New Dashboard Wants to Distinguish Heroes from Villains Based on Climate Action and CEO Pay Ratio

While it may be difficult to fit sustainability into a Marvel comics’ narrative, we find ourselves at a moment where we desperately need to know which companies behave more like Captain America and which act more like Thanos. A new dashboard offers some help!

Introduction: Sustainability wars and Marvel comics

Last week I took my 10-year-old daughter (well, she took me..) to watch Avengers: Endgame. I really enjoyed the movie and could not stop thinking afterwards about the clear dichotomy the movie presents us with — you are either a superhero or a supervillain. There is one team we all love and cheer for (go Avengers!), and there is another team we really hate (hint: we don’t like those who try to destroy our universe). There is also this clear victory moment, where you can see very clearly who won and who lost.

Unfortunately when it comes to sustainability the story is very different. While we may have at least one superhero (go Greta!) and we can consider oil and gas companies as the villains, it’s still very difficult figure out if a company is one of the “good guys” or not. The fight over sustainability issues is also much fuzzier and in most cases there is no clear victory/loss moment. In short, sustainability wars look nothing like the ones you find in Marvel comics.

While it may be difficult to fit sustainability into a Marvel comics’ narrative, we find ourselves at a moment where we desperately need greater clarity to win over the sustainability challenges we face. To overcome these challenges we need to know which companies behave more like Captain America and which act more like Thanos.

Unfortunately the tools we have right now to decide who is ‘bad’ and who is ‘good’ are dated and do not allow us to easily understand what exactly we should be demanding from companies to do. In 2019, when almost every experience we have is designed to be more delightful, easy-to-understand and convenient, there is no reason the tools we use to fight over sustainability will be any different!

All dashboards are available on Sandbox Zero

Introducing the Sustainability Dashboard

Last year I wrote here about my frustration with lengthy sustainability reports and suggested to consider the use of a new tool — a smart dashboard that can be read in 30 seconds and understood even by 5-year-olds. The dashboard idea was based on two parts. First, articulating what is it that we expect companies to do. Second, finding benchmarks we can use to learn on how well companies perform vis-à-vis the expectations we defined for them.

In the first stage, we decided that we expect every company to do at minimum the following: 1) Take climate change seriously and respond with urgency. 2) Treat stakeholders responsibly. These expectations represent a clear set of priorities, addressing climate change — “the single greatest crisis the planet has ever faced, while paying close attention at the same time to companies’ relationships with their stakeholders. They are also grounded in the understanding that no trade-offs should be allowed — you can’t treat your employees poorly while fighting climate change and vice versa.

The second stage is perhaps even more challenging. Do we have indicators that are material, public (so you don’t depend on the good will of companies), comparable, easy to understand (i.e. you don’t need to be a sustainability expert to make sense of them), and can represent well our expectations from companies?

With the initial brief in mind (a smart dashboard that can be read in 30 seconds and understood even by 5-year-olds), we decided to focus only on two indicators that we believe meet the criteria described above: 1) Application of science-based targets, representing the need of every company to take bold action on climate change, and 2) CEO pay ratio, representing companies’ commitment to treat their stakeholders responsibly.

All dashboards are available on Sandbox Zero

Now, let’s take a deeper look at the design of the dashboard:

1) Taking climate change seriously and respond with urgency

Why? Earlier this year in Davos, Greta Thunberg said the following: “I want to challenge those companies and those decision makers into real and bold climate action. To set their economic goals aside and to safeguard the future living conditions for human kind.”

Bold climate action has a very clear definition today — “setting greenhouse gas emissions reduction targets consistent with the most ambitious aim of the Paris Agreement, to limit average global warming to 1.5°C by the end of the century compared to pre-industrial temperatures.”

This is the direction the world seems to agree we should take following the 2015 Paris Agreement and especially since the publication of the IPCC report on 1.5C last year. As climate change undeniably becomes the defining challenge of our life we need to make it clear for companies that adopting a 1.5C pathway is not an option anymore, but a requirement from every business in every industry.

How? The ‘how’ part is critical. Many companies claim to do something about climate change, but ‘something’ is no longer acceptable. The only acceptable action is committing to and executing a science-based target (SBT) -> “targets adopted by companies to reduce greenhouse gas (GHG) emissions are considered “science-based” if they are in line with what the latest climate science says is necessary to meet the goals of the Paris Agreement — to limit global warming to well-below 2°C above pre-industrial levels and pursue efforts to limit warming to 1.5°C.”

We expect companies to work with the Science-Based Targets initiative (SBTi) to ensure their SBT are properly developed and executed. Created by a number of respected environmental organizations, this initiative is a credible body with the expertise and know-how to support companies working on their SBTs, as we can learn from the 550+ companies already working with SBTi. Given the clear need in proper verification here, we will not acknowledge companies who claim to work on SBTs without involvement of the SBTi in the process.

What does the dashboard tell you? The dashboard uses the following range to provide a clear and immediate understanding where each company stands with regards to committing and executing a science-based target:

No Science-Based Target (0%) — the company is not taking action with SBTi to cut its carbon emissions in accordance with the Paris Agreement goals.

Committed (25%) — the company completed step 1 in SBTi’s process — signing a commitment letter indicating it will work to set a science-based emission reduction target.

Target Set & Verified (50%)* — the company completed steps 2–4 in SBTi’s process, i.e. it has developed a target (step 2), which was then submitted for SBTi’s verification (step 3), and finally once the goal has been approved, publicly announced on it (step 4).

* For most companies this may be already a high bar, so one may wonder why setting and verifying a science-based target will get you only to a 50% level. Why not give more ‘points’ for companies that do the right thing? The answer is simple: Completing steps 1–4 demonstrates commitment and willingness to take action, but it doesn’t go beyond that. If there’s one lesson we’ve learned from (most of the) world’s unfulfilled commitment the Paris Agreement it is that words are important, but what action is what truly matters. As the Arabian proverb goes: “A promise is a cloud; fulfillment is rain”. Therefore, we give weight to commitments and action plans, but any company that wants to go beyond the 50% level has to prove it takes action in accordance with its plans.

Meeting short-term target (75%) — companies’ targets can cover a different number of years, as the SBTi guidelines offer some flexibility: “An SBT should cover a minimum of 5 years and a maximum of 15 years from the date the target is publicly announced.” To be able to compare apples to apples companies are assessed based on their fulfillment of their SBT, so for example if Adobe has targets for 2025, it will be able to meet the 75% level if and when it meets these targets in 2025. Until then it will be on the 50% level.

Meeting long-term target (100%) — while the SBTi only recommends that “companies are also encouraged to develop long-term targets (e.g., up to 2050)”, the dashboard takes the approach that companies must have long-term targets. After all, if the IPCC report on 1.5C makes the case that limiting global warming to 1.5C requires meeting the goal ‘net zero’ emissions around 2050 (and with the latest alignment of the SBTi with the IPCC report), it seems like no-brainer that we need to make sure that companies comply with the 2050 overarching goal. Only companies that will meet this goal will reach then the 100% level.

Source: This indicator is based on public data available on the SBTi website.

All dashboards are available on Sandbox Zero

2) Treating stakeholders responsibly

Why? Here we take a page from a number of thought leaders, from Bucky Fuller, whose vision was “to make the world work for 100% of humanity in the shortest possible time through spontaneous cooperation without ecological offense or the disadvantage of anyone” to Kate Raworth’s doughnut framework, “which brings planetary boundaries together with social boundaries, creating a safe and just space between the two, in which humanity can thrive.”

The logic is very clear — while we have no choice but to take bold actions against climate change, we cannot do it without taking action at the same time to secure a more equitable and just future. One cannot go without the other. In the context of companies it means we would like to see them fulfilling the Green New Deal’s vision to “achieve net-zero greenhouse gas emissions through a fair and just transition for all communities and workers.” Our vision goes even further, assuming we need to ensure all key stakeholders are treated fairly.

How? This was by no means the most challenging part. How do we find one benchmark that can meet all of our criteria? After a long exploration we came up with our choice: CEO pay ratio, which compares CEO and median employee pay.

At the beginning the choice in this indicator was mainly driven by the fact that is publicly available for all U.S. public companies due to a provision included in the Dodd-Frank Act requiring companies to disclose their median employee pay and CEO pay ratio. After learning more about this indication we believe that with all its flaws it is still a good way to evaluate how fairly a company its stakeholders.

While “the public reactions from the public were minimal” as Pearl Meyer & Partners, an executive compensation consulting pointed out in its analysis last October, we believe that with more tools like the dashboard and greater exposure to this benchmark, the public will start finding it useful. The latest public remarks of filmmaker and Disney Heiress Abigail Disney on Bob Iger, Disney CEO’s pay, making use of the CEO pay ratio in Disney (1,424-to-1) and the discussion that followed it on questions of responsibility, fairness and corporate practices overall demonstrate the potential of this indicator to provide an effective lens for examining a company’s level of responsibility.

What does the dashboard tell us? The dashboard tries to respond to a quite difficult question: What CEO pay ratio is a fair one? To answer it we tried to create different levels that we believe can provide a comprehensible perspective on fairness.

Here is the range used in the dashboard:

>400:1 (0%) — the start point of the range is as difficult to choose as then end point. What should be the point in which we begin to consider fairness in the first place? Is it AFL-CIO’s estimate of CEO-to-worker pay ratio of 361 to 1 (2017 data for S&P 500)? Maybe it should be 400:1, based on the lowest level of the congressional bill (H.R.6242 — CEO Accountability and Responsibility Act) that was introduced in 2016 by Congressman Mark DeSaulnier, looking to adjust corporate tax rates according to companies’ compensation ratio? Or perhaps even 500:1 as a shout out to filmmaker and Disney Heiress Abigail Disney’s remark: “Jesus Christ himself isn’t worth 500 times median workers’ pay”?

We decided to go with the congressional bill, which seems to suggest that less than 400:1 ratio is the bottom of the barrel when it comes to CEO pay ratio. Therefore we set the start point on any 400:1 — any ratio below it is considered to be on a 0% level.

100:1 (25%) — this level is mainly informed by Portland’s Pay Ratio Surtax, which considers the 100:1 ratio to be a threshold between acceptable and unacceptable CEO pay ratios. Portland’s surtax (the only one in the U.S. that has actually been applied to date) says the following: “Publicly traded companies that are subject to the Business License Tax in the City of Portland must pay a surtax on the tax paid if the CEO-to-median worker compensation ratio is equal to or above 100:1. If the ratio is equal to or above 100:1 but less than 250:1, the surtax is 10%. If the ratio is equal to or above 250:1 the surtax is 25%.”

50:1 (50%) — this level represents the average between the 25% and the 75% levels. This ratio is mentioned in California Senate Bill no. 1398 that was introduced last year by Senator Nancy Skinner. The bill offers to connect the corporate tax rates to the compensation ratio (using the following equation: the compensation of the CEO or the highest paid employee of the taxpayer/the median compensation of all employees employed by the taxpayer, “including all contracted employees under contract with the taxpayer, in the United States for the calendar year preceding the beginning of the taxable year”), with the lowest tax rate provided to companies with compensation rate up to 50:1.

25:1 (75%) — the 75% level is inspired by no other than management guru Peter Drucker, who made the case in 1977 that the ratio should be limited to 15:1 in small businesses and 25:1 for large companies. Rick Wartzman, Executive Director of the Drucker Institute wrote to the Securities and Exchange Commission in 2011 that Drucker even suggested a 20:1 ratio in a 1984 essay and several times thereafter. “Widen the pay gap much beyond that, he said, and it makes it difficult to foster the kind of teamwork and trust that businesses need to succeed,” Wartzman wrote.

Other references of this ratio can be found in the 2016 congressional bill mentioned earlier, which offers maximum reduction in corporate tax rates for public companies with compensation ratio that is up to 25, and in a similar proposal in Connecticut to tie the tax rate to the pay ratio, with the lowest rate of 5% offered for companies with ratios of 25:1 or less.

<10:1 (100%) — the top level is inspired by the wisdom of the crowds — in this case the survey data of more than 50,000 people from 40 countries who estimated the gap between CEO and unskilled worker pay is 10:1 and the ideal ratio to be 4.6:1. In addition it is somewhat along the lines of the 8:1 ratio of the Wagemark Foundation (this ratio is between the highest earn and the average earnings of the lowest decile of earners), as well as the (failed) 2013 referendum in Switzerland to limit the pay of executives to 12 times that of a company’s lowest-paid employee.

Source: This indicator is based on public data available on Bloomberg and AFL-CIO.

All dashboards are available on Sandbox Zero

Star rating calculations

One goal of the dashboard is to allow stakeholders to easily compare between companies. Going back again to the world we live in today, almost everything is comparable in one or two clicks, from salaries on Glassdoor to restaurants on Yelp. So, why can’t we have the same experience for corporate performance on key sustainability issues?

To make the dashboard more usable fro comparisons we added a star-rating feature for each company, similar to the rating system we have for many of the services and companies we already interact with. The rating system synthesizes the results on both indicators. While it is meant to reflect the results in the best way possible, it has been designed to create balance between different considerations, such as incentivizing progress on both indicators. For example, the ratings gives more stars to a company that is on the 25% level in each one of the indicator than to a company that is on the 50% level on one indicator and 0% on the other indicator.

Here is the information on the way the ratings were calculated:

5 stars = minimum 100% for one benchmark, 75% for the other benchmark

4.5 stars = minimum 75% for each one of the benchmarks

4 stars = minimum 75% for one benchmark, 50% for the other benchmark

3.5 stars = minimum 50% for both benchmarks

3 stars = minimum 50% for one benchmark, up to 50% for second benchmark (more than 0%)

2.5 stars = minimum 25% for both benchmarks

2 stars* = up to 25% for one benchmark (more than 0%), at least 25% for the other benchmark

1.5 stars = 0% for one benchmark, up to 25% for the other benchmark (more than zero)

1 star = 0% for both benchmarks

* Receiving two stars requires both benchmarks to be on levels higher than zero. Even if one benchmark is at the 100%, but the other one is at the 0% level (like in the case of Alphabet, then the company still receives only 1.5 stars)

All dashboards are available on Sandbox Zero

What’s next for the dashboard?

The dashboard we present here is work in progress and we hope to continue developing and improving it with your help. After conducting initial tests (including with my 6-year-old son to check the initial premise of the brief), we plan to reach out now to companies, stakeholder groups, and people in our network who work on similar initiatives, like our friends at Reporting 3.0 for feedback. We’d like to learn more on the usefulness of the dashboard and where it can create value, so if you have any comment about it feel free to email us here — we’ll be happy to hear you!

Our plan is to create a database for all the S&P 500, and as a first step we’ve created dashboards for the 25 largest companies in the S&P 500, which you can find on the Sandbox Zero website.

Clarifying which company is a hero and which one is a villain on sustainability won’t happen tomorrow and probably not next week, but it is our hope that the sustainability dashboard will be a useful tool that will help make this aspiration into a reality.