How the U.S. and North America Differ From the EU on ESG

North American CEOs are overpaid, while the EU separates the CEO and Chair positions more.

Ruth Saldanha 14 March, 2023 | 2:02AM
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Ruth Saldanha: Conversations around environmental, social and governance investing, also called ESG investing, have been tainted with the political lens recently, especially in North America. However, this is not the case in other parts of the globe. In Europe, for example, sustainable investing is more easily accepted, both by large asset managers like pension funds and investors alike. But what are some points of differences in approaches between North America and the EU? Lindsey Stewart has been studying this. He is the Director of Investment Stewardship Research at Morningstar Research Services, and he is here today to talk about what he's found. Lindsey, thank you so much for being here today.

Lindsey Stewart: Thank you, Ruth. Pleasure to be here.

EU Vs U.S.: North American CEOs Pay is Too High

Saldanha: Now, one of the things you've told us about in the past is how there's such a discrepancy in CEO pay in the EU versus the U.S. So, can you tell us a little bit more about that? What's so different between the two?

Stewart: Yes, you're absolutely right. I think CEO pay in the United States is much higher, larger salaries, larger bonuses, much more liberal allocations of stock-based compensation. In fact, research into how the United States compares with the U.K., where I'm sat, CEO pay is over three times as high in the United States versus the U.K. according to 2021 data from Glass Lewis. Pay for CEO has declined in the U.K. during the pandemic, followed by a very sharp rebound in 2021 and then trying to catch up there. We'll no doubt see further growth in CEO pay in 2022, and I think that's a salient point amid high inflation at a cost of living squeeze. It's prompting a bit more focus from asset managers on how they're managing impacts on workplace cohesion, access to the workforce. It's always interesting to track say-on-pay votes when shareholders get to give their opinion on whether they think pay is aligned with performance. And we know there's more regulation on that coming in the United States. But there will definitely be an added dimension to that this year.

Should the CEO and Chairman Positions Be Separate?

Saldanha: Staying with the C-suite for a second, one thing that is different between the two regions, the EU and North America, is how the CEO and the chairman roles are combined more often. We've talked about this in the past, especially with companies like Berkshire. Can you tell us what the differences are between the two, please?

Stewart: I think you're right. As of 2021, around 40% of the United States companies have combined chair and CEO positions according to data from ISS. That's down from around 70% of companies about 10 years prior to that, but that's still a sizable amount. In Europe, it is very, very rare to see a combined chair and CEO role. In fact, many countries in Europe have a dual board model in which management and supervisory functions are performed by two separate boards. In markets like the U.K., where they have single unitary board structures, it's best practice backed by regulators to separate the roles. And the reason why it's important is because in many corporate governance circles, separation of the chair role and the CEO role is seen as better practice. They think the role of the CEO should be to lead management and lead strategy, operations, finances, while the chair should be overseeing what the management are doing and provide independent and constructive challenge. So, when you combine those roles, many think it loses that independent voice of challenge. Although it's noteworthy still that there's usually a designated lead independent director of companies with combined chairs and CEOs. The question is, do they have enough power to challenge the CEO, who has so much of the responsibility concentrated in that one combined role.

DEI in EU is Gender-Focused. In North America, there is a Focus on Race

Saldanha: Another area in which you've noticed stark differences is in diversity, equity and inclusion, also called DEI. Tell us what you found there.

Stewart: Sure. DEI has been an area of focus for investors worldwide in recent years, with a particular emphasis on board composition, who's on the board and is it a good representation of wider society. It's seen as both a social good and also an indicator of good governance to have directors from a wider range of backgrounds, and that very much includes gender diversity. You're right that in Europe there's been a stronger focus on gender inclusion with targets and sometimes even hard quotas for women's representation on boards. Typical targets are between 30% and 40% female representation that they're seeking see, whereas in North America and the U.K., there certainly is that same focus on gender representation, but there's also been a focus on improving representation in racial and ethnic terms on boards in a way that isn't emphasized quite so much in continental Europe, where collection of ethnicity data is often very, very highly restricted or regulated.

The Differences in Shareholder Engagement in EU vs America

Saldanha: Finally, the last thing I want to know is how do the two regions deal with shareholder engagement differently.

Stewart: Well, there are some similarities and some interesting differences. Behind the scenes engagement between asset managers and company boards and management I'd say is ubiquitous. I'd say the key difference that we're noticing these days is the prevalence of shareholder resolutions at the shareholder meetings of U.S. companies. In Europe, those are much, much rarer. Our most recent research shows a record number of shareholder resolutions on environmental and social topics in the last year went over 270, but slightly lower levels of support for those resolutions – still significant, but slightly lower than the high reached in 2021 as that increased volume of proposals in 2022 has translated into very, very specific asks that asset managers aren't always prepared to back. They're more of an activist mentality, I think. However, there were also a few notable shareholder resolutions in Europe, particularly on climate action and fair pay at U.K. companies last year that will certainly be an interesting area to watch as we go into the 2023 proxy season.

Saldanha: That makes sense. Thank you so much for being here today, Lindsey. For Morningstar, I'm Ruth Saldanha.


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Ruth Saldanha

Ruth Saldanha  is Editorial Manager at Follow her on Twitter @KarishmaRuth.


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