Where is the ‘social’ wellbeing in ESG reporting?
Industry evidence and academic research suggest that the long-term success of a company depends on its ability to foster a stable, motivated, and productive workforce with staff who feel financially secure, professionally fulfilled, and appropriately skilled to flourish in their jobs.
Workforce reporting is a central part of the 'S' of good environmental, social and governance (ESG) standards, which form an increasingly important part of the investment decision-making process of asset managers and major investors such as pension funds.
The UK’s regulatory framework has placed growing emphasis on ‘social wellbeing’. For example, gender pay gap disclosure requirements have been operating since 2017. They have been followed by new pay ratio disclosures, and the government is likely to require ethnic pay gap disclosures.
The government has also commissioned a series of significant reports that have drawn attention to the need for good working practices. The Taylor Review of Modern Working Practices (2017) revealed the precarious nature of work and the endemic problem of low pay for many UK workers. The Stevenson / Farmer Review (2017) recommended a series of ‘mental health core standards’ in the private sector.
Clearly, company reporting on employee wellbeing is becoming a significant shareholder issue. But just how much do investors know about the workforce of the companies in their portfolios? To investigate, the Pensions and Lifetime Savings Association (PLSA) commissioned the High Pay Centre (HPC) to investigate the quality of workforce reporting among FTSE 100 companies.
The findings of our report, Hidden Talent 2: Has Workforce Reporting by the FTSE 100 Improved?, were disappointing.
Despite regulatory and public concern about fair pay, only 51% of FTSE 100 companies disclosed their gender pay gap at the level of the board and managerial staff with 52% disclosing the gap among staff and subsidiaries. Although firms are not required to disclose these data in annual reports, fair pay practices should be considered sufficiently important for discussion anyway. Worse, just 5% of firms disclosed the pay gap between their CEO and median worker and 3% revealed their ethnic pay gap.
Just 3% of companies disclosed rates of mental ill health among the workforce, despite the drive to grant mental health ‘parity of esteem’ with physical health, which companies routinely disclose as accidents, injuries, and time lost.
There were some positives. 61% of firms provided meaningful commentary on the composition of their workforce, providing context and links to the company’s broader strategy. 58% of firms discussed the workforce in CEO and chairs’ reports – an important indicator of prominence.
The regulatory regime is increasingly recognising the importance of worker engagement and participation, such as employee rewards and benefits. The new Financial Reporting Council's Corporate Governance Code, for example, introduces a requirement to involve some form of employee stakeholder voice in corporate governance structures. It also mandates firms to report on how directors have fulfilled their requirement to have regard for the interests of all stakeholders under Section 172 of the Companies Act (2006).
But there is room for improvement in disclosures about employee engagement. Only 37% of firms provided indicators to measure the motivation and commitment of the workforce towards corporate goals and one-third introduced a meaningful analysis of procedures for employee engagement. Just 35% revealed their employee satisfaction score even though 53% referred to their procedures for workforce engagement.
Shareholders need meaningful information about working practices to make informed judgements about long-term business viability. Social wellbeing has long been a major focus of public concern, but business culture seems slow to adapt to the rapidly changing regulatory context. Businesses cannot thrive without a positive company culture, but in order to build one companies need to be more transparent about their staff.
Ashley Walsh is Head of Policy and Research, High Pay Centre.
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