Europe

‘Social Washing’ Risk From Questionable Employment Metrics

PIRC advises investors to engage more fully with large UK, European corporates on staff data.

Investor engagement on workplace and employment issues is improving, but there is a danger of this being influenced by misleading data, said UK-based independent shareholder advisory consultancy PIRC. Its new report, ‘Exposing Social Washing’, highlights the widespread use of “questionable” employee engagement scores as a KPI for executive bonuses. The industry providing such scores is “unregulated and vast”, said PIRC.

“When assessing employment standards, a company’s assertions, or the assessments of a commercial provider hired by the company, should never be taken at face value,” said Alice Martin, Labour Specialist at PIRC.

Martin cites Teleperformance, a global digital business services company accused of monitoring and recording the screens of its workforce. It uses a commercial accreditation service as a KPI for executive bonus setting, despite scoring poorly against other social indicators such as employee turnover and pay inequality. “This demonstrates why company-led workforce surveys do not tell us anything meaningful about how those employees are really being treated. Paying out executive bonuses based on these deceptive measures amounts to social washing,” she said.

Accreditation and ratings services aimed at measuring corporates’ ESG risks and performance have grown rapidly, but methodologies are often opaque, leading to calls for greater regulation. While companies are increasingly tapping into such services to tailor their reporting and meet the expectations of the responsible investment market, there is little scrutiny of the underlying metrics used, the report observes.

Lack of rigour

PIRC reviewed the reporting and remuneration policies of 12 of the largest listed employers in the FTSE EuroFirst index, including Volkswagen, Teleperformance, Siemens Energy, HSBC and Unilever, to establish how employment-related indicators are being used. All of the companies reviewed have more than 100,000 employees and span sectors including business services, healthcare, retail, finance, and manufacturing.

Half of the companies reviewed use employee engagement scores, based on workforce surveys, as a KPI for executive bonuses. PIRC said “a lack of rigour in terms of survey methods and scoring undermines the credibility of this KPI”.

Also in half of the companies reviewed, the relevant engagement score is not disclosed, even when being used as a bonus KPI. The review found that there is not enough detail in remuneration policies to assess whether the KPIs are being appropriately set.

None of the companies reviewed fully disclosed their workforce survey methodology: half disclosed no method, half disclosed basic information. Half use commercial accreditation services that rank companies based on employee experience.

The prevalence of workforce surveillance and job insecurity mean that employees may feel pressured to participate in company-led surveys with positive responses. Despite this, said PIRC, the use of survey-based scores as a target for executive bonuses is more prevalent than the use of other, more verifiable, employment indicators. Only one company in the sample uses a workforce safety indicator and five use a gender diversity indicator.

Granular data on diversity is also difficult to assess as reporting is rarely mandatory, but moves are under way in the US and Europe to improve the situation. For example, the ShareAction Workforce Disclosure Initiative is gathering diversity and inclusion data from corporates which institutional signatories can “integrate into their investment analysis, and practical insights on how to address pressing workforce issues”.

Investor engagement

PIRC said investors should consider whether a company’s engagement scores capture “what matters”, in terms of equitable treatment and conditions for employees, and whether the process is likely to result in employees feeling able to respond honestly. In companies and sectors with very high turnover, PIRC questioned what “real meaning” an engagement score has if the workforce is regularly replaced.

Councillor Gerald Cooney, Chair of Northern LGPS, a partnership between the Greater Manchester, Merseyside and West Yorkshire local government pension schemes, said pension funds are increasingly concerned with the social impacts of their investee companies, particularly with regards to how workforces are treated. “We are however inhibited by the lack of comparable data out there to help us assess a company’s practices. This is made worse by the slew of awards and accreditation services that companies commission to promote a positive image of their workforce practices, whilst telling us little about the more important markers of decent work, like safety, job security and pay,” he said.

PIRC’s Martin said investors and other stakeholders should ask companies whether their KPIs “really warrant reward” due to exceeding ambitious targets, rather than representing executives performing a core element of their job. “Ensuring the workforce are engaged and feel listened to for example is arguably a core thing for any company to get right and does not warrant a bonus,” she said.

Investors should also probe whether surveys and engagement scores are based on a rigorous and verifiable methodology that is shared and whether third-party accreditation services are financially independent from the company they are assessing.

Ask the right person

To accurately report on social issues, companies should use verifiable and comparable data, such as staff turnover rates, pay gaps and job security measures, said PIRC. The firm is compiling data for the FTSE350 to help investors make these assessments. “Most companies aren’t consistently reporting on these metrics yet, although there is a growing investor push for them to do so,” said Martin. “Other cross-checking can be done, such as talking to representatives of the workforce in trade unions and works councils where they exist and research on regulatory interventions, legal challenges or bad press relating to employment rights.”

PIRC said investors should not rely solely on what management or third-party assessments say about how the workforce feels. “Remember that the S can talk – these are human beings. Our strongly held view is that you can’t meaningfully engage over workforce issues without undertaking significant stakeholder engagement. The best way to find out what the workforce thinks is to ask them, not someone else,” said Martin.

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