Everything really is connected. The Institute for Policy Studies has just released an important report illustrating how CEO pay at oil companies is actually accelerating climate change. It is called “Money to Burn” and you can find it here: http://www.ips-dc.org/.... Upton Sinclair once wrote, “It is difficult to get a man to understand something, when his salary depends on his not understanding it.” The human nature obtuse denial (and political funding of more such) is definitely real. But it is worse than that and IPS methodically goes through the corrupt cycle, and how it could affect all of us.
The report notes that energy stocks held by pension funds and 401k portfolios today could be the equivalent of the high-risk mortgage-based securities they held in 2007. Though this time, instead of a risk of a recession or housing crisis, the planet is in peril.
Here are a few things that really grabbed me as I read the report:
BAD INCENTIVES: A big emphasis in executive compensation for the past decade has been “pay for performance.” Measurable metrics for bonuses satisfied shareholders, and many executives gained astonishing windfalls. There’s been more and more debate about whether these make sense, because in many cases company performance was far outside the control of executives. When I talk about this the example I’ve often used is the price of oil. I used that as an example when the price of oil was over $100, and it is still true today. But executives who did extraordinarily well when oil prices were at stratospheric levels, and were richly rewarded, have another metric now. It is called “reserve replacement” and IPS found 13 oil exploration and production companies that tie bonuses “to achieving a positive ‘reserves replacement ratio.’”
IPS describes this as “energy industry jargon that expresses the amount of proven carbon reserves added to a company’s reserve base over a year’s time relative to the amount extracted.” In other words, get more oil, more oil, more oil. The only future that can be imagined, and the one that is being incentivized, is a petroleum based future. And, as many have noted here, that is an impossible one. There’s an idea that the Guardian and others have written about called “stranded assets.” Essentially it is the growing understanding that if we use the reserves already identified we will sabotage the future, and looking for more costly petroleum only exacerbates that.
Utility companies are a really interesting counter-example. If those executives had been rewarded to acquire coal companies they may have done that. Now they’d be drowning in costs. Instead many utility companies moved to diversify into more sustainable energy. These companies are transitioning technology not just because of climate change but because of market signals.
The executives in the oil industry today are incentivized not to transition.
I’m sure that are positive and possible metrics that could be substituted, but a good start would just be getting rid of the worst incentive. That’s what shareholders affiliated with the Unitarian Universalists proposed at ConocoPhillips when they filed very specific shareholder proposal. They called on the compensation committee to adopt a policy that it will no longer use “reserve additions,” “reserve replacement ratio” (“RRR”) or any other metric based on reserves to determine the amount of any senior executive’s incentive compensation unless they take the step of adjusting reserves to “exclude barrels of oil equivalent that are not economically producible under a Demand Reduction Scenario in which the price of a barrel of Brent crude oil decreases to $65.” In other words, if the price of a barrel of oil falls so much that it is costly and not beneficial to keep extracting the oil – from, say, the artic – then don’t reward the executives for trying to extract that oil. The proponents base the $65 figure on the number Standard and Poor’s used in a “stress scenario” to evaluate oil companies’ creditworthiness. We’re actually below that number right now.
As IPS notes, ConocoPhillips tried to persuade the SEC to allow them to exclude the proposal. They failed. Here’s a small thing you can do: find out how any assets you may own, or that are owned on your behalf, were voted on this proposal, and on the pay packages at oil companies generally.
THE RICH KEEP ON GETTING RICHER: In addition to red meat for environmentalists, there’s plenty here to raise the ire of those of us that focus about income inequality. Here’s one example, at just two coal companies, Peabody and Alpha Natural Resources, executives cashed in $80 million dollars in stock options before the prices plummeted. The high levels of unemployment and anger in areas where coal once used to equal reasonably paying jobs are a real political factor. And anyone who works on what some call the blue/green divide should stress again and again how individual executives made fortunes, while many workers suffered.
The IPS report also highlights the astonishing pensions these executives have that will “cushion executives from risks they impose on billions of others.” Given some of the bleak news on climate change that cushion may not be enough to protect even the heirs of these executives.
Let me end on something a little bit more upbeat. Intelligent executives not blinded by their own self-interest are increasingly aware of the dangers of climate change. General Mills announced this week a goal of reducing greenhouse gasses by 28% in the next ten years, investing in energy efficiency not just for itself but for those companies in its supply chain. “We think that human-caused greenhouse gas causes climate change and climate volatility and that's going to stress the agricultural supply chain, which is very important to us," said CEO Ken Powell, according to an associated press report. "Obviously we depend on that for our business, and we all depend on that for the food we eat."
Here’s hoping that such common sense becomes widespread. Perhaps the IPS report will inspire individuals who work as compensation consultants, or who serve on boards, to really think about the kind of world they are creating.