Included in this issue of our Governance & Compliance Update: FRC Lab report on workforce-related corporate reporting; PLSA AGM voting review – executive remuneration remains a major concern and more
FRC Lab report on workforce-related corporate reporting
The Financial Reporting Council's Financial Reporting Lab (Lab) has published a report on "Workforce-related corporate reporting – Where to next?". The Lab has also published a summary of the key issues and questions for companies.
The report sought to test whether the principles of good reporting in previous Lab reports on business models, risk and viability and performance metrics could be applied in the context of reporting on the workforce. According to the Lab, each of these reports has proven relevant, as they highlighted the importance of companies articulating how the workforce contributes to the success of the business model, what the risks and opportunities are, and how they measure the success of their strategy through reliable, transparent metrics.
Despite regulatory focus over recent years and increasing company and investor interest, the Lab believes there is a lack of consistent disclosure on workforce matters and that a gap remains between the reporting investors are looking for and what is being disclosed. Investors are looking for a more basic understanding of the composition of the workforce, as well as an indication of whether the workforce is a strategic asset and how this relates to longer-term value creation. The Lab's report provides practical examples of its view of how companies can close this gap.
The Lab's report is organised around four main categories mirroring its work on climate change:
- Governance and management: This section deals with how Boards consider and assess the topic of the workforce, including what information they see.
- Business model and strategy: What the workforce is and how it contributes to the success of the business model; whether it is regarded as a strategic asset, how it is invested in, and how the workforce and strategy interlink.
- Risk management: The risks and opportunities related to the workforce and how the company is responding, including the prioritisation of risks and their likelihood of crystallisation and impact.
- Metrics and targets: How the company measures the contribution of the workforce and how it has taken into account the workforce’s views. The metrics used should clearly show what parts of the workforce they apply to and should include relevant segmental information.
Against each category the report sets out questions that companies should ask themselves when approaching reporting in order to better help investors and highlights some of the characteristics of best practice disclosure. It gives examples of feedback it has received, both from investors and companies, and of developing practice from companies' reports and accounts.
The Lab's high-level conclusions are that to aid investor understanding companies should report on:
- 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 them, how the risks were identified and where they are in the business.
- 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; and
- 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; and
PLSA AGM voting review – executive remuneration remains a major concern
The Pensions and Lifetime Savings Association (PLSA) has published its latest AGM voting review.
It concludes that executive remuneration remains a major concern for pension scheme shareholders as the number of remuneration-related resolutions that received significant levels of dissent (55) during the 2019 AGM season remained as high as in 2018, with the average level of dissent on remuneration policies at FTSE 100 companies nearly doubling to 11.26%. The report notes that the average pay for FTSE 100 CEOs has increased from 40 – 50 times that of the average UK worker in the 1990s to 117 times in 2020. Nevertheless, the PLSA cite evidence that some companies are beginning to address the issue, given that median CEO pay in the FTSE 100 fell 13% last year, with a number of companies deciding to "head off" investor dissent by proactively reducing not only overall salary but also bonuses and executive pension entitlements in advance of the 2020 AGM season.
As regards climate change, the PLSA notes the fact of several resolutions being put forward by shareholders relating to climate matters. Given the growth in policymaker and public scrutiny of the issue, the PLSA believes that such activism could increase. The PLSA has recommended that pension schemes work with their managers and advisers to judge the impact of climate risk on their portfolios. The PLSA's voting guidelines for 2020, due to be published in the next few weeks, will include practical tips to assist members on the issue of climate change.
Despite increasing concern as to the effectiveness of audit in light of various corporate failures, shareholder dissent over audit-related resolutions was consistent with previous years, with average dissent at low levels.