In brief follow-up to my last blog, it is worthwhile to reflect on the latest report from the FRC’s Financial Reporting Lab which on January 16th published a report on the ways in which leading companies currently report on their workforce. The report provides suggestions on how others can consider adopting better practice.
“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,” the report states, making clear the challenge by going on to say: “there is no single approach that captures how human capital considerations have an impact on company performance”.
The proposed model of placing human capital investments on the corporate balance sheet, as critiqued in People matter, but not like that, is certainly not the favoured single approach for any of the companies identified as producing leading practice. That’s welcome.
The fact that there is no single approach to appropriately capturing human capital considerations is in a sense the opportunity for companies, who can highlight the value of their people in the way that most suits their business model. As the Lab rightly highlights, the other thing that investors are keen to understand is the effectiveness of board oversight of employee issues, without which the link to strategy and business model cannot mean anything of substance.
My favoured among the sample of good practice that the Lab identifies is Rentokil Initial:
From this small sample of their reporting in the Lab report, it is clear that the company is willing to talk openly about challenges as well as the positive stories, and it publishes clear metrics about performance, including year-on-year performance. Rentokil takes seriously the skill levels of its workforce and has an idea of the culture it has and is seeking.
The example from the report that perhaps best covers issues of fairness is that from SSE:
While I’m rather dubious about the very precise numbers put on this (for every £1 invested in 2017, apparently SSE generated £4.52 in return on inclusion, ROI; it predicts £7.56 ROI on each £1 of investment in 2020 just from business as usual, £11.33 ROI from a tweaked strategy or £15 ROI from a fully upgraded strategy), the company’s approach is admirable and does attempt to address some of the current unfairnesses and inequalities in our country — as well as allowing the company to identify and build a workforce that should prove effective and loyal. The hoped for £15 return happens to be the organisation’s target for delivery by March 2021, with the main driver for achieving it appearing to be a still more inclusive approach that seeks to advance many individuals now most neglected by employers. That can only be a good thing, something that must advance fairness.
As discussed in People matter, but not like that, at the end of the day the real driver for that fairness will be when these metrics on people actually matter for executive reward. It’s therefore welcome that Rentokil Initial recently switched to make employee retention a measure in its performance share plan (albeit only 5% of the total) as well as (rather opaquely) part of its bonus scheme. SSE determines fully 20% of executive bonuses (though none of its performance share plan) based on a range of workforce measures. In this, as with their reporting on workforce issues, the two companies are unusual and exemplars. Sadly they remain uncommon still as insufficient companies genuinely seek to take the steps necessary to deliver workforce fairness.