-world decisions. Download the research here. The second winning paper, The Long-Term Consequences of Short-Term Incentives, is also co-authored by Edmans and Fang, together with Allen H. Huang of the Hong Kong University of Science and Technology. This paper studies two corporate actions that allow accurate measurement of the long-term consequences of short-term incentives – stock repurchases and mergers and acquisitions (M&A). The research shows that the impending vesting of equity may lead CEOs to take myopic actions that boost the short-term stock price at the expense of long-term value. An increase in vesting equity is associated with a greater frequency of stock repurchases and M&A announcements, and both corporate events were associated with higher short-term returns and lower long-term returns. Download the research here. Alex Edmans said, “We are honored to win this award. With IRRC’s leading role in the practice of corporate governance, we hope our research can be used to guide the reform of executive pay. While pay does need to be improved, a correct diagnosis must precede treatment. Many views on executive pay – and thus calls for reform – are based on hand-picked anecdotes rather than large-scale evidence. While reformers often target the level of pay, our research suggests that the horizon of pay is a more important dimension. Giving CEOs equity with long vesting periods will encourage them to focus on long-term investment rather than short-term earnings.” Vivian Fang said, “For decades, both academics and practitioners have argued that short-term incentives hinder long-term growth. While intuitive, showing a causal effect of incentives on CEO actions is challenging because the same factors that drive CEO actions can also drive incentives. We use CEO vesting schedules – which were decided several years prior and thus are unlikely linked to current CEO actions – as a measure of short-term incentives. By linking vesting equity to firm outcomes that reflect value erosion, we show a negative causal effect of short-term incentives on firm value.” The academic paper submissions were of such high quality that the judges selected another research paper for Honorable Mention recognition, Corporate Governance and The Rise of Integrating Corporate Social Responsibility Criteria in Executive Compensation: Effectiveness and Implications for Firm Outcomes. This research is co-authored by Caroline Flammer at Boston University’s Questrom School of Business; Bryan Hong at the University of Western Ontario’s Ivey Business School; and Dylan Minor at Northwestern University’s Kellogg School of Management. This study also examines the structure of CEO compensation, and it finds that the integration of corporate social responsibility criteria in executive compensation – a relatively recent phenomenon – leads to an increase in long-term orientation; an increase in firm value; an increase in social and environmental performance; a reduction in emissions; and an increase in green innovations. Download the research here. The respected judges for the 2017 IRRC Institute Prize were:
- Robert Dannhauser, Head of Capital Markets Policy, CFA Institute
- James Hawley, Professor emeritus and Director of the Elfenworks Center for Fiduciary Capitalism at St. Mary’s College of California
- Erika Karp, Founder, CEO and Chair of the Board of Cornerstone Capital
- Nell Minow, Governance Expert and Huffington Post Columnist
The judges did not award a prize for a practitioner paper this year. Biographies of the judges are available here. Information on past winners is available here. More information about the award is available here. Read the full body of IRRCi research here. The IRRC Institute is a nonprofit research organization that funds academic and practitioner research that enables investors, policymakers and other stakeholders to make data-driven decisions. IRRCi research covers a wide range of topics of interest to investors, is objective, unbiased and disseminated widely. More information is available at the IRRCi Website. Follow IRRCi on Twitter at @IRRCResearch. IRRCi Award Contact: Jon Lukomnik 1-646-512-5807| jon@irrcinstitute.orgIRRCi Media Contact: Kelly Kenneally | +1.202.256.1445 | kelly@irrcinstitute.org
IRRCi, IRRCi Research
Alex Edmans, Katharina A. Lewellen, Vivian W. Fang – Monday, December 18, 2017
This paper studies the link between real investment decisions and CEO’s short-term stock price concerns. It finds that vesting equity induces CEOs to reduce investments in long-term projects and to take actions that increase short-term stock price. More broadly, it shows that that the structure of CEO compensation has a causal effect on real-world decisions.
IRRCi, IRRCi Research
Alex Edmans, Allen H. Huang, Vivian W. Fang – Monday, December 18, 2017
This paper studies two corporate actions that allow accurate measurement of the long-term consequences of short-term incentives – stock repurchases and mergers and acquisitions (M&A). The research shows that the impending vesting of equity may lead CEOs to take myopic actions that boost the short-term stock price at the expense of long-term value. An increase in vesting equity is associated with a greater frequency of stock repurchases and M&A announcements, and both corporate events were associated with higher short-term returns and lower long-term returns.
IRRCi, IRRCi Research
Bryan Hong, Caroline Flammer, Dylan Minor – Monday, December 18, 2017
This study examines the structure of CEO compensation, and it finds that the integration of corporate social responsibility criteria in executive compensation – a relatively recent phenomenon – leads to an increase in long-term orientation; an increase in firm value; an increase in social and environmental performance; a reduction in emissions; and an increase in green innovations.
