People are our greatest asset/cost* (*delete as applicable)

26 February 2018 12:12
Asset or liability?

Employer branding and company reports hail staff as a precious element of business. Steve Young explains a project to dig deeper into FTSE-100 reports and see whether all the upbeat messaging is backed up by actual attention and commitment.

It’s a cliché that it’s people that make a business: a motivated, skilled and engaged body of staff converting capital assets and models into gold. But what evidence is there that employers both believe in this principle for strategic planning, and act on it in terms of support and investment?

Investors have long been concerned that businesses are not making the most of their human resources, limiting their performance and potential for growth. We were asked by the Pensions and Lifetime Savings Association (PLSA) to make a detailed analysis of FTSE-100 company reports and what they revealed about employment models, working practices and attitudes to their people. Investors want to know about the composition of a firm’s workforce; its level of stability, skills, capabilities and engagement. By looking at the FTSE-100 we were starting with the kinds of major businesses that should be acting as role models for delivering ‘Good Work’ to the UK jobs market, with the funds and scale of operations to be taking a more enlightened approach, while also needing to be the most transparent in their reporting, given the number of stakeholders and investors.

We found a highly mixed picture. Workforce-related issues were judged to be fully-integrated into the annual report at 56% of companies. Many large flagship employers appear to be stuck in an old economy mindset when it comes their people - seeing them principally as a cost that needs to be minimised. While 43% of companies provided detailed discussion of how their workforce adds value or contributes to the execution of company strategy, this is much smaller than the 91% who discussed the workforce in relation to risk management. And this wasn’t an issue of sectors. The same variety in attitudes and approach was seen across different sectors, with some of the best Good Work practices being seen in the older industries, such as construction and mining. Business like to talk positively about performance and their people, how great everything is, which is a typical and expected feature of company reports. What they don’t attempt to do is register challenges or reflect critically on any problems relating to employment practices or people performance.

Revealing disclosures

Our study looked at the most recent annual reports of the FTSE-100 as of 1 June 2017, identifying whether there has been meaningful narrative discussion of each of the themes of most interest to investors (composition, stability, skills and capabilities and engagement), and making an assessment of whether each report fulfilled the need for ‘good reporting’ in relation to workforce-related issues. In general, there was some degree of reporting on each theme - but companies kept to making disclosures on what was mandatory in relation to people practices. Most reports don’t comprehensively detail the composition, stability, skills and capabilities and engagement levels of their workforce in a way that explains how these relate to the company’s long-term strategy and purpose. We found only three companies (Royal Mail, Whitbread and Wolseley) provided a meaningful discussion of these key issues.

When it comes to workforce composition, all firms discuss gender diversity both at management and overall workforce levels, reflecting equality legislation in this area. However, only 15% provide details of the ethnic diversity of their workforce, probably because it’s not mandatory to do so. All companies detail their CEO’s pay relative to the other executive directors, but only 7% provide the pay ratio between the CEO and the average or median worker. This is now a legal requirement (since August 2017). The bigger issue here is around justification. There are no explanations for why a CEO may earn so much more than their Director of Finance or Director of Operations, who arguably may require equivalent levels of experience and take on similar responsibilities.

Stability - meaning how stable and secure the current workforce is, and how it might change over time - was the least discussed. Just 10% of companies provide any narrative commentary - surprising in the context of wider public debates and growing Government concerns around precarious employment models such as zero-hour and other flexible contracts. 4% of companies give a breakdown of their workforce by full time and part time workers; 7% on their use of agency workers. Only 18% of companies provide any figures on staff turnover, one of the most revealing indicators of employee attitudes and engagement.

Companies report on physical illness relating to health and safety (around half offering at least one metric on this, such as workplace deaths, accidents and time lost to injuries, with more detail being given by high risk sectors such as mining and construction). None of the reports examined provide specific numbers of workplace-related mental illness cases. Several companies discuss mental wellbeing (including steps taken to enhance this issue) at a general level. It’s clearly a sensitive reporting issue, and lack of transparency is perhaps not surprising considering the negative attention that low rates of mental wellbeing are likely to attract. But failure to provide information serves only perpetuate any organisational challenges that may already exist, as well as reinforcing the inconsistencies in the way both business and society approaches physical versus mental wellbeing.

Despite the large investments made by FTSE-100 firms in skills and capabilities, most only outline what’s happening in very general terms. 21 companies provide specific information on training programmes, only one (SSE) disclosed details of training arrangements for graduates and apprentices. Management training programmes aren’t touched on; succession planning arrangements for senior management and strategically important organisational roles is rarely covered. Given that FTSE-100 companies undoubtedly invest significant resources in training, reporting practices in this area almost certainly lag behind actual activities and policies. Precisely what factors limit transparency on this theme is unclear. Lack of disclosures could be due to commercial sensitivity, a lack of investor interest, or challenges generating data.

Employee engagement and voice - how motivated the workforce is and how fulfilled in their jobs and committed to corporate goals - is a key driver of long-term performance. 34% gave a narrative discussion of ways in which they foster and measure employee engagement - less than the 42% who included results from employee engagement surveys, because some didn’t add any useful explanatory context. Only 5% provided sickness absence rates (1% on retention rates post-parental leave) with rarely any attempt to describe policies to address absence - a clear area where corporate disclosure policy appears to be out of line with the increasing focus on the tangible benefits associated with enhanced employee wellbeing and attention by policymakers and health professionals on mental wellbeing.

Reporting lessons

One explanation for low levels of reporting on key workforce-related themes is that management see the importance of employees to corporate success as so self-evident as not to need explicit discussion: the value of a high quality and well-motivated workforce is a corporate hygiene factor whose importance does not warrant explicit mention in an already over-crowded and ever-expanding annual report. An alternative and more troubling possibility is that the lack of explicit reference to workforce matters by many companies reflects their relative low status in the list of corporate priorities. The limited volume of reporting is potentially at odds with company directors’ responsibilities to act in the long-term interest of their members, such as shareholders, and also to have regard for the interests of other stakeholders, including workers.

The onus is both on companies to provide better information and on investors to ask for it. Greater recognition of the importance of reporting on people issues, a genuine culture of appreciation, will be of more value for the long-term than further Government legislation. This tends to lead to box-ticking compliance by employers, rather than changes made in the spirit of seeing the workforce as an asset. The work by the PLSA - its nudge approach - is useful in raising awareness of what is and isn’t happening within businesses, ensuring stakeholders such as fund managers see the importance of Good Work and will exert pressure on organisations. A cycle of more attention to people issues, better reporting and more confidence among investors and other stakeholders can only be a win-win for businesses and their employees.

Back to News