Corporate governance and transparent reporting

A number of corporate governance scandals in recent years – and more recently the COVID-19 pandemic – have highlighted the importance of the critical ‘people’ issues organisations face. The value of treating people well, and the associated risks and opportunities, should be central to corporate governance and strategic leadership conversations.

The situation

Too many corporate governance disasters are caused by boards and senior management teams failing to recognise the importance of critical ‘people’ issues, such as organisational culture, people management, diversity and inclusion, and investment in workforce skills and capability.

For example, multiple corporate governance scandals on a range of issues, including sexual harassment, poor working conditions, patient care failings in the NHS and phone hacking in the media sector, were primarily the result of organisations failing to live up to stated values, poor leadership and under-investment in high quality people management practices.

The longstanding fall in investment in training, poor productivity growth, and a lack of workforce diversity (particularly at senior levels) are further signals that many organisations are failing to adequately consider the interests of stakeholders (such as employees) in their approach to governance.

These failings have increased the spotlight on sometimes excessive levels of CEO pay, with concerns centred on the often poor link between their rewards and those of the wider workforce, and the value of the personal contribution of executives relative to the performance of the business over the longer-term.

CIPD viewpoint

People professionals and HR functions should be at the front and centre of improving corporate governance practices in organisations. This will ensure that people-related issues – such as culture, reward equity, diversity and inclusion, and employee voice – are given appropriate attention at board level, and are factored into the decision-making process of the executive team.

Organisations will not perform well over the long term unless decisions taken at board and executive management level are informed by an in-depth understanding of the value of the workforce, which human capital data and people analytics can provide. This includes:

understanding the risks associated with poor people management and under-investment in people and HR
a deeper understanding of the value of the workforce to long-term value creation through the business model.

Recent changes to companies reporting legislation and the UK Corporate Governance Code, aimed at encouraging firms to improve employee voice, fairness on executive reward and enhance workforce reporting (including CEO pay ratio reporting) are welcome, but don’t go far enough to change corporate culture and improve transparency.

Actions for Government

Establish voluntary human capital reporting standards, and work with key stakeholders to encourage more companies to provide better information and report externally on how they invest in, lead and manage their workforces for the long term. Similar requirements could be made for the reporting of public sector organisations.
Require privately owned firms to comply with the UK Corporate Governance Code.
Require the Financial Reporting Council to conduct a regular annual audit of firms’ compliance with the UK Corporate Governance Code to increase its effectiveness.
Extend single figure pay reporting requirements and guidance to cover key management personnel and pay for the top 1% of earners, to further improve senior executive pay transparency.

Recommendations for employers

Ensure that workforce and human capital issues are covered within the remit of the board and/or its sub-committees. There should be a clear focus on human capital/workforce risks, reporting, management and auditing.
Actively seek HR expertise at board level. Employers should adopt one or a combination of the FRC required models for improving employee voice (non-executive director [NED], executive director [ED] or worker committee). One or more EDs or NEDs should have people and culture expertise within their portfolio.
Broaden the remit of remuneration committees to consider wider workforce reward practices and understanding of organisational culture, fairness and investment in people.
Link CEO pay to both financial and non-financial measures of performance. This should encourage longer-term investment in the business in critical areas, such as workforce development and organisational culture, research and development, and corporate social responsibility.
Simplify CEO reward packages and link them to fewer and more meaningful measures of performance. This would make it easier to understand how CEOs are being rewarded and make CEO remuneration reporting more accessible to investors, employees and other key stakeholders.
Take the lead on human capital/workforce reporting standards by voluntarily disclosing key workforce datapoints and explaining the business’s people strategy through a clear and robust narrative.
Transparently report on workforce/human capital risks and opportunities using external reporting methods. Engage key stakeholders by improving the quality of narrative disclosures relating to workforce/human capital issues.
Develop a bespoke People Report or Corporate Social Responsibility report to transparently report key workforce information, including workforce job quality data both for direct operations and supply chain staff.
Work with key investors to improve the quality of their engagement on workforce issues.