NEI Ethical Funds has called for the investment industry to turn up the heat on high executive pay.

In a white paper released Wednesday, titled Crisis, What Crisis?, the investment management company says there is a design flaw at the heart of how the executives of public companies get paid. This flaw has encouraged excessive risk-taking, contributed to the global financial crisis and presents systemic risks to our economy by contributing to income polarization and the shrinking middle class.

The white paper states that fixing this problem will take a fundamental repositioning of the corporation’s purpose away from maximizing returns for shareholders and towards the idea that the corporation should provide a positive return to all company stakeholders including customers, employees, communities and investors.

The underpinnings of shareholder value maximization are now under attack by legal scholars, public policy leaders and the people who actually manage companies.

“A focus on shareholder value maximization is misplaced. While companies do need to pay attention to share price, they also need to focus on providing good products at good value for customers. Companies need to attract, motivate and retain engaged employees and work well with their suppliers. They need to be welcome neighbours in the communities where they locate operations,” says Robert Walker, vice president of Ethical Funds for NEI Investments. “All of these goals are important and the evidence shows that companies that focus solely on the shareholder will underperform over the long term.”

In place of shareholder value maximization, NEI Ethical Funds recommends that public companies, and the investment institutions that own their shares, embrace the stakeholder theory of the firm.

“Through Ethical Funds we’ve been pushing the stakeholder model for years and encouraging companies to integrate stakeholder-specific metrics into the design of executive compensation,” says Walker. “And in fact, our recommendations have been taken up by several companies. In releasing Crisis, What Crisis? we’re calling for our colleagues in the responsible investment industry around the world to support the stakeholder model as they vote on company pay packages.”

With offices in Toronto, Vancouver and Montreal, NEI Investments is owned 50% by the Provincial Credit Union Centrals and 50% by Desjardins Group.