Lack of guidance on disclosure of material workforce-related risks leaving asset owners in the dark as labour retention and disruption rise up agenda.
Listed companies in the UK are failing to provide data on financially material workforce-related risks that they have identified themselves, a recent report by PIRC, an independent corporate governance and shareholder advisory firm, found.
The lack of clarity on the extent of firms’ risks around labour retention, recruitment and disruption at investee companies is a particular concern for asset owners at a time when high inflation levels are driving wage demands.
When the researchers began collecting the data for the report, they quickly realised how each company surveyed reported workforce-related risk in completely different ways.
“It’s a complete minefield,” said William Glover, report co-author and Senior Stewardship Researcher at PIRC, noting the different methods companies use for reporting total recordable incident rate (TRIR), with some measuring the frequency of incidents and injuries per 100,000 employees and another per 100,000 hours.
The Financial Reporting Council (FRC) states that: “Information on how the principal risks are managed is important to shareholders when making resource allocation decisions and assessing management’s stewardship.”
Although companies are identifying workforce-related risks, without also providing data to support and validate those risks, investors are unable to evaluate how large or small the risks are and cannot assess the extent to which they are being effectively managed.
Currently, there are no official reporting standards or frameworks for UK companies to help them demonstrate to shareholders how they manage such risks, said Tom Powdrill, Head of Stewardship at PIRC.
Policy currently focuses on the governance aspect of workforce engagement, rather than the social aspects, he said.
Recent voluntary workforce-related initiatives include ShareAction’s Workforce Disclosure Initiative and Railpen’s ‘Worthwhile Workforce Reporting’ guidance for sustainable asset owners.
Where is all the data?
PIRC reviewed the annual and sustainability reports issued by FTSE All-Share companies for reporting on three key workforce-related principal risks: labour retention and recruitment, health and safety, and labour disruption.
For labour retention and recruitment, 233 out of 388 (60%) companies listed it as a principal risk. But of these, only 55 (24%) provided any data on turnover rates.
The lack of workforce-related data is widespread, Glover said. “There wasn’t a particular sector that was very bad – the return on data was low across the whole of the FTSE All-Share.”
The level of disclosure for health and safety risk was better in sectors where it is a “big issue” such as construction, he noted.
For the 121 companies (32%) that listed health and safety as a principal risk, the proportion that provided data was significantly better at 79%.
However, it’s not clear why a higher proportion of companies provided data for health and safety risks, said Robert Humphries, report co-author and Global Data Researcher at PIRC.
The Health and Safety Executive’s (HSE) guidance “isn’t the clearest” in terms of how to report relevant data, added Humphries, noting that a significant minority of companies failed to disclose any safety metrics at all.
Just 1% of companies identified labour disruption or industrial relations as a principal risk, which is surprising given the upsurge in industrial action across the UK where the impact was financially material, said Powdrill, pointing to the collapse of Royal Mail’s share price amid ongoing disputes with trade unions.
Escalated engagement and shareholder activism against directors is the “next logical step forward” as investors seek to better assess workforce reporting and utilise it to engage with companies, the researchers said.
“Investors are already voting against boards on climate and governance issues […] so why can’t they do the same thing on workforce issues,” Powdrill said.
“Companies pay a lot of money to have a good workforce and utilise it effectively […] so getting the management of that investment wrong is a big material factor.”
Last year, food retailer Sainsbury’s saw significant support at its AGM for the UK’s first ever ‘Living Wage’ resolution and several years prior Sports Direct witnessed a record-breaking shareholder uprising against the company over working conditions.
Given the surge in strike action over the past 12 months, and further action scheduled this year, PIRC expects to see more companies disclosing labour disruption as a potential risk in the next round of reports.
Reporting and validation
Growing recognition of the materiality of workplace-related risks is expected to pave the wave for further official guidance and even regulation.
The UK government’s Department for Work and Pensions established a task force to support pension scheme engagement with social factors in ESG investing in July 2022.
The taskforce – led by the Minister for Pensions – will support pension schemes with some of the challenges around managing social factors, including the identification of reliable data and metrics.
The researchers hope the new task force will encourage better reporting and validation on workforce-related risks, with the PIRC report highlighting the need for data standardisation.
“Companies do recognise workforce factors are material and, therefore, are risks that need managing and they are telling shareholders about workforce-related risks in their businesses that they are trying to manage and mitigate,” said Powdrill.
“The missing bit is what does that look like in practice.”
The next stage, according to Powdrill, is trying to cohere investors around a set of core indicators that everyone agrees on.
The FRC could play a pivotal role in achieving this goal by setting clear guidance and making disclosure mandatory, he said.
“The more voluntary you make [workforce disclosures], you just end up with a wide variety of different approaches and that makes the comparative bit way harder,” said Powdrill.