written by Richard Hollins. Find out more at http://www.richardhollins.com/
(Note: Some of the images included in this blog may appear a bit fuzzy! Click to enlarge the images for a clearer picture)
Our last post looked at how you should address sustainability in the most important areas of your strategic report, such as your strategy, business model and key performance indicators (KPIs). Here we’re going to consider how you should approach your more detailed sustainability disclosures.
What do you have to say?
The content of a strategic report is determined by the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013.
For unquoted companies, the regulations are light. Your only legal requirement – and even then, only to the extent appropriate for your business – is to provide non-financial KPIs, “including information relating to environmental matters and employee matters”.
The requirements for quoted companies are greater. The strategic report must include “to the extent necessary for an understanding of the development, performance or position of the company’s business,” information about:
“(i) environmental matters (including the impact of the company’s business on the environment),
(ii) the company’s employees, and
(iii) social, community and human rights issues,
including information about any policies of the company in relation to those matters and the effectiveness of those policies.”
What does this mean in practice?
The first point here is to understand what the regulations mean by ‘to the extent necessary’. The regulations don’t define this but the FRC’s strategic report guidance introduces the concept of materiality. The guidance goes into some detail about materiality but as we noted in our last post, it can be summarised as information that could influence someone’s decision to invest in your company.
This means putting yourself in your investors’ shoes. What are they going to be so interested in that it could affect their investment decision? To make the discussion below more concrete, we’re going to look at one aspect of sustainability – employees – and how different companies approach their disclosures. In each case, this reflects the specific people-related issues the company is facing.
Issue: attracting and retaining people
For many companies, simply finding the right people and keeping hold of them can be the biggest challenge. This may be because the industry is booming and demand for people is high or because too few people are coming through with the right skills.
One of our clients, Galliford Try, is a leading housebuilder and construction company. The surge in the housing market has resulted in huge demand for good people. In fact, the company has identified its people strategy and recruitment as critical to achieving its strategic objectives. It therefore publishes its staff churn rate as one of its KPIs, with a medium-term target to put performance in context.
Technology company ARM Holdings depends on having people with the right technical skills to design the next generation of products. One of its KPIs is therefore the number of employees at the year end. This is not always a helpful metric – absolute numbers of people can show you’re an attractive and growing employer or that you’re inefficient. However, the disclosure works for ARM because it differentiates between the engineers it hires and those who support their work.
Issue: training and developing people
Once you’ve got those people through the door, it’s critical that you get the most out of them. Training and development is therefore fundamental to most people strategies.
While reports often talk in general terms about the company’s approach, fewer provide hard data that investors can track over time. Those that do typically either disclose total spending on training and development or the number of training days they’ve provided. Galliford Try takes the latter approach and again has a target for the amount of training it aims to offer.
Issue: engaging people
Happy people are more productive and loyal. Conversely, if you don’t provide a good working environment, all that investment in recruitment and training can literally walk out.
For this reason, many companies disclose a headline engagement score from their annual employee survey. Another of our clients, Experian, has made engagement one of its KPIs. While its score is very respectable, the company measures itself against a tough benchmark, which it also discloses to give context.
A few companies go further. Lloyds Banking Group has three engagement disclosures, as shown below:
The EEI and PEI are both KPIs, reflecting the critical role of people in meeting its strategic aim of building customer relationships. The line management index is particularly interesting and is a nod to the HR saying that people join a company but leave a manager.
Issue: talent and succession planning
Almost any annual report these days will contain two buzzwords: talent and leadership. Many companies talk about identifying talent, filling their talent pipelines and bringing new leaders through the organisation. However, hard facts – particularly ones that are comparable over time – are more difficult to come by.
Experian is one company that does provide data, to demonstrate strength in depth in its leadership positions:
Issue: increasing diversity
Diversity is another hot topic in company reports, not least because the regulations include compulsory gender diversity disclosures for listed companies. Specifically, the strategic report must include:
While this seems straightforward enough, a surprising number of companies get this disclosure wrong, for two reasons
1. They define senior management too broadly
Companies often have their own definition of who is a senior leader, which governs things like eligibility for bonus or incentive schemes. However, that doesn’t necessarily make them senior managers for reporting purposes. How many of your people are really ‘planning, directing or controlling … the company or a strategically significant part’ of it?’ The definition should point to a select group of executives.
Lloyds Banking Group is a good example of this problem. If you’d need to hire the O2 to get all your senior managers in one room, you should rethink your definition.
2. They don’t disclose the number of people properly
The regulation says ‘the number of persons of each sex’. That means if you’re only disclosing percentages, or you just give the number of women and forget about the men, you’re doing it wrong.
Applying this approach to your other sustainability disclosures
Although we’ve looked at people disclosures here, the same principles apply to other areas of sustainability. The key is to think about what’s material to your business and therefore what your investors need to know. What you say flows naturally from that.
Look for meaningful metrics you can calculate accurately, since data gathering is often an issue for non-financial reporting. You also need to be prepared to provide the same information each time you report, whether it paints you in a favourable light or not. In many respects, the thought process is similar to choosing the right financial disclosures.
It’s also worth being aware of forthcoming changes in EU regulations. At the end of last year, a new non-financial reporting directive came into force. Although member states have two years to transpose it into national legislation, you may want to think now about how it will influence what you say.
For further resources on the non-financial disclosure requirements under the Companies Act 2006 and the implications of the EU Directive for companies see here.