Shareholders first, or employees? What we don't talk about when we talk about corporate governance

    By Marissa Lee

    The Business Times, 30 November 2019

    IN the boardrooms of Singapore, corporate governance has a distinctly Anglo-American flavour. The purpose of a firm's existence is to make money for its owners. Most corporate chieftains believe that it is their duty to prioritise the interests of shareholders above other stakeholders, namely employees or the communities that a firm draws its resources from. Profits go to capital and labour gets paid the market wage, until said unit of labour breaks into the professional managerial class, where executive pay is tied to measures of shareholder value.

    But in an age when rising wealth and income inequality has pushed more and more people to think along class lines, the notion that "the social responsibility of business is to increase its profits" - first articulated by Milton Friedman in 1970 and torn out of context by corporate raiders in the 1980s - is losing its resonance.

    In the United States, some politicians have proposed that stock buybacks be curbed or even banned. They argue that buybacks only enrich top executives and shareholders by lowering the number of publicly traded shares, which gives the firm's reported earnings per share a boost. That money would have been better spent investing in workers instead of laying them off, they wrote.

    Then there's the Accountable Capitalism Act, introduced by Senator Elizabeth Warren last year. Among other things, the bill seeks to empower employees of any company with more than US$1 billion in annual revenue to elect at least 40 per cent of the board of directors. This concept of co-determination is common in German, Dutch and Scandinavian firms.

    Obviously, these ideas have provoked fierce criticism. But even if you disagree that so-called "shareholder capitalism" is a key cause of inequality in the US, the trend is clear: People are increasingly looking to the business world to solve the most pressing social issues of our time.
    Perhaps it's time to refresh the vocabulary we use when we talk about corporate governance.

    Inequality at work
    If charity begins at home, income inequality begins at the workplace, where Singaporeans spend most of their time.

    At the largest Singapore-listed companies (market cap above S$10 billion), chief executives are paid 80 to 100 times what their median employees earn, according to estimates by Willis Towers Watson.

    CEOs of mid-sized companies (market cap of S$1 billion to S$10 billion) earn 30 to 50 times what their median employees receive.

    The ratio narrows for smaller companies (market cap of S$300 million to S$1 billion), where CEOs earn 15 to 30 times what their median employees make.

    Compared to the US, where the average S&P 500 company has a CEO-to-worker pay ratio of 287 to 1 and rising, Singapore's figures look great.

    But what's interesting is that US public companies are disclosing their CEO-to-worker pay ratios at all. (The requirement arose out of a need to curb corporate excess in the wake of the 2008 mortgage crisis, when Wall Street paid its top bankers and traders million-dollar bonuses after receiving a government bailout.)

    In Singapore, the Code of Corporate Governance encourages the detailed disclosure of CEO remuneration, and the remuneration of the top five management personnel.

    But the rate of compliance is low, notes Singapore University of Social Sciences associate professor Chua Wei Hwa: "The 2019 survey (by the Singapore Institute of Directors) also suggests that attitudes towards remuneration disclosures is unlikely to change."

    So it's no surprise that the recent sustainable employment advocacy paper from the Singapore Business Federation (SBF) flagged income inequality as an issue to be addressed, but does not advocate for firms to track worker pay ratios of any sort. According to Ho Meng Kit, the Federation's chief executive: "We discussed this, but we were not sure how useful a ratio would be... because it becomes a lightning rod, it becomes controversial." The report chose to focus on how to help groups of workers that are vulnerable to job displacement instead.

    People priorities
    Shai Ganu, managing director of Willis Towers Watson, also warns against drawing too many inferences from CEO-to-worker pay ratios. If change doesn't come from within, forcing it along can have negative effects.

    For example, the CEO-to-worker pay ratio is easily lowered by firing or outsourcing lower-paid labour, so overburdened CEOs may opt for this quick fix instead of investing in high-wage jobs or in employees' career progression.

    This would be a pity because there is solid evidence to show that there is a positive correlation between company performance and investment in people priorities.

    Earlier this month, a study by Willis Towers Watson based on surveys of close to 250 million employees (at more than 500 companies over a period of 50 years) showed that companies that scored higher on employee experience consistently outperformed their sector on average by a clear margin of two to four percentage points across key performance metrics, including return on assets and equity, one-year change in profitability and three-year changes in revenue and profitability.
    "In contrast, companies delivering less effective employee experience consistently underperformed their peers by up to 10 percentage points," Mr Ganu adds.

    Employee experience - similar to the concept of customer experience - refers to the sum of all interactions an employee has with his or her employer. Corporate structure, senior leadership effectiveness, culture, training opportunities, immediate supervision and teamwork are all aspects of the employee experience.

    Structural integrity

    In an age of unprecedented cynicism towards leadership, internal pay equity is important for another reason. As Judith Samuelson, a vice president at the Aspen Institute, puts it: "Internal pay equity is more important to the health of the enterprise than benchmarks across companies... when too great a disparity exists between layers, the sense of teamwork, engagement, agency, and creativity begins to shred."

    Yet, the norm is for executives' pay packages to be benchmarked to peer groups that are not strictly defined.

    One Singapore-listed company even wrote in its latest annual report that it had decided not to disclose the remuneration of its top five key management personnel, "in the interest of maintaining good morale and a strong spirit of teamwork within the group".

    Boards have turned some CEOs into corporate superstars, says Sirius Venture Capital managing director Eugene Wong: "Today, boards place a lot of emphasis on CEOs as the key drivers of company performance. They pay CEOs like they are the top strikers in a football club. Good leadership definitely contributes to good company performance, and the CEO is definitely critical. But it takes more than one person to deliver performance."

    He believes that renumeration committee members can play the devil's advocate and ask, for example, if the firm's bonus-sharing system is equitably designed.

    "Salary already compensates for different skills. Why add one more layer to it when each worker's bonus is a percentage of his salary?" Mr Wong asks.

    "If your goal is to create loyalty and if you believe employees are integral to the company, I advocate an equal bonus scheme for staff regardless of title because that is more equal. And it (the bonus pool) is from a percentage of profits, like 20 per cent.

    "I'm not saying that we should pay management poorly. Senior bonuses could be equity related or pegged to the long-term performance of the firm, like a three-year goal which is transparent to all staff and if they hit those open goals for the good of the firm, the firm's profits will go up and the equal bonus scheme will take care of all staff and senior management."

    Another unique feature of the Singapore market is the large number of family-run and founder-led businesses on the local bourse.

    A distinction should be made between entrepreneurs and professional managers, Mr Wong feels. Entrepreneurs shouldn't be bargaining for the same kind of salary increments as professional CEOs, or even their own staff.

    "Some towkays benchmark themselves against the managerial class... (but) they should be benchmarked to the entrepreneurial class. If entrepreneurs already receive their performance incentives through dividend payouts as shareholders, they shouldn't have two slices of the same cake."

    To be sure, pay is not the only thing that matters. In 2012, 35 per cent of US employees polled by Parade magazine said they would rather see their direct supervisor fired than get a pay raise.
    When bosses show that they think for their employees and are accountable to them, that gives them more moral power.

    Mr Wong points out: "Workers want a good CEO who deserves his salary. But sometimes management overstays. Usually, management's KPIs (key performance indicators) are subjective and negotiable with the board, whereas working employees are valued on technical KPIs... And most CEOs' KPIs, I wonder if that's ever shared to the factory worker. It should be."

    Social pollution
    In 2016, a Stanford study estimated that more than 120,000 deaths per year and roughly 5 to 8 per cent of annual healthcare costs in the US may be attributable to how companies manage their work forces.

    In other words, the workplace is the fifth leading cause of death in the US, according to Stanford professor Jeffrey Pfeffer, one of the study's authors. And society bears the cost of negative externalities caused by workplace stressors like low job control and the lack of health insurance.
    The silly part is that lower worker well-being actually hurts employers in the form of higher absenteeism and sick leave rates.

    History has also shown that lay-offs or redundancies do not improve organisational performance and often drive the best employees to leave.

    Labour economist and Nominated MP Walter Theseira agrees that it is "reasonable" to expect firms to be responsible for the harm they cause to workers.

    But there is a problem, Dr Theseira explains. "There is a very long onset between when people are exposed to chronic stress and when they actually develop health conditions... There are also fewer universally agreed indicators of exposure. You can measure radiation exposure of workers, but what is the most valid way of measuring workplace stress?" He adds: "In an environment where people have multiple careers throughout their life, it's also not clear what taking responsibility really means (for employers)."

    A worker's healthcare costs may not have much to do with whether their current employer caused that poor health.

    "However, there is a case to be made for some type of national-level fund that taxes companies based on their stress-related indicators," notes Dr Theseira.
    "In fact, there is already a general principle of doing this with respect to unemployment benefits in the US.

    "But it has to start with establishing the connection between practical measures of workplace stress and eventual health, assessing the costs of such impacts, and then establishing a mechanism for employers to provide for sick workers."

    Hidden figures
    Meanwhile, in the name of competitiveness, the use of contract and temporary staff by firms is growing.

    Some of the workers with the least job security are no longer on listed companies' payrolls, points out Milton Ng, second adviser to the Environmental Management Association of Singapore. "Most corporations outsource their non-core services and as such do not manage the downstream effects of low-wage workers."

    A few months ago, local start-up Nimbus became the first cleaning firm here to set up an employee share appreciation scheme for all outstanding workers, from cleaners to operations managers.
    The initiative drew a round of cheers from the labour movement, though Mr Ng is sceptical that Nimbus can generate better shareholder returns than the competition.

    "Is this possible when cheap sourcing is still prevalent in Singapore? You must have equally enlightened customers to be able to achieve this. The ecosystem does not work if the buyers are only interested in buying the cheapest," he says.

    "Service buyers must recognise that even if they outsource services, they still have the moral obligation to ensure fair salary and a good working environment are in place."

    That has to start with Singaporeans and corporate leaders recognising the contributions that cleaners make to keeping the country safe and hygienic, Mr Ng adds. "Salary is not the only instrument to demonstrate better treatment. In Japan, environmental workers are not paid highly but due respect is given to them."

    Ultimately, what's really required is a shift in values, says Kim Jung Kyu, a Confucian writer and director of fund management firm ACA Investments: "I'm not saying institutional remedies (like more employee-centric corporate governance disclosures) won't help. But they won't be sufficient without the accompanying change in cultural values.

    "We live in a culture where maximising shareholder value trumps all other human and social considerations. I serve as director of multiple companies. If I were to prioritise, say, environmental considerations over profit, I could be accused of breaching fiduciary duty. This must change!

    "Maybe the Singapore government could introduce a legislation making it clear that a director's fiduciary duty encompasses environmental, social and governance responsibilities? This could really shift attitudes in boardrooms."

    The upper crust
    ONE company that's constantly building a better employee experience is BreadTalk Group.

    In the infamously trying food and beverage (F&B) industry, BreadTalk has achieved a relatively low annualised staff attrition rate of 35 per cent.

    The national average was 52.8 per cent in the second quarter, notes group chief operating officer William Cheng: "By continually upgrading our welfare and training programmes, we have been able to groom and retain talent and lift staff morale."

    In 2017, BreadTalk introduced a talent-grooming programme, where existing staff members are identified as potential next-generational leaders and participate in overseas secondment opportunities to observe global operations. A permanent five-day work week has been implemented, and top-performing bakery front-liners are rewarded with incentive trips.

    Last year, BreadTalk spent S$70,000 to convert an Orchard Road apartment near its Paragon and Wisma Atria outlets into the first Din Tai Fung staff lounge, where staff get to nap and unwind between shifts.

    Mr Cheng, who's been with the firm for 16 years, says: "The idea for a lounge came about when I was passing by a mall, and saw F&B front-liners laying down for a rest, on common benches at public areas - some of which were unshaded.

    "Justifying this additional spending was challenging, but imperative. Once the board was able to see that these changes would bring about positive results toward customer service excellence, employee motivation, and healthier top lines, they were supportive of these initiatives.

    "Striking a balance between shareholder returns and welfare benefits is challenging, but they are not mutually exclusive."

    Restaurant meritocracy

    HAIDILAO, China's most popular hotpot chain, took an employee-centric philosophy and turned it into a powerful business model.

    Each restaurant manager starts out by earning a 2.8 per cent cut of their own restaurants' profits on top of their base salary, and the profit-sharing component rises in proportion to the success of the apprentices that he or she trains.

    For instance, the restaurant manager or shifu can opt to take 0.4 per cent of his or her own restaurant's profits, plus 2.8 to 3.1 per cent of the profits of the restaurants managed by his or her first-generation mentees, plus 1.5 per cent of the profits of the restaurants that his or her second-generation mentees manage.

    "This apprentice system forms the core of our bottom-up driven expansion strategy that enables continuous replicative growth," Haidilao wrote in its prospectus last year.

    Haidilao also has a strong culture of promoting from within that harks back to founder Zhang Yong's belief in fair opportunities for social mobility. Mr Zhang worked in a tractor factory before opening his first restaurant.