Commentary

Material Metrics for a Motivated Workforce

Climate reporting dominated 2022, but 2023 is set to see a bigger focus on workforce treatment and disclosure, says Caroline Escott, Senior Investment Manager at Railpen.

It is now widely agreed that investors need to understand how a company is managing climate risk to ascertain its future performance prospects. Consequently, climate reporting has advanced significantly in recent years (though there is still some way to go). At the same time, though perhaps less explored until very recently, the plethora of changes and challenges to how and where we work, as a result of longer-term technological shifts and the pandemic, has also highlighted the necessity of a resilient and well-treated workforce to a company’s sustainable financial performance.

It is not just in investors’ and employees’ best interests, but also a companies’ own. Firms must dedicate time and consideration to looking after their workforce and to telling a compelling story to all their stakeholders about the work they undertake to do so.  At Railpen, workforce issues have long been a core stewardship priority and we expect our portfolio companies to take a meaningful approach to workforce treatment. Articulating how the steps they have taken fit within their broader corporate culture and align with their business model and long-term strategy is vital to purposeful disclosure.

The current state of workforce reporting 

Five years ago, the Financial Reporting Council (FRC) introduced changes to the UK Corporate Governance Code to reflect the importance of the board’s engagement with the workforce. The Code plays an important role in providing a framework for engagement between investors and companies. It has driven the importance of the workforce as a corporate governance and stewardship issue more broadly.

While companies have long dedicated several pages in their annual reports to executive remuneration and increasingly to environmental issues, progress on effective workforce disclosure has been lacking. This is why Railpen worked with the Chartered Institute of Personnel and Development (CIPD), High Pay Centre and the Pensions and Lifetime Savings Association (PLSA) earlier this year to research how effectively the UK’s largest companies are doing ‘good’ workforce reporting, assessing the FTSE 100 companies against a framework pulled together by the group.

Our research found that, while improvements had been made on certain metrics, the quality of workforce reporting remains highly variable. Railpen acted as the investor ‘boots on the ground’ within the coalition, taking the framework to our portfolio companies and asking for feedback during the research itself as well as discussing the findings and final report.

What we heard from companies in response to the final report was a genuine desire to further understand exactly what the best companies are doing on workforce reporting. We were pleased to collaborate with the High Pay Centre, as well as with the CIPD, PLSA and Board Intelligence, on a follow-up piece of work launched in December. This provides extensive, concrete examples of what best practice reporting looks like on the workforce metrics that investors consider to be particularly material.

What best practice looks like

The idea of our case study guidance – entitled ‘Worthwhile Workforce Reporting: Good practice examples from the UK’s biggest companies’ – is not to provide text that a company can cut and paste into its own reporting, but to offer further clarity around what good looks like and to support the investor-company dialogue.

With that in mind, our report refers back to the framework that our group had established, which aligns in many respects with the excellent work of the Workforce Disclosure Initiative (WDI), and asks for disclosures on five topics:

  • Workforce cost and composition
  • Employee relations and wellbeing
  • Reward
  • Worker voice
  • Skills, capabilities and recruitment

We sought to define some overarching principles of effective workforce reporting, to support companies in understanding the broader approach investors would like to see taken. Some of these include:

  • A clear link between the approach to workforce and the company’s strategy and performance
  • A combination of data and narrative, presented in a way that is balanced, honest and self-critical
  • Forward-looking, outcome-focused and stretching targets, to add heft to narratives which ideally discuss what progress has been made (or not) and show that a company is committed to continuous improvement.
  • Disaggregation of data where relevant, and particularly regarding what may well be different experiences across workforce practices for directly employed and indirectly employed workers.

Building upon these key areas and overarching principles, our report goes a step further through providing specific best practice examples and excerpts from recent company reports, while undertaking ‘deep dive’ discussions on hot topic issues such as fair pay and workforce directors.

Accelerating improvements in reporting practices

For a dialogue to be truly impactful, all parties need to do their bit. While we hope that our guidance will support companies in making meaningful improvements on their reporting of material workforce issues, we also recognise that the investor community can do more.

Investors should ensure they take a pragmatic approach and recognise that better and more meaningful disclosure will likely highlight areas for improvement, particularly at the beginning.  While not being complacent, or letting poor workforce treatment slide, investors must be willing to listen and have the honest conversation that companies and investors both say they want.

Investors also need to be targeted in their requests. Taking the time to understand the company’s strategy and business model, and the broader context (jurisdiction and sector) within which it operates, will enable increasing focus on the key workforce metrics that are most material to specific companies.

A resilient and motivated workforce

The past few years have shone a spotlight on the importance of a resilient and motivated workforce, which feels (and is) fairly treated. This in turn has underlined the need for effective communication between companies, workers and investors – which itself relies upon companies providing the kind of information which investors and other stakeholders will find helpful. The quality and state of workforce reporting still lags behind corporate climate disclosures. We hope the work undertaken by our group, as well as other investor and corporate organisations, will be effective in improving the quality of workforce treatment and disclosure, enabling companies to define measurable improvement plans and support their workers during (and beyond) these challenging times.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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