Every company has a workforce, but what do investors need to know in order to understand the risks and opportunities associated with it? The FRC’s Financial Reporting Lab recently released a report on workforce-related corporate disclosures to address just that question.
By Hannah Armitage
Companies are facing a range of challenges in relation to their workforce, including the implications of automation and changing contractual employment arrangements, or new reporting regulations around remuneration and cultural issues.
A range of stakeholders have a legitimate interest in companies’ approaches to workforce-related matters, not least the workforce themselves. Whilst the Lab’s report focuses on investors’ expectations of corporate reporting, alongside investors, many stakeholders are calling for companies to take the opportunity to improve their reporting on the contribution of the workforce.
Reporting on sustainable workforce development
Investor participants overwhelmingly support clearer disclosure of workforce matters. In trying to understand which companies are able to build and maintain a productive workforce over time, investors are interested in how a company intends to support the development of its workforce in a sustainable, long-term fashion.
While there are a number of metrics that might give an insight into a company, there is no single approach that captures how human capital considerations have an impact on company performance. Both companies and investors agree that the workforce can have a significant influence on company performance, but there is less agreement about what information should be reported to provide insight into this. However, investor participants are seeking greater insight into:
how boards consider and assess the topic of the workforce, including what information they see and what they consider the workforce to be;
what the workforce is and how it contributes to the success of the business model, whether it is considered a strategic asset, how it is invested in, and what changes might need to be made to strategy in order to maximise workforce-related opportunities;
the risks and opportunities related to the workforce and how the company is responding to these, including the prioritisation of risks and their likelihood and impact; and
how the company measures the contribution of the workforce and how it has taken into account the workforce’s views. Investors seek more data, including financially relevant information and reliable, transparent metrics.
Which metrics are investors interested in?
Whilst investors noted a lack of true understanding about whether, and how, a workforce is considered to be a strategic asset to the company and, if so, what that means for the company, there was also a view that more standardised, important metrics about the workforce would also be helpful. As such, reporting on the workforce should address the strategic nature of the workforce, and underpin this with some more specific metrics.
Investors are seeking to understand the composition of the workforce and whether the board views the workforce as a strategic asset, how value is maintained and risks mitigated. To aid investor understanding companies should therefore report:
the oversight of workforce-related matters, including how the Board engages with the workforce and what impact the board’s consideration of workforce matters has had on strategic decisions;
who the company considers its workforce to be (including total headcount, demographics and employment composition such as direct employees, contractors and/or others in the supply chain);
how each aspect of the workforce creates value for the organisation and what opportunities there are to grow that value, including how the workforce model links to the business model;
the risks and opportunities related to the workforce, how the company is responding to these, how the risks were identified and where they are in the business, including health and safety metrics;
how the desired culture is being driven from the top including how ‘‘buy in’’ has been achieved from the workforce and how culture and values help achieve the strategy, including: employee engagement retention and turnover (both planned and regrettable) values being applied in the working environment other measures of culture that the company monitors
how the company is enhancing and incentivising its workforce to deliver value. This should include information about remuneration and other benefits, training and development progression.
The metrics used should clearly show what parts of the workforce they apply to and should include relevant segmental information.
Growing stakeholder expectations
Apart from suggesting these disclosures, the Lab’s report also provides a set of questions for the board to ask itself, developed from the discussions with investors and companies. These address the following areas: governance, business model and strategy, risk management and metrics and targets.
There is a growing interest in a company’s relationship with its workforce and whether through increasing regulation, calls from the workforce itself, or ongoing investor pressure, the expectations of this reporting are likely to continue to grow. Companies are making some interesting disclosures in this area, but much of the reporting is still developing. In this context, investors feel that there is an opportunity for companies to report more effectively on their workforce, and the Lab’s report also provides practical examples of how companies can close this gap.
Hannah Armitage
joined the Lab in 2017 and has managed the projects on performance metrics, climate-related reporting and workforce disclosures. Hannah moved from the FRC’s Corporate Governance Team, where she worked on reviews of the Stewardship Code and UK Corporate Governance Code and ran the 2016 Stewardship Code tiering exercise. Hannah is a qualified lawyer and prior to joining the FRC, worked in the Australian Department of the Treasury on corporations and corporate law policy.